Order Code IB91121
CRS Issue Brief for Congress
Received through the CRS Web
China-U.S. Trade Issues
Updated December 6, 2005
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
Major U.S.-China Trade Issues
China’s Currency Peg
The Bush Administration’s Response
China Changes its Currency Policy
China and the World Trade Organization
WTO Implementation Issues
Most Recent Developments
Violations of U.S. Intellectual Property Rights
Most Recent Action
Chinese Acquisition of U.S. Companies
Congressional Concern Over the CNOOC Bid
U.S. Restrictions on Certain Imports from China
Legislation on U.S.-China Trade in the 109th Congress
Comprehensive China Trade Legislation
Bills Addressing China’s Currency Policy
Other Bills

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China-U.S. Trade Issues
SUMMARY
U.S.-China economic ties have expanded
China announced it would appreciate its
substantially over the past several years. Total
currency to the dollar by 2.1% and begin to
U.S.-China trade rose from $5 billion in 1980
peg the yuan to a basket of currencies. How-
to $231 billion in 2004. In 2004, China was
ever, many Members have expressed disap-
the third largest U.S. trading partner, its
pointment that the yuan has not appreciated
second-largest source of imports, and its fifth-
significantly. On November 16, 2005, the
largest export market. With a huge population
Senate agreed to consider S. 295, a bill which
and a rapidly expanding economy, China is
would raise U.S. tariffs on Chinese goods by
becoming a large market for U.S. exporters.
27.5% unless China appreciated its currency
Yet, U.S.-China commercial ties have been
to market levels, no later than March 31,
strained by a number of issues, including a
2006. In the House, legislation (H.R. 3283)
surging U.S. trade deficit with China (which
was passed (July 27, 2005), which would
totaled $162 billion in 2004 and could hit
apply U.S. countervailing laws on government
$207 billion in 2005), China’s currency pol-
to non-market economies, such as China.
icy, and lax protection of U.S. intellectual
(Some Members believe that China’s currency
property rights (IPR).
policy constitutes a type of export subsidy.)

The continued rise in the U.S.-China
China joined the World Trade Organiza-
trade imbalance, complaints from several
tion (WTO) in 2001, and U.S. officials con-
U.S. manufacturing firms over the competitive
tinue to closely monitor China’s compliance
challenges posed by cheap Chinese imports,
with its WTO commitments. A major concern
and concerns that U.S. manufacturing jobs are
to U.S. policymakers regarding China’s WTO
being lost due to unfair Chinese trade prac-
implementation has been its failure to imple-
tices have led several Members to call on the
ment an effective strategy to combat wide-
Bush Administration to take a more aggres-
spread IPR piracy in China. Although China
sive stance against certain Chinese trade
has enacted a number of strict IPR laws and
policies deemed to be unfair. For example,
regulations, U.S. firms charge that enforce-
some Members argue that China’s currency
ment is lax and ineffective and costs U.S.
policy undervalues its currency (the renminbi,
firms billions of dollars in lost sales annually.
or yuan) vis-a-vis the U.S. dollar, making
On October 26, 2005, the United States initi-
U.S. exports to China more expensive, and
ated a special process under WTO rules to
U.S. imports from China cheaper, than they
obtain detailed information on China’s IPR
would be if the yuan were fully convertible. A
enforcement efforts. If China fails to comply
number of bills have been introduced to ad-
with this request, the United States might
dress China’s currency policy, including some
choose to bring a dispute resolution case
that, and others that would apply U.S. counter-
against China in the WTO.
vailing laws (dealing with government subsi-
dies) to nonmarket economies (based on the
belief that China’s currency policy is an indi-
rect government subsidy). On July 21, 2005,
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
In its November 28, 2005 report to Congress on exchange rate policies, the Treasury
Department did not cite China as a country that manipulates its currency, but concluded that
it had failed to fully implement its commitment to make its new exchange rate mechanism
more flexible and to increase the roll of market forces.
On November 16, 2005, the Senate agreed to consider S. 295 (a bill which would raise
U.S. tariffs on Chinese goods by 27.5% unless China appreciated its currency to market
levels) no later than March 31, 2006.
On November 8, 2005, China agreed to restrict textile and apparel exports to the United
States.
On October 26, 2005, United States initiated a special process under World Trade
Organization (WTO) rules to obtain detailed information on China’s IPR enforcement
efforts.
On July 27, 2005, the House passed H.R. 3283, a bill that would apply U.S.
countervailing law to nonmarket economies (such as China), require extensive monitoring
of China’s commitments on trade and intellectual property rights, and require the Treasury
Department to report on China’s new currency mechanism.
On July 21, 2005, the Chinese government announced major reforms to its currency
policy. It stated that China’s currency would now be “referenced” to a basket of currencies
and that the exchange rate of the U.S. dollar against the yuan would immediately be adjusted
to 8.11 yuan per U.S. dollar (from about 8.28), an appreciation of 2.1%.
BACKGROUND AND ANALYSIS
U.S. Trade with China1
U.S.-China trade rose rapidly after the two nations established diplomatic relations
(January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-
favored-nation (MFN) treatment beginning in 1980. Total trade (exports plus imports)
between the two nations rose from about $5 billion in 1980 to $231 billion in 2004; China
is now the third-largest U.S. trading partner. Over the past few years, U.S. trade with China
has grown at a faster pace than that of any other major U.S. trading partner.
