China-U.S. Trade Issues
Wayne M. Morrison
Specialist in Asian Trade and Finance
June 23, 2009
Congressional Research Service
7-5700
www.crs.gov
RL33536
CRS Report for Congress
Prepared for Members and Committees of Congress
China-U.S. Trade Issues
Summary
U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.-
China trade has risen from $5 billion in 1980 to $409 billion in 2008. In 2008, China was the
second largest U.S. trading partner, its third largest export market, and its biggest source of
imports. About 12% of total U.S. global trade is now with China. According to U.S. data, U.S.
firms have invested around $28 billion in China (through 2007), some of which is aimed at the
Chinese domestic market, while other investment has gone into export-oriented manufacturing
facilities.
With a huge population and a rapidly expanding economy, China is a potentially huge market for
U.S. exporters. However, bilateral economic relations have become strained over a number of
issues, including large and growing U.S. trade deficits with China ($266 billion in 2008), China’s
failure to fully implement its World Trade Organization (WTO) commitments (especially in
regards to protection of intellectual property rights), its refusal to adopt a floating currency
system, its use of industrial policies (such as subsidies) and other practices deemed unfair and/or
harmful to various U.S. economic sectors, and its failure in some cases to ensure that its exported
products meet U.S. health and safety standards.
Further complicating the bilateral economic relationship is China’s large holdings of U.S. debt,
such as Treasury securities. In September 2008, China overtook Japan to become the largest
foreign holder of such securities. Some analysts welcome China’s purchases of U.S. debt
securities, which help fund U.S. budget deficits, while others have expressed concerns that
growing Chinese holdings of U.S. debt may increase its leverage over the United States.
The current global economic crisis could further challenge China-U.S. economic ties. Many
analysts have expressed concern that the Chinese government may, in an effort to help its sagging
export industries, implement new trade barriers, boost industrial subsidies, and/or depreciate its
currency, which could harm some U.S. firms and workers. Many U.S. policymakers have urged
China to lessen its reliance on exports for its economic growth and instead implement policies to
promote domestic consumption. Central to this position is the belief that China should appreciate
its currency and eventually adopt a floating exchange rate system, which would boost its imports.
Several Members of Congress have urged the Obama Administration to take a more assertive
approach in dealing with Chinese economic practices, including increasing the use of U.S.
antidumping, countervailing, and safeguard provisions; bringing more dispute resolution cases
against China to the WTO; and continuing pressure on China to appreciate its currency. Others
have warned against using “protectionist” measures to block imports of Chinese goods and have
advocated using high-level bilateral talks (such as the Strategic Economic Dialogue that began
during the Bush Administration in 2006) to resolve major trade disputes.
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China-U.S. Trade Issues
Contents
U.S. Trade with China ................................................................................................................. 1
Major U.S. Exports to China ................................................................................................. 4
Major U.S. Imports from China............................................................................................. 6
Investment Ties..................................................................................................................... 8
China’s Holdings of U.S. Securities................................................................................. 8
U.S. Holdings of Chinese Securities .............................................................................. 10
Bilateral FDI Flows....................................................................................................... 10
Major U.S.-China Trade Issues.................................................................................................. 10
Health and Safety Concerns Over Certain Imports from China ........................................... 11
China’s Poor Regulatory System and Implications......................................................... 12
China’s Currency Policy...................................................................................................... 14
China and the World Trade Organization ............................................................................. 15
WTO Implementation Issues ............................................................................................... 16
Pending U.S. Cases Against China ................................................................................ 18
Chinese WTO Cases Against the United States.............................................................. 20
Violations of U.S. Intellectual Property Rights .................................................................... 20
The U.S. WTO Cases Against China on IPR.................................................................. 22
Applying U.S. Countervailing Laws to China ...................................................................... 23
China Safeguard Provisions ................................................................................................ 23
Textile and Apparel Products............................................................................................... 24
The U.S.-China Strategic and Economic Dialogue............................................................... 24
U.S.-China Trade Legislation in the 111th Congress ................................................................... 25
Figures
Figure 1. U.S. Trade With China: 2000-2008 ............................................................................... 3
Figure 2. Top Five U.S. Export Markets: 2008............................................................................. 3
Tables
Table 1. U.S. Merchandise Trade with China: 1980-2008 and Projections for 2009*.................... 2
Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2008 ............................ 2
Table 3. Major U.S. Exports to China: 2008 ................................................................................ 4
Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and 2008 ......................... 5
Table 5. Major U.S. Imports From China: 2008 ........................................................................... 6
Table 6.Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2008 .................... 7
Table 7. China’s Holdings of U.S. Securities: June 2002-June 2008 ............................................. 9
Table 8. China’s Holdings of U.S. Treasury Securities: 2002-2008 Year-End and April
2009 ........................................................................................................................................ 9
Table 9. China’s Cumulative FDI in the United States and U.S. FDI in China: 2002-2007.......... 10
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China-U.S. Trade Issues
Contacts
Author Contact Information ...................................................................................................... 26
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conomic and trade reforms (begun in 1979) have helped transform China into one of the
world’s fastest growing economies. China’s economic growth and trade liberalization,
E including comprehensive trade commitments made upon entering the World Trade
Organization (WTO) in 2001, have led to a sharp expansion in U.S.-China commercial. Yet,
bilateral trade relations have grown increasingly strained in recent years over a number of issues,
including a large and growing U.S. trade deficit with China, the refusal by China to adopt a
floating currency, its failure to fully implement many of its WTO obligations, especially in
regards to protection of intellectual property rights (IPR), and problems relating to the health and
safety of Chinese-made products. Several Members of Congress have called on the Obama
Administration to take a tougher stance against China to induce it to eliminate economic policies
deemed harmful to U.S. economic interests and/or are inconsistent with WTO rules.
This report provides an overview of U.S.-China economic relations, surveys major trade disputes,
and lists bills introduced in the 111th Congress that would impact bilateral commercial ties.
U.S. Trade with China1
U.S.-China trade rose rapidly after the two nations re-established diplomatic relations (in January
1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation
(MFN) treatment beginning in 1980.2 In 1978 (before China’s reforms began), total U.S.-China
trade (exports plus imports) was $1 billion; China ranked as the 32nd largest export market and the
57th largest source of U.S. imports. In 2008, bilateral trade hit $409 billion, making China the
second largest U.S. trading partner (after Canada), the third largest U.S. export market, and the
largest source of U.S. imports. In recent years, China has been one of the fastest growing U.S.
export markets and the importance of this market is expected to grow even further as living
standards continue to improve and a sizable Chinese middle class emerges.