The U.S. trade deficit with China has grown significantly in recent years, due largely
to a surge in U.S. imports of Chinese goods relative to U.S. exports to China. That deficit
1 For additional statistics on U.S.-China trade, see CRS Report RL31403, China’s Trade with the
United States and the World, by Thomas Lum and Dick K. Nanto. For general information on U.S.
China ties, see CRS Report RL32804, China-U.S. Relations: Current Issues and Implications for
U.S. Policy, by Kerry Dumbaugh.
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rose from $30 billion in 1994 to $162 billion in 2004 (see Table 1). The U.S. trade deficit
with China is now larger than that of any other U.S. trading partner, including Japan ($75.2
billion), Canada ($65.8 billion), and Mexico ($45.1 billion). The U.S. trade deficit with
China in 2004 was 30.6% higher than it was in 2003. During the first nine months of 2005,
the U.S. trade deficit with China was 28% higher than the same period in 2004. If current
trends continue, the total U.S. trade deficit with China in 2005 could hit $207 billion.
Table 1. U.S. Merchandise Trade with China: 1994-2005
($ in billions)
U.S.
U.S. Trade
Year
U.S. Imports
Exports
Balance
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
-83.1
2002 22.1
125.2
-103.1
2003 28.4
152.4
-124.0
2004 34.7
196.7
-162.0
2005
40.5
248.8
-208.3
(projection)*
Source: U.S. Department of Commerce.
* 2005 projection based on January-September 2005 data.
Major U.S. Exports to China
U.S. exports to China in 2004 totaled $34.7 billion, up 22.2% over 2003 levels, making
China the 5th largest U.S. export market in 2004 (it ranked 6th in 2003). U.S. exports to
China accounted for 4.2% of total U.S. exports in 2004 (compared to 3.9% in 2003). The
top five U.S. exports to China in 2004 were semiconductors and electronic components,
soybeans, waste and scrap, aircraft, and chemicals (see Table 2). During the first nine
months of 2005, U.S. exports were up by 16.7% over the same period in 2004.
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Table 2. Top Five U.S. Exports to China: 2000-2004
($ in billions and % change)
NAIC Commodity
2003-2004
2000-2004
Groupings
2000
2001
2002
2003
2004
% Change
% Change
Total all commodities
16.3
19.2
22.1
28.4
34.7
22.2
112.9
Semiconductors and other
1.3
1.7
2.2
3.0
3.6
20.0
176.9
electronic components
Oilseeds and grains
1.0
1.0
0.9
2.9
2.8
-1.4
180.0
(mainly soybeans)
Waste and scrap
0.7
1.1
1.2
1.9
2.5
29.1
257.1
Aerospace products and
1.8
2.6
3.6
2.7
2.1
-22.1
16.7
parts (mainly aircraft)
Basic chemicals
0.7
0.6
0.8
1.4
2.0
41.1
187.4
Commodities sorted by top five exports in 2004 using NAIC classification, four-digit level.
Source: U.S. International Trade Commission Database.
Many trade analysts argue that China could prove to be a much more significant market
for U.S. exports in the future. China is one of the world’s fastest-growing economies, and
rapid economic growth is likely to continue in the near future, provided that economic
reforms are continued. China’s goal of modernizing its infrastructure and upgrading its
industries is predicted to generate substantial demand for foreign goods and services.
According to a U.S. Department of Commerce report: “China’s unmet infrastructural needs
are staggering. Foreign capital, expertise, and equipment will have to be brought in if China
is to build all the ports, roads, bridges, airports, power plants, telecommunications networks
and rail lines that it needs.” Finally, economic growth has substantially improved the
purchasing power of Chinese citizens, especially those living in urban areas along the east
coast of China. China’s growing economy and large population make it a potentially
enormous market. To illustrate:
! China currently has the world’s largest mobile phone network, and one of
the fastest-growing markets, with 320 million cellular phone users as of
2004 (50 million new subscribers were added in 2004).
! Boeing Corporation predicts that China will be the largest market for
commercial air travel outside the U.S. for the next 20 years; during this
period, China will buy 2,300 aircraft valued at $183 billion. By 2003,
Chinese carriers are expected to be flying more than 2,801 airplanes, making
China the largest commercial aviation market outside the United States. In
January 2005, Chinese airline companies ordered 60 new Boeing 787 jets
for $7.2 billion, and in August 2005, Chinese airline companies placed an
order for 42 Boeing 787 jets valued at $5 billion.
! In 2002, China replaced Japan as the world’s second-largest PC market.
China also became the world’s second-largest Internet user (after the United
States) with nearly 94 million users at the end of 2004.
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! The Chinese government projects that by the year 2020, there will be 140
million cars in China (seven times the current level), and that the number of
cars sold annually will rise from 4.4 million units to 20.7 million units.
Major U.S. Imports from China
China is a relatively large source of many U.S. imports, especially labor-intensive
products. In 2004, imports from China totaled $196.7 billion, accounting for 13.4% of total
U.S. imports in 2004 (up from 6.5% in 1996). U.S. imports from China rose by 29.1% in
2004 over the previous year; over the past four years they have risen by 92.3%. The
importance (ranking) of China as a source of U.S. imports has risen dramatically, from 8th
largest in 1990, to 4th in 2000, to 2nd in 2004. During the first nine months of 2005, U.S.
imports from China were 25.9% higher than the same period in 2004.