The U.S. trade deficit with China has surged in recent years as imports from China have grown
much faster than U.S. exports to China (although it grew by only $10 billion in 2008). That
deficit rose from $34 billion in 1995 to $266 billion in 2008 (see Table 1 and Figure 1); it was
significantly larger than that with any other U.S. trading partner and several trading groups. For
example, it was nearly equal to the combined U.S. deficits with the countries that make up the
Organization of the Petroleum Export Countries (OPEC) and the 27 countries that make up the
European Union (EU27), and it was more than three times larger than the trade deficit with Japan
(see Table 2). Some analysts view the huge U.S. trade deficit with China as an indicator that
China’s economic and trade policies are restrictive or unfair, while others contend that the
growing deficit reflects a shift in export-oriented production from other countries (largely in Asia)
to China.
1 For more information on China’s economy, see CRS Report RL33534, China’s Economic Conditions, by Wayne M.
Morrison. For general information on U.S.-China ties, see CRS Report RL33877, China-U.S. Relations in the 110th
Congress: Issues and Implications for U.S. Policy, by Kerry Dumbaugh.
2 The United States suspended China’s MFN status in 1951, which cut off most bilateral trade. China’s MFN status was
conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act, as amended
(including the Jackson-Vanik freedom of emigration provisions). China’s MFN status (which was re-designated under
U.S. trade law as normal trade relations status, or NTR) was renewed on an annual basis through January 2002, when
permanent NTR was extended to China (after it joined the WTO).
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The global financial crisis has had a significant impact on U.S.-China trade flows. During the
first four months of 2009, U.S. exports to, and imports from, China were down 17.2% and 12.1%,
respectively over the same period in 2008. At this rate, the U.S. trade deficit with China could
decline to $238 billion in 2009.
Table 1. U.S. Merchandise Trade with China: 1980-2008 and Projections for 2009*
($ in billions)
Year
U.S. Exports
U.S. Imports
U.S. Trade Balance
1980 3.8
1.1
2.7
1985 3.9
3.9
0.0
1990 4.8
15.2
-10.4
1995
11.7
45.6
-33.8
2000
16.3
100.1
-83.8
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
41.8
243.5
-201.6
2006 55.2
287.8
-232.5
2007 65.2
321.5
-256.3
2008 71.5
337.8
-266.3
2009 projection*
59.2
296.9
-237.7
Source: USITC DataWeb.
* 2009 projections based on actual data for January-April 2009.
Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2008
($ in billions)
Country or Trading Group
U.S. Trade Balance
World
-800.0
China
-266.3
Organization of Petroleum Exporting Countries (OPEC)
-175.6
European Union (EU27)
-93.4
Canada
-74.6
Japan
-72.7
Mexico
-64.4
Association of Southeast Asian Nations (ASEAN)
-50.6
Source: USITC DataWeb.
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Figure 1. U.S. Trade With China: 2000-2008
$billions
400
300
200
100
0
-100
-200
-300
2000 2001 2002 2003 2004 2005 2006 2007 2008
Exports
Imports
Trade Balance
Source: USITC DataWeb.
Figure 2. Top Five U.S. Export Markets: 2008
$billions
$billions
300
260.9
250
200
151.5
150
100
71.5
66.6
54.7
50
0
Canada
Mexico
China
Japan
Germany
U.S. Exports
Source: USITC DataWeb.
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Major U.S. Exports to China
U.S. merchandise exports to China in 2008 were $71.5 billion, up 9.5% (compared to an 18.1%
rise in 2007) over the previous year.3 In 2007, China overtook Japan to become the third largest
U.S. export market and was third in 2008 (see Figure 2). U.S. exports to China in 2008 accounted
for 5.5% of total U.S. exports (compared to 3.9% in 2003). The top five U.S. exports to China in
2008 were waste and scrap, semiconductors and electronic components, oilseeds and grain,
aircraft and parts, and resins and synthetic rubber and fibers (see Table 3).4 China is a significant
market for U.S. agricultural products. It was the fourth largest destination for U.S. agricultural
exports in 2008 at $12.1 billion, up 46.5% over the previous year. Major U.S. agricultural exports
to China include soybeans, meat products, and cotton.5
Over the past few years, China has been one of the fastest growing U.S. export markets, as can be
seen in Table 4. U.S. exports to China rose by nearly 240% from 2001 to 2008, which was higher
than that of any other top 10 U.S. trading partner.
Table 3. Major U.S. Exports to China: 2008
($ in millions and percent change)
2004 2005 2006 2007 2008 Percent Change
NAIC Number and Description
2007 - 2008
$ millions
9100
Waste
and
scrap
2,508 3,670 6,071 7,331 7,562
3.1%
3344 Semiconductors and other electronic
components
3,565 4,015 6,830 7,435 7,475
0.5%
1111 Oilseeds and grains
2,829
2,339
2,593
4,145
7,316
76.5%
3364 Aerospace products and parts
2,111
4,535
6,309
7,447
5,471
-26.5%
3252 Resin, synthetic rubber, and artificial &
synthetic fibers & filament
1,631 2,127 2,548 3,290 3,524
7.1%
Source: USITC DataWeb
Notes: North American Industry Classification system, 4-digit level.
3 The United States also exports a significant level of private services to China; these totaled $14.2 billion in 2007.
4 Based on the North American industry Classification System, 4-digit level.
5 Some U.S. analysts have expressed concern over the composition of U.S. exports to China, noting that much of it
consists of scrap products, components, and food, as opposed to high-value assembled manufactured products (such as
cars). Chinese official complain that U.S. export controls on high tech trade has a significant negative impact on the
composition and size of U.S. exports to China.
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Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and 2008
($ in billions and % change)
2001
2008
% Change from 2007-2008
% Change from
2001-2008
Canada 163.7
260.9
5.0
59.4
Mexico 101.5
151.5
11.0
49.3
China 19.2
71.5
9.5
272.3
Japan 57.6
66.6
6.2
15.6
Germany
30.1 54.7 10.2
31.9
United Kingdom
40.8
53.8
6.9
31.9
Netherlands
19.5 40.2 21.9
106.2
South Korea
22.2
34.8
6.9
56.8
Brazil
15.9 32.9 33.6
106.9
France 19.9
29.2
6.5
46.7
World 731.0
1,300.1
11.8
77.9
Source: USITC DataWeb. Ranked by top 10 U.S. export markets in 2008.