As indicated in Table 3, the top five U.S. imports from China in 2004 were computers
and parts, miscellaneous manufactured articles (such as toys, games, etc.), audio and video
equipment, footwear, and apparel. Traditionally, nearly all of U.S. imports from China have
been low-value, labor-intensive products such as toys and games, footwear, and textiles.
However, over the past few years, an increasing proportion of U.S. imports from China has
comprised more technologically advanced products, such as computers.
Table 3. Top Five U.S. Imports from China: 2000-2004
($billions and % change)
2003-2004
2000-2004
NAIC Commodity
2000
2001
2002
2003
2004
% Change % Change
Total All Commodities
100.1
102.3
125.2
152.4
196.7
28.7
92.3
Computer equipment
8.3
8.2
12.0
18.7
29.5
58.1
255.4
Miscellaneous manufactured
16.3
16.5
19.5
21.8
23.7
8.9
45.4
commodities (e.g., toys,
games, etc.)
Audio and video equipment
6.3
6.3
8.9
10.0
11.2
26.4
77.8
Footwear
9.1
9.6
10.1
10.4
11.2
7.4
23.1
Apparel
7.0
7.2
7.7
9.0
10.5
16.8
50.0
Commodities sorted by top five imports in 2004 using NAIC classification, four-digit level.
Source: U.S. International Trade Commission Trade Data Web.
Many analysts contend that the sharp increase in U.S. imports from China is largely the
result of movement in production facilities from other Asian countries to China.2 That is,
various products that used to be made in Japan, Taiwan, Hong Kong, etc., and then exported
to the United States are now being made in China (in many cases, by foreign firms in China)
and exported to the United States. An illustration of this shift can be seen in Table 4 on U.S.
imports of computer equipment and parts from 2000-2004. In 2000, Japan was the largest
2 Chinese data indicate that the share of China’s exports produced by foreign-invested enterprises
(FIEs) in China rose from 1.9% in 1986 to 57% in 2004.
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foreign supplier of U.S. computer equipment (with a 19.6% share of total shipments), while
China ranked 4th (at 12.1%). In just five years, Japan’s ranking fell to 5th, the value of its
shipments dropped by over half, and its share of shipments declined to 8.5% (2004);
Singapore and Taiwan also experienced significant declines in their computer equipment
shipments to the United States over this period. In 2004, China was by far the largest foreign
supplier of computer equipment with a 40% share of total imports. While U.S. imports of
computer equipment from China rose by 255% over the past five years, the total value of
U.S. imports of these commodities rose by only 7.9%, an indicator that several foreign firms
have shifted their production facilities to China.
Table 4. Major Foreign Suppliers of U.S. Computer Equipment
Imports: 2000-2004
($billions and % change)
2000-2004 %
2000
2001
2002
2003
2004
Change
Total
68.5
59.0
62.3
64.0
73.9
7.9
China
8.3
8.2
12.0
18.7
29.5
255.4
Malaysia
4.9
5/0
7.1
8.0
8.7
77.6
Mexico
6.9
8.5
7.9
7.0
7.4
7.2
Singapore
8.7
7.1
7.1
6.9
6.6
-24.1
Japan
13.4
9.5
8.1
6.3
6.3
-53.0
Taiwan
8.3
7.0
7.1
5.4
4.1
-50.6
Ranked according to top 6 suppliers in 2004.
Source: U.S. International Trade Commission Trade Data Web.
Major U.S.-China Trade Issues
Although China’s economic reforms and rapid economic growth have expanded U.S.-
China commercial relations in recent years, tensions have arisen over a wide variety of
issues, including the growth and size of the U.S. trade deficit with China (which many
Members contend is an indicator that the trade relationship is unfair), China’s currency
policy (which many Members blame for the size of the U.S. trade deficit with China and the
loss of manufacturing jobs in the United States), China’s mixed record on implementing its
obligations in the WTO, failure to provide adequate protection of U.S. intellectual property
rights (IPR), and over the challenges posed by China’s rising economic power Several bills
have been introduced to respond to several of these issues (see section on legislation).
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China’s Currency Peg3
Between 1994 and July 2005, China pegged its currency, the yuan, to the U.S. dollar at
about 8.28 yuan to the dollar. In order to maintain the rate of exchange with the dollar, the
government has maintained restrictions and controls over capital transactions and through
large scale purchases of U.S. dollars. For example, most firms in China are required to
exchange a large share of their hard currency earnings to the central government in exchange
for yuan.
Many U.S. policymakers and business representatives have charged that China’s
currency is significantly undervalued vis-à-vis the U.S. dollar (with estimates ranging from
15 to 40%), making Chinese exports to the United States cheaper, and U.S. exports to China
more expensive, than they would be if exchange rates were determined by market forces.
They complain that this policy has particularly hurt several U.S. manufacturing sectors (such
as textiles and apparel, furniture, plastics, machine tools, and tool and dye), which are forced
to compete against low-cost imports from China, and has contributed to the growing U.S.
trade deficit with China. They have called on the Bush Administration to pressure China
either to appreciate its currency or to allow it to float freely in international markets.
Chinese officials argue that its currency policy is not meant to favor exports over
imports, but instead to foster economic stability. They have expressed concern that
abandoning its currency policy could cause an economic crisis in China and would especially
hurt its export industries sectors at a time when painful economic reforms (such as closing
down inefficient state-owned enterprises and restructuring the banking system) are being
implemented. Chinese officials view economic stability as critical to sustaining political
stability; they fear an appreciated currency could reduce jobs and lower wages in several
sectors and thus cause worker unrest.
U.S. critics of China’s currency policy contend that the low value of the yuan has forced
other East Asian economies to keep the value of their currencies low vis-à-vis the U.S. dollar
in order to compete with Chinese products. They further note that while China is still a
developing country, it has been able to accumulate massive foreign exchange reserves ($769
billion at end of June 2005) and thus has the resources to maintain the stability of its currency
if it were fully convertible. They also argue that appreciating the yuan would greatly benefit
China by lowering the cost of imports. Several bills have been introduced in Congress to
address this issue (see legislation section). On the other hand analysts have indicated
concern that pushing China to appreciate its currency could cause it to decrease purchases
of U.S. Treasury securities, which might result in higher U.S. interest rates. China is the
second largest foreign purchaser (after Japan) of U.S. Treasury securities ($252.2 billion as
of September 2005).

3 For additional information on this issue, see CRS Report RS21625, China’s Currency Peg: A
Summary of the Economic Issues, by Wayne Morrison and Marc Labonte; and CRS Report
RL32165, China’s Exchange Rate Peg: Economic Issues and Options for U.S. Trade Policy, by
Wayne Morrison and Marc Labonte.
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The Bush Administration’s Response. President Bush has criticized China’s
currency peg, stating that exchange rates should be determined by market forces, and he has
raised the issue during meetings with high level Chinese officials (including Chinese
President Hu Jintao. Initially, the Bush Administration rejected calls from several Members
to apply direct pressure on China to force it to abandon its currency peg. Instead, the
Administration sought to encourage China to reform its financial system under the auspices
of a joint technical cooperation program, agreed to on October 14, 2003.
The Administration’s position on China’s currency peg appears to have toughened in
April 2005, when U.S. Treasury Secretary John Snow stated at a G-7 meeting that “China
is ready now to adopt a more flexible exchange rate.” In its May 17, 2005 report on
exchange rate policies, the Treasury Department stated that China’s currency peg policy “is
a substantial distortion to world markets” and that “China is now ready to move to a more
flexible exchange rate and should move now.” The report warned that the Treasury
Department would closely monitor China’s progress over the next six months.
China Changes its Currency Policy. On July 21, 2005, the Chinese government
announced that the yuan’s exchange rate would become “adjustable, based on market supply
and demand with reference to exchange rate movements of currencies in a basket,” (which
include the U.S. dollar, the Japanese yen, the euro, the South Korean won, and a number of
other currencies), and that the exchange rate of the yuan to the U.S. dollar would be
immediately adjusted from 8.28 to 8.11, an appreciation of about 2.1%. Congressional
reaction to China’s announcement was mixed — many welcomed the move, but some
referred to it as merely a good first step and called on China to further appreciate the yuan.
However, on July 26, 2005, China’s Central Bank stated it had no immediate plans for
further revaluations and that reforms would be done in a “gradual” way.
In its November 28, 2005 report to Congress on exchange rate policies, the Treasury
Department did not cite China as a country that manipulates its currency, but concluded that
it had failed to fully implement its commitment to make its new exchange rate mechanism
more flexible and to increase the roll of market forces. Instead, the report stated that China’s
new currency appears to strongly resemble the previous mechanism of pegging the yuan to
the dollar. However, the report stated that Treasury would not cite China as a manipulator
because of China’s assurances that it was committed to “enhanced, market-determined
currency flexibility” and that it would put greater emphasis on promoting domestic sources
of growth, including financial reform.
China and the World Trade Organization
Negotiations for China’s accession to the General Agreement on Tariffs and Trade
(GATT) and its successor organization, the WTO, began in 1986 and took over 15 years to
complete. During the WTO negotiations, Chinese officials insisted that China was a
developing country and should be allowed to enter under fairly lenient terms. The United
States insisted that China could enter the WTO only if it substantially liberalized its trade
regime. In the end, a compromise was reached that requires China to make immediate and
extensive reductions in various trade and investment barriers, while allowing it to maintain
some level of protection (or a transitionary period of protection) for certain sensitive sectors.
China’s WTO membership was formally approved at the WTO Ministerial Conference in
Doha, Qatar on November 10, 2001 (Taiwan’s WTO membership was approved the next
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day). On November 11, 2001, China notified the WTO that it had formally ratified the WTO
agreements, and on December 11, 2001, it formally joined the WTO. Under the WTO
accession agreement, China agreed to:
! Reduce the average tariff for industrial goods and agriculture products to
8.9% and 15%, respectively (with most cuts made by 2004 and all cuts
completed by 2010).
! Limit subsidies for agricultural production to 8.5% of the value of farm
output and eliminate export subsidies on agricultural exports.
! Within three years of accession, grant full trade and distribution rights to
foreign enterprises (with some exceptions, such as for certain agricultural
products, minerals, and fuels).
! Provide non-discriminatory treatment to all WTO members. Foreign firms
in China will be treated no less favorably than Chinese firms for trade
purposes.
! Implement the WTO’s Trade-Related Aspects of Intellectual Property Rights
(TRIP) Agreement upon accession.
! Accept a 12-year safeguard mechanism, available to other WTO members
in cases where a surge in Chinese exports cause or threaten to cause market
disruption to domestic producers.