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 goals of modernizing its infrastructure, upgrading its industries, and improving rural
living standards could generate substantial demand for foreign goods and services. Finally,
economic growth has substantially improved the purchasing power of Chinese citizens, especially
those living in urban areas along the east coast of China. China’s growing economy and large
population make it a potentially enormous market. To illustrate:
• China currently has the world’s largest mobile phone network and one of the
fastest-growing markets, with an estimated 679 million mobile phone users (as of
April 2009), compared to 87 million users in 2000.
• Boeing Corporation predicts that China will be the largest market for commercial
air travel outside the U.S. for the next 20 years (2008-2027); during this period,
China will buy 3,710 aircraft valued at $390 billion.6 On April 11, 2006, Boeing
announced it had signed a general purchase agreement with China for 80 Boeing
737s. On September 6, 2007, China announced it would buy 55 Boeing aircraft
valued at $3.8 billion.
• It is estimated that China in 2008 replaced the United States as the world’s largest
Internet user: 253 million users versus 221 million respectively (as of June
2008).7 Yet, the percentage of the Chinese population using the Internet is small
relative to the United States: 19% versus 73%, respectively.
6 Boeing, Current Market Outlook, 2008-2027,
7 New York Times, “China Surpasses U.S. in Number of Internet Users,” July 26, 2008.
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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 7.2 million units (2006) to 20.7 million units in 2020.8
According to some estimates, China is now the world’s second largest market for
new cars. General Motors (GM) and Ford reportedly sold 1.09 million and 306
thousand vehicles, respectively, in China in 2008.9
Major U.S. Imports from China
China was the largest source of U.S. imports in 2008 at $338 billion, or 16.1% of total U.S.
imports (up from 6.5% of total in 1996).10 U.S. imports from China rose by 5.1% in 2008 over the
previous year (compared with an 11.7% rise in 2007). The importance (ranking) of China as a
source of U.S. imports has risen dramatically, from eighth largest in 1990, to fourth in 2000, to
second in 2004-2006, to first in 2007-2008. The top five U.S. imports from China in 2008 were
computers and parts, miscellaneous manufactured articles (such as toys, games, etc.),
communications equipment, apparel, and audio and video equipment (see Table 5).
Table 5. Major U.S. Imports From China: 2008
($ in millions and percent change)
2004 2005 2006 2007 2008
NAIC Number and Description
Percent Change
2007 - 2008
$ in millions
3341
computer
equipment
29,486 35,467 40,046 44,462 45,820
3.1%
3399 Miscel aneous manufactured
commodities
23,712 26,449 28,888 34,827 35,835
2.9%
3342 Communications equipment
9,015
14,121
17,977
23,192
26,618
14.8%
3152
Apparel
10,530 16,362 19,228 22,955 22,583
-1.6%
3343 Audio and video equipment
12,421
15,287
18,789
19,075
19,715
3.4%
Source: USITC DataWeb
Notes: North American Industry Classification system, 4-digit level.
Throughout the 1980s and 1990s, nearly all of U.S. imports from China were low-value, labor-
intensive products such as toys and games, consumer electronic products, footwear, and textiles
and apparel. However, over the past few years, an increasing proportion of U.S. imports from
China has comprised of more technologically advanced products, such as computers. According
to the U.S. Census Bureau, in 2008, U.S. imports of advanced technology products from China
totaled $91.4 billion (27.1% of total U.S. imports from China), compared with $29.3 billion in
8 China Daily, September 9, 2004.
9 According to GM’s website, it operates seven joint ventures and two wholly owned foreign enterprises and has more
than 20,000 employees in China.
10 U.S. imports from China as a share of total imports in 2007 was 16.5%.
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2003 (19.2% of total U.S. imports from China). In addition, imports of advanced technology
products from China accounted for 27.5% of total U.S. imports of such products in 2008,
compared with 14.1% in 2003, indicating that U.S. dependency on China for advanced
technology products is rapidly increasing. U.S. exports of advanced technology to China in 2008
were $18.7 billion; these accounted for 26.2% of total U.S. exports to China and 6.8% of total
U.S. advanced technology exports.11
Many analysts contend that the sharp increase in U.S. imports from China (and hence the growing
trade deficit) is largely the result of movement in production facilities from other (primarily)
Asian countries to China.12 That is, various products that used to be made in Japan, Taiwan, Hong
Kong, etc., and then exported to the United States are now being made in China (in many cases,
by foreign firms in China) and exported to the United States. An illustration of this shift can be
seen in Table 6, which lists U.S. imports of computer equipment and parts from 2000-2008. For
example, in 2000, Japan was the largest foreign supplier of U.S. computer equipment (with a
19.6% share of total shipments), while China ranked fourth (with a 12.1% share). In just eight
years, Japan’s ranking fell to fourth, the value of its shipments dropped by over half, and its share
of U.S. computer imports declined to 7.7% (2008). China was by far the largest foreign supplier
of computer equipment in 2008 with a 53.6% share of total U.S. imports. While U.S. imports of
computer equipment from China rose by 452% over the past eight years, the total value of U.S.
computer imports from the world rose by only 25%. Many analysts contend that a large share of
the increase in Chinese computer production has come from foreign computer companies that
have moved manufacturing facilities China.
Table 6.Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2008
($ in billions and % change)
2000 2002 2004 2006 2008
2000-2008
% change
Total
68.5 62.3 73.9 83.8 85.4 24.7
China
8.3 12.0 29.5 40.0 45.8 451.8
Malaysia 4.9 7.1 8.7 11.1 9.0 83.7
Japan 13.4 8.1 6.3 6.3 6.6
-50.7
Mexico 6.9 7.9 7.4 6.6 6.2
-10.1
Singapore 8.7 7.1 6.6 5.6 4.0
-54.0
Source: U.S. International Trade Commission Trade Data Web.
Note: Ranked according to top five suppliers in 2008.
China has become a major source of U.S. agricultural imports. It was the third largest supplier of
such imports in 2008 (compared with 12th largest in 2000), at $4.7 billion. U.S. agricultural
imports from China rose by 42.2% in 2008 and by 104.5% from 2004-2008. Major agricultural
imports from China include seafood products, vegetables and fruit, and animal foods.
11Note, these figures do not indicate the level of sophistication of these products. Many U.S. imports of advanced
technology products are parts.