! Fully open the banking system to foreign financial institutions withing five
years. Joint ventures in insurance and telecommunication will be permitted
(with various degrees of foreign ownership allowed).
WTO Implementation Issues. In December 2004, the USTR issued its third annual
China WTO compliance report. It stated that, while China’s efforts to implement its WTO
commitments have been “impressive,” they remain “far from complete and have not always
been satisfactory.” Major areas of concern identified by the USTR’s report include
discriminatory import policies, burdensome regulations and restrictions on agriculture and
services, industrial policies that discriminate against foreign companies, restrictions on
trading rights and distribution, failure to provide adequate transparency of trade laws and
regulations, and poor IPR protection. For example:
! Export subsidies and discriminatory taxes. U.S. officials charge that
China has subsidized grain exports (mainly corn) and cotton, and uses its tax
system to promote exports and discourage imports, contrary to its WTO
commitments. For example, China continues to give rebates on value-added
taxes (VAT) for certain exports, especially high tech products. In some
instances, China imposes higher VAT rates on certain imported products
(such as fertilizers and various agricultural products) than it does for similar
products produced domestically. On March 18, 2004, the USTR announced
it had filed a WTO dispute resolution case against China over its
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discriminatory tax treatment of imported semiconductors.4 Following
consultations with the Chinese government, the USTR announced on July
8, 2004, that China agreed to end its preferential tax policy on certain
semiconductors by April 2005.
! Services. U.S. firms have complained that Chinese regulations on services
are confusing and often discriminatory. China maintains high capital
requirements, restrictions on branching, and prudential requirements (e.g.,
already operating in China for a certain number of years, profit
requirements) in order for firms to enter the market. In addition, many U.S.
firms have complained that they have not been afforded the extent of market
access promised under China’s WTO accord, especially regarding
geographic market access and the amount of foreign ownership allowed for
insurance and telecommunications companies in China.
! Health and safety requirements. U.S. officials charge that China
continues to use a variety of health and safety regulations to effectively bar
foreign imports, especially food products (such as wheat, poultry and meats,
and citrus). Many of these issues where supposed to have been resolved
under a 1999 agreement with China.
! Industry policies. Although China agreed to make state-owned enterprises
(SOE) operate according to free market principles when it joined the WTO,
U.S. officials contend that SOEs are still being subsidized, especially
through the banking system. This is seen as a significant problem since
nearly half of China’s exports come from SOEs. The use of subsidies is
viewed as giving Chinese firms an unfair trade advantage. Under the terms
of China’s WTO accession agreement, China is required to report its subsidy
programs. However, to date, it has failed to do so.

! IPR. While China has enacted a variety of new IPR laws, enforcement of
those laws remains relatively weak (see section on IPR below).
Most Recent Developments. A number of market access and IPR issues were
discussed during the latest round of meetings held under the auspices of the U.S.-China Joint
Commission on Commerce and Trade (JCCT) held on July 11, 2005.5 In terms of market
access, China agreed to fulfil its WTO obligations on distribution rights and direct sales (and
to make rules governing these activities more transparent), continue a dialogue with the
United States to discuss U.S. concerns regarding access to insurance and telecom markets
in China, improve cooperation with the United States on animal and plant safety issues and
take other measures to improve access for U.S. agricultural products (including biotech
corn), and provide a detailed accounting of its subsidies to the WTO by the end of 2005.
China also agreed to substantial reforms to its IPR protection regime (discussed below).
4 The United States claimed that China applied a 17% VAT rate on semiconductor chips that have
been designed and made outside China, but gave VAT rebates to domestic producers.
5 The JCCT was established in 1983 to provide a forum for high level bilateral economic and trade
discussions.
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Violations of U.S. Intellectual Property Rights
The United States has pressed China to improve its IPR protection regime since the late
1980s. In 1991, the United States (under a Section 301 case) threatened to impose $1.5
billion in trade sanctions against China if it failed to strengthen its IPR laws. Although
China later implemented a number of new IPR laws, it often failed to enforce them, which
led the United States to once again threaten China with trade sanctions. The two sides
reached a trade agreement in 1995, which pledged China to take immediate steps to stem IPR
piracy by cracking down on large-scale producers and distributors of pirated materials and
prohibiting the export of pirated products, establishing mechanisms to ensure long-term
enforcement of IPR laws and providing greater market access to U.S. IPR-related products.
Under the terms of China’s WTO accession (see above), China agreed to immediately
bring its IPR laws in compliance with the WTO agreement on Trade Related Aspects of
Intellectual Property Rights (TRIP). The USTR has stated on a number of occasions that
China has made great strides in improving its IPR protection regime, noting that it has passed
several new IPR-related laws, closed or fined several assembly operations for illegal
production lines, seized millions of illegal audio-visual products, curtailed exports of pirated
products, expanded training of judges and law enforcement officials on IPR protection, and
expanded legitimate licensing of film and music production in China. However, the USTR
has indicated that much work needs to be done to improve China’s IPR protection regime.