12 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 55% in 2008.
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Investment Ties
Investment plays a major role in U.S.-China commercial ties.13 China’s investments in U.S. assets
can be broken down into two categories: holdings of U.S. securities and foreign direct investment
(FDI). The Treasury Department defines foreign holdings of U.S. securities as “U.S. securities
owned by foreign residents (including banks and other institutions) except where the owner has a
direct investment relationship with the U.S. issuer of the securities.” These include long-term
(LT) U.S. Treasury securities, LT U.S. government agency securities,14 LT corporate securities
(some of which are asset-backed), equities (such as stocks), and short-term debt.15 The U.S.
Bureau of Economic Analysis (BEA) defines FDI (in the United States) as “the ownership or
control, directly or indirectly, by one foreign resident of 10 percent or more of the voting
securities of an incorporated U.S. business enterprise or the equivalent interest in an
unincorporated U.S. business enterprise.”16 BEA classifies FDI flows according to broad
industrial sections, including mining; utilities; manufacturing (broken down into nine
subsectors17); wholesale trade; information; depository institutions; finance (excluding depository
institutions); professional, scientific, and technical services; nonbank holding companies; and
other industries.
China’s Holdings of U.S. Securities18
The Treasury Department performs annual surveys of foreign holders of U.S. securities, the latest
of which was released in February 2009 (preliminary data) for holding as of June 2008.19 China’s
total holdings of U.S. securities at the end of June 2008 were estimated at $1,205 billion,
compared to $922 billion in June 2007 (an increase of 31%). From June 2002 to June 2008,
China’s holdings of U.S. securities as a share of total foreign holdings of U.S. securities rose from
3.9% to 11.7% and its ranking increased from fifth to second (after Japan at $1,250 billion).
China is likely became the largest holder in late 2008 or early 2009 (see Table 7). From June
2002 to June 2008, China’s U.S. securities holdings grew by nearly $1.1 trillion (or 566%), which
was by far the largest increase in U.S. securities holdings of any other country.20 These holding
are largely the result of China’s currency policy (discussed below). The largest type of U.S.
13 U.S. data on FDI flows to and from China differ sharply from Chinese data on FDI flows to and from the United
States. This section uses U.S. data.
14 Agency securities include both federal agencies and government-sponsored enterprises created by Congress (e.g.,
Fannie Mae and Freddie Mac) to provide credit to key sectors of the economy. Some of these securities are backed by
assets (such as home mortgages).
15 LT securities are those with no stated maturity date (such as equities) or with an original term to maturity date of
more than one year. Short-term debt includes U.S. Treasury securities, agency securities, and corporate securities with
a maturity date of less than one year.
16 The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the
management of an enterprise. See, BEA, International Economic Accounts, BEA Series Definitions, available at
http://www.bea.gov/international.
17 These sectors include food; chemicals; primary and fabricated metals; machinery; computers and electronic products;
electrical equipment, appliances and components; transportation equipment, and other manufacturing.
18 For additional information on this issue, see CRS Report RL34314, China’s Holdings of U.S. Securities: Implications
for the U.S. Economy, by Wayne M. Morrison and Marc Labonte
19 U.S. Treasury Department, Preliminary Report on Foreign Portfolio Holdings of U.S. Securities as of June 30, 2008,
February 27, 2009. A final report expected in April 2009.
20 U.S. Treasury Department, Report on Foreign Portfolio Holdings of U.S. Securities, various editions. Note, 2002 was
the first year in which surveys listed data as of June. Prior to that, survey data were listed as of March or December.
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securities held by China are U.S. Treasury securities, which are used to finance U.S. budget
deficits; data for foreign holdings of these type of securities are reported on a monthly basis.
China’s holdings of U.S. Treasury securities rose from $118 billion (or 9.6% of total foreign
holdings) at the end of 2002 to $727.4 billion (23.6% of foreign holdings) in December 2008.
China’s holdings as of April 2009 were $764 billion or 23.5% of total foreign holdings (see Table
8).21 Since September 2008, China has become the largest foreign holder of U.S. Treasuries.
China’s holdings in April 2009 were down by $4.4 billion over its March 2009 holdings.
Table 7. China’s Holdings of U.S. Securities: June 2002-June 2008
($ billions and percent change)
2002 2003 2004 2005 2006 2007 2008
2002-2008
% change
188 255 341 527 699 922
1,205
566%
Source: U.S. Department of Treasury.
Notes: U.S. securities include short term and long-term debt, including Treasury securities, U.S. government
agency securities, corporate securities, and equities.
Table 8. China’s Holdings of U.S. Treasury Securities: 2002-2008 Year-End and April
2009
($ billions and as a percent of total foreign holdings)
2002 2003 2004 2005 2006 2007 2008 April
2009
China’s Holdings
($billions)
118.4 159.0
222.9
310.0
396.9
477.6 727.4 763.5
Holdings As a Percent of
Total Foreign Holdings
9.6% 10.4%
12.1%
15.2%
18.9%
20.3% 23.6% 23.4
Source: U.S. Treasury Department.
Notes: Data based on periodical surveys by the Treasury Department, which often revises estimates for the
previous year but not for al years and thus should be interpreted with caution.
Many U.S. policymakers have raised concern over China’s large and growing holdings of U.S.
securities, stating that while such purchases have helped the United States meet its investment
needs and have helped fund the growing U.S. Federal budget deficit, they could give China
increased leverage over the United States on major political and economic issues. On the other
hand, Chinese officials have expressed concern over the “safety” of their large holdings of U.S.
debt. Many analysts contend that China’s economy is so dependent on a healthy and stable U.S.
economy that China has no choice but to keep buying U.S. government debt. However, Chinese
officials have expressed concern that growing U.S. government debt will spark inflation in the
21 U.S. Treasury Department, Major Foreign Holders of U.S. Treasury Securities, June 15, 2009. Note, the Treasury
Department often revises its estimates of foreign holdings for a given year, but not for previous years.
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United States and a sharp depreciation of the dollar, which would diminish the value of China’s
dollar assets.22
U.S. Holdings of Chinese Securities
The Treasury Department also does surveys on U.S. holdings of Chinese securities; these data are
on a year-end basis. The last survey (issued in October 2008) estimated total U.S. holdings of
Chinese securities at $97.2 billion in 2007 (98% of which were in equities), up from $13.7 billion
in 2003. U.S. holdings of Chinese securities in 2007 were equal to about 1.3% of total U.S.
holdings of foreign securities.23
Bilateral FDI Flows
China’s FDI in the United States is quite small relative to its holdings of U.S. securities: $1.1
billion (cumulative at the end of 2007) versus $922 billion (as of June 2007), respectively.24 In
2007, China ranked as the 30th largest source for FDI in the United States.25 On the other hand,
total U.S. FDI in China in 2007 was $28.3 billion (nearly 26 times China’s FDI in the United
States), making China the 21st largest U.S. destination for FDI (see Table 9).26
Table 9. China’s Cumulative FDI in the United States and U.S. FDI in China: 2002-
2007
($ in millions and percent change)
2002-2007
2002 2003 2004 2005 2006 2007 percent
change (%)
China’s FDI in the
U.S.
385 284 435 574 974
1,091
183.4
U.S. FDI in China
10,570
11,261
17,616
19,016
23,405
28,298
167.7
Source: U.S. Bureau of Economic Analysis.
Notes: Data on a historical-cost basis.
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
22 See China View, “U.S. stimulus-related debt could hurt investors, China warns,” February 18, 2009.
23 U.S. Treasury Department, Report on U.S. Portfolio Holdings of Foreign Securities as of December 31, 2007,
October 2008.
24 All BEA data is on a historical-cost, or book value, basis.
25 In comparison, total U.S. FDI in China in 2007 was $28.3 billion—nearly 26 times China’s FDI in the United States
–making China the 21st largest U.S. destination for FDI.
26 Chinese FDI data differ significantly from U.S. data. China estimates that cumulative U.S. FDI in China through
2007 was $56.6 billion (7.4% of total FDI in China) and that its FDI in the United States was $1.9 billion (equal to
1.6% of total Chinese FDI).
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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), concerns over unsafe Chinese food and consumer
products, China’s currency policy (which many Members blame for the size of the U.S. trade
deficit with China and the loss of U.S. manufacturing jobs), China’s mixed record on
implementing its obligations in the WTO, including its, failure to provide adequate protection of
U.S. intellectual property rights (IPR), and Chinese industrial policies used to promote and
protect domestic industries. Legislation has been introduced to respond to several of these issues
(see “U.S.-China Trade Legislation in the 111th Congress”).
Health and Safety Concerns Over Certain Imports
from China27
Reports throughout 2007 of tainted or unsafe food and consumer products (including seafood, pet
food, toys, and tires) from China raised concerns in the United States over the health, safety, and
quality of imports from China. Some analysts contend that China maintains a poor regulatory
framework for enforcing its health and safety regulations and standards, and that this is proving to
be a growing problem for U.S. consumers. Many U.S. policymakers have raised concern over
how to press China to improve enforcement of its health and safety standards of its exports as
well as the ability of U.S. regulatory agencies to ensure the health and safety of imports from
China (and other countries).
In 2007 and 2008, there were numerous recalls, warnings, and safety concerns involving Chinese
products, as the following instances illustrate.
The Food and Drug Administration (FDA) in March 2007 issued warnings and announced
voluntary recalls on over 150 brands of pet foods (and products such as rice protein concentrate
and wheat gluten used to manufacture pet food and animal feed) from China believed to have
caused the sickness and deaths of numerous pets in the United States.28 In May 2007, the FDA
issued warnings on certain toothpaste products (some of which were found to be counterfeit)
found to originate in China that contained poisonous chemicals. In June 2007, the FDA
announced import controls on all farm-raised catfish, basa, shrimp, dace (related to carp), and eel
from China after antimicrobial agents, which are not approved in the United States for use in
farm-raised aquatic animals, were found. The FDA ordered that such shipments will be detained
until they are proven to be free of contaminants.29 On January 25, 2008, the FDA posted on its
website a notice by Baxter Healthcare Corporation that it had temporarily halted the manufacture
of its multiple-dose vials of heparin (a blood thinner) for injection because of recent reports of
serious adverse events associated with the use of the drug, including 246 deaths from January
2007 to May 2008. Some analysts have speculated that an unlicensed drug company in China,
which produces ingredients for the drug, may be the source of the problem.30 On September 12,
2008, the FDA issued a health information advisory on infant formula in response to reports of
27 For additional information on this issue, see CRS Report RS22713, Health and Safety Concerns Over U.S. Imports of
Chinese Products: An Overview, by Wayne M. Morrison.
28 For a legal overview of FDA recalls, see CRS Report RL34167, The FDA’s Authority to Recall Products, by Vanessa
K. Burrows.
29 In addition, FDA has refused shipments of a variety of Chinese food and drug products. See CRS Report RL34080,
Food and Agricultural Imports from China, by Geoffrey S. Becker.
30 New York Times, “China Didn’t Check Drug Supplier, Files Show,” February 16, 2008.
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contaminated milk-based infant formula manufactured and sold in China, and later issued a
warning on other products containing milk imported from China. On November 12, 2008, the
FDA issued a new alert stating that all products containing milk imported from China would be
detained unless proven to be free of melamine. On December 2, 2008, the Chinese government
reported that melamine-tainted formula had so far killed six children and sickened 294,000 others
(51,900 of whom had to be hospitalized and 154 were in serious condition).31
The National Highway Traffic Safety Administration (NHTSA) in June 2007 was informed by
Foreign Tire Sales, Inc., an importer of foreign tires, that it suspected that up to 450,000 tires
(later reduced to 255,000 tires) made in China may have a major safety defect (i.e., missing or
insufficient gum strip inside the tire). The company was ordered by the NHTSA to issue a recall.
The Chinese government and the manufacturer have maintained that the tires in question meet or
exceed U.S. standards.
The Consumer Product Safety Commission (CPSC) has issued alerts and announced voluntary
recalls by U.S. companies on numerous products made in China. From January-December 2007,
over four-fifths of CPSC recall notices involved Chinese products. Over this period, roughly 17.6
million toys were recalled because of excessive lead levels. Recalls were also issued on 9.5
million Chinese-made toys (because of the danger of loose magnets), 4.2 million “Aqua Dots”
toys (because of beads that contained a chemical that can turn toxic if ingested) and 1 million toy
ovens (due to potential finger entrapment and burn hazards).32 China is the dominant supplier of
toys to the United States, accounting for 89% of total U.S. imports (2007). U.S. recalls of lead-
tainted Chinese-made toys were sharply down in 2008, totaling about 2.5 million toy units.33
During the first five months of 2009, recalls of lead-tainted Chinese toys totaled 1.1 million units.