U.S. business groups continue to complain about significant IPR problems in China,
especially of illegal reproduction of software, retail piracy, and trademark counterfeiting. It
is estimated that counterfeits constitute between15 and 20% of all products made in China
and totals and accounts for about 8% of China’s GDP. Chinese enforcement agencies and
judicial system often lack the resources (or the will) needed to vigorously enforce IPR laws;
convicted IPR offenders generally face minor penalties. In addition, while market access for
IPR-related products has improved, high tariffs, quotas, and other barriers continue to
hamper U.S. exports; such trade barriers are believed to be partly responsible for illegal IPR-
related smuggling and counterfeiting in China. Industry analysts estimate that IPR piracy in
China cost U.S. copyright firms $2.5 billion to $3.5 billion in lost sales in 2004.6 The piracy
rate for IPR-related products in China (such as motion pictures, software, and sound
recordings) is estimated at 90% or higher. In addition, China accounts for a significant share
of imported counterfeit products seized by U.S. Customs and Border Protection: $87.3
million, or 63% of total goods seized, in FY2004.
IPR protection has become one of the most important bilateral trade issues between the
United States and China in recent years:
! In April 2004, the Chinese government pledged to “significantly reduce”
IPR infringement levels by increasing efforts to halt production, imports,
and sales of counterfeit goods and lowering the threshold for criminal
prosecution of IPR violations.
6 International Intellectual Property Alliance, 2004 Special 301 Report: People’s Republic of China,
February 2005 (available at [http://www.iipa.com]).
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! On November 19, 2004, eight members of the House Ways and Means
Committee sent a letter to the Chinese Ambassador to the United States
(Yang Jiechi) expressing concern that proposed Chinese regulations on
government procurement of software would virtually lock out U.S. software
companies due to requirements for local content and technology transfer.
! On December 16, 2004, General Motors Daewoo Auto & Technology
Company (a division of General Motors) filed a case in China against Chery
Automobile Co. Ltd. (a Chinese firm) for allegedly violating its IPR by
copying one of its car models (the Chevrolet Spark) to produce the Chery
QQ. The case has raised concern in the United States because Chery is
planning to export its vehicles to the United States beginning in 2007.
! On February 9, 2005, the International Intellectual Property Alliance and the
U.S. Chamber of Commerce urged the USTR to initiate WTO consultations
with China for its poor record on IPR enforcement.
! On April 29, 2005, the USTR announced that it had placed China on the
Special 301 “Priority Watch List,” due to “serious concerns”over China’s
compliance with its WTO IPR obligations and China’s failure to fully
implement its pledges on IPR made in April 2004 to make a significant
reduction in IPR piracy. The USTR urged China to launch more criminal
piracy cases and to improve market access for IPR-related products, and
warned that it was considering taking a case to the WTO if IPR enforcement
did not soon show significant improvement.
Most Recent Action. During the JCCT July 2005 meeting, China agreed to boost
enforcement of IPR, such as increasing criminal prosecutions of IPR offenders, improving
cooperation among Chinese enforcement officials and between U.S. and Chinese IPR
officials, and taking special steps to halt movie and internet piracy. It also pledged to
improve government coordination of enforcement efforts, and to ensure the use by all levels
of the Chinese government (including state-owned firms) of legitimate software products.
In addition, the Chinese government agreed to delay implementing proposed regulations
restricting government purchases of foreign-made software and to accelerate efforts to join
the WTO’s Government Procurement Agreement.
On October 26, 2005, the United States initiated a special process under WTO rules to
obtain detailed information on China’s IPR enforcement efforts. If China does not provide
sufficient or satisfactory information to the United States on its IPR enforcement efforts, the
United States may bring a trade dispute resolution case against China in the WTO.
Chinese Acquisition of U.S. Companies
China’s rise as an economic power has raised a number of concerns among U.S.
policymakers. Of particular concern over the past year has been efforts by Chinese
companies with substantial state ownership to make bids to take over major U.S. companies.
Many Members believe these takeovers could pose risks to U.S. economic and national
security interests. Some of these major takeover bids include:
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! On December 8, 2004, Lenovo Group Limited, a computer company
primarily owned by the Chinese government, signed an agreement with IBM
Corporations to purchase IBM’s personal computer division for $1.75
billion. On April 30, 2005, the acquisition was completed.
! On June 20, 2005, Haier Group, a major Chinese home appliances
manufacturer, made a $1.28 billion bid to take over Maytag Corporation.7
The bid was withdrawn on July 19, 2005.
! On June 23, 2005, the China National Offshore Oil Corporation (CNOOC),
through its Hong Kong subsidiary (CNOOC Ltd.), made a bid to buy a U.S.
energy company, UNOCAL, for $18.5 billion. On August 2, 2005, CNOOC
withdrew its bid.
Congressional concern over Chinese efforts to purchase U.S. concerns is driven in part
by the perception that China does not play by the rules in international trade policy. For
example, most of China’s major companies are state-owned or are largely owned by the
state.8 Many U.S. analysts believe that Chinese state firms are heavily subsidized by the
government (primarily through the banking system where loans often go unpaid) and that the
government has a plan to direct companies under its control to purchase major international
companies to obtain their brand names and thus become global companies. Some analysts
believe that the Chinese government may also be involved in financing takeover bids.
Finally, many Members contend that Chinese firms should not be allowed to take over U.S.
firms because, in most cases, China does not allow foreign firms to take over major Chinese
companies (rather it sometimes permits minority ownership in some companies).