China’s Poor Regulatory System and Implications
China is believed to have a rather weak health and safety regime for manufactured goods and
agricultural products. Problems include:
• weak consumer protection laws and poorly enforced regulations,
• lack of inspections and ineffective penalties for code violators,
• underfunded and understaffed regulatory agencies and poor interagency
cooperation,
• the proliferation of fake goods,
• the existence of numerous unlicensed producers,
• falsified export documents,
31 On October 15, 2008, the Chinese government issued an urgent notice to recall all dairy products made prior to
September 14, 2008, so that they could be tested.
32 For a list of company recalls of Chinese products, see the CPSC website at http://www.cpsc.gov/cpscpub/prerel/
prerel.html. In addition, several U.S. retailers have announced that they have halted sales of certain Chinese products,
due to health and safety concerns, which do not appear on the CPSC website.
33 Congressional concerns over product safety led to the enactment of the Consumer Product Safety Improvement Act of
2008 (P.L. 110-314) in August 2008. The law tightened requirements on children products, including mandatory
testing. See CRS Report RL34684, Consumer Product Safety Improvement Act of 2008: P.L. 110-314, by Margaret
Mikyung Lee.
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• extensive pollution,34
• intense competition that often induces firms to cut corners,
• the relative absence of consumer protection advocacy groups,
• failure by Chinese companies to effectively monitor the quality of their suppliers’
products,
• restrictions on the media,35 and
• widespread government corruption and lack of accountability, especially at the
local government level.
Although China has criticized the United States for its actions against unsafe Chinese products,36
it has pledged to improve and strengthen food and drug safety supervision and standards, beef up
inspections, require safety certificates before some products can be sold, and crack down on
government corruption.
The United States and China reached a number of agreements in 2007 to address health and
safety concerns:
• On September 11, 2007, the CPSC and its Chinese counterpart, the General
Administration of Quality Supervision, Inspection and Quarantine (AQSIQ),
signed a Joint Statement on enhancing consumer product safety. China pledged to
implement a comprehensive plan to intensify efforts (such as increased
inspections, efforts to educate Chinese manufacturers, bilateral technical personal
exchanges and training, regular meetings to exchange information with U.S.
officials, and the development of a product tracking system) to prevent exports of
unsafe products to the United States, especially in regard to lead paint in toys.
• On September 12, 2007, the NHTSA signed a Memorandum of Cooperation with
its Chinese counterpart on enhanced cooperation and communication on vehicles
and automotive equipment safety.
• On December 11, 2007, the U.S. Department of Health and Human Services
(HHS) announced that it had signed two Memoranda of Agreements (MOA) with
its Chinese counterparts; the first covering specific food and feed items that have
been of concern to the United States, and the second covering drugs and medical
devices. Both MOAs would require Chinese firms that export such products to
the United States to register with the Chinese government and to obtain
certification before they can export. Such firms would also be subject to annual
inspections to ensure they meet U.S. standards. The MOAs also establish
mechanisms for greater information sharing, increase access of production
34 For example, many fish farmers in China are believed to feed various drugs to the fish to help keep them alive in
polluted waters. See Washington Post, “Farmed in China’s Foul Waters, Imported Fish Treated with Drugs; Traditional
Medicine, Banned Chemicals Both Used,” July 6, 2007, p. A1.
35 China’s media often reports on health and safety problems, but rarely criticizes the central government for such
problems.
36 In June 2007, China impounded U.S. shipments of apricots and orange pulp, claiming that they contained excessive
bacteria. In July 2007, China had suspended some frozen chicken and pork products imported from the U.S., citing
various health concerns. In August 2007, China rejected a shipment of U.S. pacemakers, due to quality concerns. Some
analysts contend these have been retaliatory moves over U.S. recalls and detentions of Chinese products.
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facilities by U.S. officials, and create working groups in order to boost
cooperation. In March 2008, the FDA announced that it would post eight FDA
inspectors in China.
China’s Currency Policy37
Unlike most advanced economies (such as the United States), China does not maintain a market-
based floating exchange rate. Between 1994 and July 2005, China pegged its currency, the
renminbi (RMB) or yuan, to the U.S. dollar at about 8.28 yuan to the dollar. In July 2005, China
appreciated the RMB to the dollar by 2.1% and moved to a “managed float,” based on a basket of
major foreign currencies, including the U.S. dollar. In order to maintain a target rate of exchange
with the dollar (and other currencies), the Chinese government has maintained restrictions and
controls over capital transactions and has made large-scale purchases of U.S. dollars (and dollar
assets). According to the Bank of China, from July 21, 2005, to June 23, 2009, the dollar-yuan
exchange rate went from 8.11 to 6.83 yuan per dollar, an appreciation of 18.7%.38 During 2009,
China’s has kept the exchange rate with the dollar at about 6.83 yuan per dollar, indicating that it
has abandoned (at least for now) its policy of gradual appreciation.
Many U.S. policymakers and business representatives have charged that China’s currency policy
has made the RMB significantly undervalued vis-à-vis the U.S. dollar (with estimates ranging
from 15% to 40%) and that this makes Chinese exports to the United States cheaper, and U.S.
exports to China more expensive, than they would be if exchange rates were determined by
market forces. They complain that this policy has particularly hurt several U.S. manufacturing
sectors (such as textiles and apparel, furniture, plastics, machine tools, and steel), which are
forced to compete against low-cost imports from China, and further contend that it has been a
major factor in the size and growth of the U.S. trade deficit with China. Numerous bills have been
introduced over the past few years to pressure China to either significantly appreciate its currency
or to let it float freely in international markets.
Chinese officials have argued that its currency policy is not meant to favor exports over imports,
but instead to foster domestic 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.
Section 3004 of the 1988 Omnibus Trade and Competitiveness Act (P.L. 100-418) requires the
Secretary of Treasury to issue a report every six months on international economic policy
(including exchange rate policy) and to determine if any country is manipulating its currency in
order to prevent an effective balance of payments adjustment or to gain an unfair competitive
advantage in international trade. After China reformed its currency in July 2005, the Bush
Administration continued to press China to further reform its currency and its financial sector, but
declined to cite China for currency manipulation. In April 2009, the Treasury Department under
37 For additional information on this issue, see CRS Report RS21625, China’s Currency: A Summary of the Economic
Issues, by Wayne M. Morrison and Marc Labonte.