Congressional Concern Over the CNOOC Bid. CNOOC’s bid to take over
Unocal was particularly troublesome to many Members of Congress. On June 27, 2005,
Representative Joe Barton, Chairman of the House Energy and Commerce Committee, and
Representative Ralph Hall, chairman of the House Energy and Commerce Subcommittee on
Energy and Air Quality sent a letter to President Bush expressing “deep concern” over
CNOOC’s bid to take over Unocal, describing it “a clear threat to the energy and national
security of the United States.” The letter went on to state that the transaction would put vital
oil assets in the Gulf of Mexico and Alaska into the hands of a Chinese state controlled
company, contrary to the goal of enhanced energy independence embodied in the House-
passed energy bill (H.R. 6). Finally, the letter stated that the deal could transfer “a host of
highly advanced technologies” to China. The letter concluded by urging the President to
ensure that “vital U.S. energy assets are never sold to the Chinese government.” In the
Senate, letters written by Senators Conrad, Portman, and Grassley expressed concerns that
CNOOC’s bid to take over Unocal would be heavily subsidized by the Chinese government
and urged the Administration to determine whether the CNOOC bid would be a violation of
China’s WTO commitments. Several bills were introduced on CNOOC’s bid, including
some that would have blocked the sale had it gone through.9
7 Haier made the bid under a consortium of investors, which includes U.S. private equity groups.
8 CNOOC, for example, is 70% owned by the Chinese government.
9 On June 30, 2005, the House passed H.Res. 344 (Pombo) by a vote of 398 to 15, expressing the
(continued...)
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CNOOC made a number of pledges to allay concerns, including promising that most
of the oil and gas produced by UNOCAL in the United States would still be sold in the
United States and that most Unocal jobs in the United States would be retained. The
chairman of CNOOC stated that his company’s main interest in UNOCAL was its large
holdings of oil and gas in Asia, not the United States. However, on August 2, 2005, CNOOC
announced it was withdrawing its bid, citing significant political opposition to the sale in the
United States, which the company termed as “regrettable and unjustified.”10
U.S. Restrictions on Certain Imports from China
Various U.S. industry groups have called on the Administration to invoke special
safeguard provisions (included in China’s WTO accession package) that would enable the
United States to restrict imports of certain Chinese products deemed harmful to U.S.
industries. U.S. producers of textile and apparel products have been particularly vocal over
the competitive pressures they face from China, especially since U.S. textile and apparel
quotas on Chinese goods were eliminated in January 2005.11 According to the U.S.
Commerce Department, China is the United States’ largest foreign supplier of textiles and
apparel, accounting for 17.5% of total imports in 2004 (or $14.6 billion), compared with a
9.1% share ($6.5 billion) in 2000. U.S. textile and apparel imports from China rose by 22%
in 2003 and by 25% in 2004. Many U.S. textile and apparel representatives note that the
flood of Chinese textile and apparel products into the United States has continued, especially
now that the quotas have been eliminated. Total textile and apparel imports from China
during the first six months of 2005 were 46.6% higher than they were during the same period
in 2004.
The Administration has imposed safeguard provisions (i.e. quotas) on textile products
on a number of occasions, and has been particularly active in 2005.12 The Chinese
government has vigorously protested the U.S. use of safeguard measures, calling them
protectionist and a violation of WTO rules. Many members of Congress have called on the
Administration to seek a comprehensive agreement with China on limiting its textile and
apparel exports to the United States, a policy the Administration began pursuing beginning
9 (...continued)
sense of the House of Representatives that a Chinese state-owned energy company exercising control
of critical United States energy infrastructure and energy production capacity could take action that
would threaten to impair the national security of the United States and calls on the President to make
a thorough review if the deal takes place. On the same day, the House passed an amendment,
H.Amdt. 431 (Kilpatrick), by a vote of 333 to 92, to an appropriations bill (H.R. 3058) that would
prohibit the use of funds from being made available to recommend approval of the sale of Unocal
to CNOOC. In the Senate, S 1412 (Dorgan) would prohibit CNOOC from purchasing Unocal.
10 For an overview of this issue, see CRS Report RL33093, China and the CNOOC Bid for Unocal:
Issues for Congress, by Dick K. Nanto, James K. Jackson, and Wayne M. Morrison.
11 For additional information on U.S.-China textile issues, see CRS Report RL32168, Safeguards on
Textile and Apparel Imports from China, by Vivian C. Jones.
12 On May 13, 2005, the Administration announced it would invoke safeguard measures on cotton
knit shirts and blouses, cotton trousers, and cotton and man-made fiber underwear. On May 15,
2005, it announced it would invoke safeguards on men’s and boys’ cotton and man-made fiber shirts,
man-made fiber trousers, man-made fiber knit shirts and blouses, and combed cotton yarn.
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in August 2005. On November 8, 2005, China agreed to restrict various textile and apparel
exports to the United State (according to specified quota levels) from January 2006 through
the end of 2008.
Legislation on U.S.-China Trade in the 109th Congress
A number of bills that would affect U.S.-China trade relations have been introduced in
the 109th Congress. This section lists major bills and congressional action.
Comprehensive China Trade Legislation
Legislation has been introduced that seeks to address a wide number of trade disputes
in U.S.-China relations:13
! H.R. 3283 (English) would apply U.S. countervailing laws (dealing with
foreign government subsidies) to non-market economies; establish a
comprehensive monitoring system to track China’s compliance with specific
WTO commitments and pledges made at JCCT meetings (such as on market
access, IPR protection, and reporting subsidies), and to require reports to
Congress on China’s progress on meeting these commitments; tighten rules
on anti-dumping duties to prevent non-payment; require the Treasury
Department to define “currency manipulation,” describe actions that would
be considered to constitute manipulation, and report on China’s new
currency regime; increase funding for the USTR to improve monitoring and
enforcement of U.S. trade agreements; and require the U.S. International
Trade Commission to conduct a comprehensive study on U.S.-China trade
and economic relations. The bill passed (255 to 168) on July 27, 2005. A
similar bill has been introduced in the Senate, S.1421 (Collins).