38 Source: Calculated from Bank of China data using the official middle rate.
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the Obama Administration issued its report on exchange rates, stating “China’s continued large
current account surplus and accumulation of foreign exchange reserves suggest the renminbi
remains undervalued.”39 However, Treasury did not cite China as a currency manipulator.
Further complicating the issue of China’s currency policy is its large holdings of U.S. debt (such
as Treasury securities). The Chinese government has had to make large-scale purchases of U.S.
dollars to meet its exchange rate targets. Rather than hold dollars (which earn no interest), China
has sought to invest its dollars in U.S. assets, primarily U.S. government debt securities. On the
one hand, some analysts welcome China’s purchases of U.S. debt securities, especially during the
current financial crisis in the United States where efforts to stimulate the economy will likely
require the government to issue large amounts of new debt. They warn that threatening China
over its currency policy could induce the Chinese government to slow its purchases, or even sell
off current holdings, of U.S. Treasury Securities, which could contribute to higher U.S. interest
rates. On the other hand, some policymakers have expressed concern that growing Chinese
holdings of U.S. debt may increase its leverage over the United States on a number of economic
and non-economic issues, and some contend that China’s currency policy was a contributing
factor to the current global economic crisis.40
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 transitional period of
protection) for certain sensitive sectors. China’s WTO membership was formally approved at the
WTO Ministerial Conference in Doha, Qatar on November 10, 2001. 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, 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).
39 Treasury Department, Report to Congress on International Economic and Exchange Rate Policies, April 2009.
Copies of the past 8 Treasury reports can be found at: http://www.treas.gov/offices/international-affairs/economic-
exchange-rates.
40 For additional information on this issue, see CRS Report RL34314, China’s Holdings of U.S. Securities: Implications
for the U.S. Economy, by Wayne M. Morrison and Marc Labonte; and CRS Report RS22984, China and the Global
Financial Crisis: Implications for the United States, by Wayne M. Morrison.
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• Provide non-discriminatory treatment to all WTO members. Foreign firms in
China will be treated no less favorably than Chinese firms for trade purposes.
End discriminatory trade policies against foreign invested firms in China, such as
domestic content rules and technology transfer requirements.
• Implement the WTO’s Trade-Related Aspects of Intellectual Property Rights
(TRIPS) Agreement upon accession. (That agreement establishes basic standards
on IPR protection and rules for enforcement.)
• Accept a 12-year safeguard mechanism in cases where a surge in Chinese exports
cause or threaten to cause market disruption to U.S. (or other WTO members)
domestic producers, which allow temporary restrictions on those products. China
also agreed that the United States (and other WTO members) could continue to
apply a non-market economy methodology for measuring dumping in
antidumping investigations of imports from China for 15 years.
• Fully open the banking system to foreign financial institutions within five years
(by the end of 2006). Joint ventures in insurance and telecommunication will be
permitted (with various degrees of foreign ownership allowed).
WTO Implementation Issues
China’s record on implementing its WTO commitments has been mixed. China’s average overall
tariff has dropped from 15.6% in 2001 to 9.9% in 2009 (the tariff rate on industrial goods and
agricultural products is 8.9 and 15.2, respectively) and a number of non-tariff measures have been
eliminated. However, there have been several areas where China’s implementation is considered
to be incomplete. The USTR’s seventh annual China WTO compliance report (issued in
December 2008) identified several areas of concern, including failure by the Chinese government
to maintain an effective IPR enforcement regime (discussed below), industrial policies and
national standards that attempt to promote Chinese firms (while discriminating against foreign
firms), restrictions on trading and distribution rights (especially in regards to IPR products, such
as movies, books, and music), discriminatory and unpredictable health and safety rules on imports
(especially agricultural products), burdensome regulations and restrictions on services (including
excessive capital requirements), and failure to provide adequate transparency of trade laws and
regulations.41
The USTR’s December 2008 China WTO report stated that China’s failure to comply with key
areas of its WTO commitments largely stemmed from its incomplete transition to a market based
economy. A significant part of the economy, including the banking system and state owned
enterprises (SOEs), are controlled by the central government—remnants of the old command
economy that existed before reforms began in 1979. Although China agreed to make SOEs
operate according to free market principles when it joined the WTO, U.S. officials contend that
SOEs are still being subsidized, especially through the banking system. In addition, China is
attempting to promote the development of several industries (such as autos, steel,
telecommunications, and high technology products) deemed by the government as important to
China’s future economic development and has implemented policies to promote and protect them.
41 USTR, 2008 Report to Congress on China’s WTO Compliance, December 23, 2008.
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When China joined the WTO, it agreed to provide a full description of all its subsidy programs,
but to date has failed to fully do so. In addition, China agreed to make its state-owned enterprises
operate according to market principles; yet such firms continue to receive direction and subsidies.
Some major issues of concern to the United States include the following.
• In November 2008, the government announced a $586 billion economic stimulus
plan, which included policies that would be implemented to assist 10 pillar
industries (including, autos, steel, shipbuilding, textiles, machinery, electronics
and information, light industry, petrochemicals, non-ferrous metals, and logistics)
to promote their long-term competitiveness. Government support policies for the
10 industries are expected to include tax cuts and incentives (including export tax
rebates), industry subsidies and subsidies to consumers to purchase certain
products (such as consumer goods and autos), fiscal support, directives to banks
to provide financing, direct funds to support technology upgrades and the
development of domestic brands, government procurement policies, the
extension of export credits, and funding to help firms invest overseas.42 Some
analysts contend that these new subsidy programs could violate China’s WTO
commitments.
• In December 2006, the Chinese government designated seven industries (military
equipment, power generation and distribution, oil, telecommunications, coal,
civil aviation, and shipping) as critical to the nation’s economic security and
stated it must retain “absolute control” and limit foreign participation.43
• On June 30, 2006, China announced a partial opening of its beef market, which
had been completely closed to U.S. imports in 2003, due to concerns over mad
cow disease. However, U.S. officials have expressed disappointment that China
has failed to develop a science-based trading protocol for importing beef from the
United States, which would enable the United States to resume beef trade with
China.44
• In July 2005, the Chinese government issued new guidelines on steel production,
which reportedly include provisions for the preferential use of domestically
produced steel-manufacturing equipment and domestic technologies; extensive
government involvement in determining the number, size, location, and
production quantities of steel producers in China; technology transfer
requirements on foreign investment; and restrictions on foreign majority
ownership. On June 14, 2006, Assistant U.S. Trade Representative for China Tim
Stratford stated that China’s steel guidelines were “troubling, because it attempts
to dictate industry outcomes and involves the government in making decisions
that should be left to the marketplace. ”45 The U.S. steel industry has expressed
growing fears that Chinese government policies have led to overinvestment and
42 On May 18, 2009, China’s State Council, announced plans to create 3 million new jobs in light industry over the next
three years by providing financial support to small and medium-sized light industry firms with “good development
potential.”