! H.R. 3306 (Rangel) would apply U.S. countervailing laws to non-market
economies; require the USTR to bring a case against China in the WTO over
its currency practices; define currency manipulation in U.S. trade law as
“protracted large-scale intervention by an authority to undervalue its
currency in the exchange market;” narrow the discretion of the USTR and
the President to deny relief for U.S. industries that are injured due to import
surges from China; tighten rules on anti-dumping duties to prevent non-
payment; and would reinstate “Super 301” to require the President to
identify trade expansion priorities and to take action against countries that
maintain the most significant barriers to U.S. exports.
13 The debate over U.S.-China trade relations became closely linked with congressional consideration
of the Dominican Republic-Central America-United States Free Trade Agreement (or the
DR-CAFTA). Some congressional observers contended that the DR-CAFTA might not pass the
House unless a tough China trade bill was first passed.
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! H.R. 4186 (Camp) would create a Chief Trade Prosecutor to ensure
compliance with trade agreements. (The sponsors of the bill named China
and Japan as the prime targets of their bill).
Bills Addressing China’s Currency Policy
In addition to H.R. 3283 and H.R. 3306, the following bills would address China’s
currency policy:
! S. 14 (Stabenow), S. 295 (Schumer), and H.R. 1575 (Myrick) direct the
Secretary of the Treasury to negotiate with China to accept a market-based
system of currency valuation, and imposes an additional duty of 27.5% on
Chinese goods imported into the United States unless the President submits
a certification to Congress that China is no longer manipulating the rate of
exchange and is complying with accepted market-based trading policies.
H.R. 3004 (English) would require the Treasury Department to determine
if China manipulated its currency and to impose additional tariffs on
Chinese goods comparable to the rate of currency manipulation.
! S.Amdt. 309 (Schumer) to S. 600 (Foreign Affairs Authorization Act),
which would impose a 27.5% tariff on Chinese goods if China failed to
substantially appreciate its currency to market levels. On April 6, 2005, the
Senate failed (by a vote of 33 to 67) to table the amendment, In response to
the vote, the Senate leadership moved to allow a vote on S. 295 (which has
same language as S.Amdt. 309) no later than July 27, 2005, as long as the
sponsors of the amendment agree not to sponsor similar amendments for the
duration of the 109th Congress. However, on June 30, Senator Schumer and
other sponsors of S. 295 agreed to delay consideration of the bill after they
received a briefing from Administration officials and were told that China
was expected to make significant progress on reforming its currency over the
next few months. Disappointment over China’s July 2005 currency reforms
led Senator Schumer to push for consideration of S. 295 (under the previous
compromise). On November 16, 2005, the Senate agreed to consider the
bill no later than March 31, 2006.
! H.R. 3157 (Dingell) and S. 377 (Lieberman) direct the President to negotiate
with those countries determined to be engaged most egregiously in currency
manipulation and to seek an end to such manipulation. If an agreement is
not reached, the President is directed to institute proceedings under the
relevant U.S. and international trade laws (such as the WTO) and to seek
appropriate damages and remedies for the U.S. manufacturers and other
affected parties.
! H.R. 2208 (Manzullo), S. 984 (Snowe), and S. 1048 (Schumer) adds
changes to the criteria that the U.S. Treasury Department is required to
consider when making a determination on currency manipulation (including
a protracted large-scale intervention in one direction in the exchange
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markets) in its bi-annual reports on International Economic and Exchange
Rate Policies.14
! H.R. 2414 (Rogers, Mike) would require the Treasury Department to make
a determination whether China’s currency policy interferes with effective
balance of payments adjustments or confers a competitive advantage in
international trade that would not exist if the currency value were set by
market forces. If such a determination were made, the President would be
required to bring a WTO case against China to seek across-the-board tariffs
on Chinese goods in order to offset the subsidy effects of undervaluation.
! H.R. 1216 (English) and S. 593 (Collins) would apply U.S. countervailing
laws to nonmarket economies. H.R. 1498 (Tim Ryan) would apply U.S.
countervailing laws to countries that manipulate their currencies.
! S.Res. 270 (Bayh) expresses the sense of the Senate that the International
Monetary Fund should investigate whether China is manipulating its
currency.
Other Bills
! H.Amdt 381 (Sanders) to H.R. 3057 would prohibit the U.S. Export-Import
Bank from financing the sale of U.S. nuclear power equipment to China.
The amendment passed on June 28, 2005, by a vote of 313 to 114. A similar
measure in the Senate (S.Amdt.1242 to H.R. 3057) failed to pass, by a
margin of 37 to 62, on July 19, 2005.
! H.Con.Res. 203 (Rangel) expresses the sense of the Congress that the
United States should seek a commitment from China to join the WTO
Agreement on Government Procurement.
! H.Con.Res. 303 (DeFazio) urges the USTR to take action to ensure that the
China complies with its IPR obligations to protect IPR.
! H.R. 738 (Sanders) would terminate China’s PNTR status.
14 A country would be considered to be manipulating its currency if there was a protracted
large-scale intervention in one direction in the exchange markets.
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