43 China Daily, “Nation Lists Sectors Critical to National Economy,” December 19, 2006.
44 In 2009, China imposed restrictions on pork imports from certain U.S. states because of concerns relating to the
outbreak of influenza A(H1N1), or swine flu.
45 Statement of Timothy Stratford, Assistant U.S. Trade Representative for China Affairs, before the Congressional
Steel Caucus, June 14, 2006.
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overcapacity in China’s domestic steel industry, which could lead it to flood
world markets with cheap steel.46 Such concerns led the USTR to begin a Steel
Dialogue with China (which first met in March 2006) to discuss issues of
concern to the U.S. steel industry.
• China’s Automotive Industrial Policy, issued by the government in May 2004,
includes provisions discouraging the importation of auto parts and encouraging
the use of domestic technology, while requiring new automobile and automobile
engine plants to include substantial investment in research and development
facilities. New auto parts regulations that went into effect in April 2005
discriminate against imported auto parts by assessing an additional charge on
imported parts if they are incorporated into a vehicle that does not meet
minimum levels of domestic content, discussed below.47
To date, the United States has initiated eight WTO dispute resolution cases against China, five of
which have been resolved or ruled upon.48 China has filed three cases against the United States.
These cases are summarized below.
Pending U.S. Cases Against China
• On June 23, 2009, the United States and the EU filed a case against China’s
export restrictions (such as export quotas and taxes,) on raw materials (bauxite,
coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow
phosphorus, and zinc). The United States charges that such policies are intended
to lower prices for Chinese firms (steel, aluminum, and chemical sectors) in order
to help them obtain an unfair competitive advantage.
• On December 19, 2008, the USTR filed a WTO case against China over its
support for “Famous Chinese” brand programs, charging that such programs
utilize various export subsidies (including cash grant rewards, preferential loans,
research and development funding to develop new products, and payments to
lower the cost of export credit insurance) at the central and local government
level to promote the recognition and sale of Chinese brand products overseas.
• On April 10, 2007, the USTR filed two IPR-related cases against China: the first
case charges that China has failed to comply with the TRIPS agreement (namely
in terms of its enforcement of IPR laws) and the second case charges that China
has failed to provide sufficient market access to IPR-related products, namely in
terms of trading rights and distribution services. On January 26, 2009, the WTO
ruled that many of China’s IPR enforcement policies failed to WTO obligations
(see IPR section, below).
46 China is now the world’s largest steel producer, accounting for 31% of the world’s steel production. Its steel
production levels rose by 25% over the previous year. According to U.S. officials, China’s excess steel capacity in
2006 could be larger than total U.S. steel production.
47 China applies higher tariffs on imported auto parts when a specific combination of parts is used to produce cars in
China, or if the value of these parts amounts to 60% or more of the cost of a car made in China. This policy increases
tariffs on some auto parts from about 10% to about 25% (which is the tariff China currently applies to imports of
completed autos). Source: USTR 2007 Report to Congress on China’s WTO Compliance, p. 61.
48 For an overview of the WTO dispute resolution process, see CRS Report RS20088, Dispute Settlement in the World
Trade Organization (WTO): An Overview, by Jeanne J. Grimmett.
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• Resolved U.S. Cases Against China
• On March 3, 2008, the USTR requested WTO dispute resolution consultations
with China regarding its discriminatory treatment of U.S. suppliers of financial
information services in China. On November 13, 2008, the USTR announced that
China had agreed to eliminate discriminatory restrictions on how U.S. and other
foreign suppliers of financial information services do business in China.
• On February 5, 2007, the USTR announced it had requested WTO dispute
consultations with China over government regulations that give illegal (WTO-
inconsistent) import and export subsidies to various industries in China (such as
steel, wood, and paper) that distort trade and discriminate against imports.49
China’s WTO accession agreement required it to immediately eliminate such
subsidies. On November 29, 2007, China formally agreed to eliminate the
subsidies in question by January 1, 2008.
• On March 30, 2006, the USTR initiated a WTO case against China for its use of
discriminatory regulations applied to imported auto parts (which often applies the
high tariff rate on finished autos to certain auto parts), stating that the purpose of
these rules was to discourage domestic producers from using imported parts and
encouraging foreign firms to move production to China. On February 13, 2008, a
WTO panel ruled that China’s discriminatory tariff policy was inconsistent with
its WTO obligations (stating that the auto tariffs constituted an internal charge
rather than ordinary customs duties, which violated WTO rules on national
treatment). China appealed the decision, but a WTO Appellate Body largely
upheld the WTO panels decision.
• On March 30, 2006, the USTR initiated a WTO case against China for its use of
discriminatory regulations applied to imported auto parts (which often applies the
high tariff rate on finished autos to certain auto parts), stating that the purpose of
these rules was to discourage domestic producers from using imported parts and
encouraging foreign firms to move production to China. On February 13, 2008, a
WTO panel ruled that China’s discriminatory tariff policy was inconsistent with
its WTO obligations (stating that the auto tariffs constituted an internal charge
rather than ordinary customs duties, which violated WTO rules on national
treatment). China appealed the decision, but a WTO Appellate Body largely
upheld the WTO panels decision.
• On March 18, 2004, the USTR announced it had filed a WTO dispute resolution
case against China over its discriminatory tax treatment of imported
semiconductors. The United States claimed that China applied a 17% VAT rate on
semiconductor chips that were designed and made outside China, but gave VAT
rebates to domestic producers. Following consultations with the Chinese
government, the USTR announced on July 8, 2004, that China agreed to end its
preferential tax policy by April 2005. However, the USTR has expressed concern
over new forms of financial assistance given by the Chinese government to its
domestic semiconductor industry.
49 Some programs give tax preferences, tariff exemptions, discounted loans, or other benefits to firms that meet certain
export performance requirements, while others give tax breaks for purchasing Chinese-made equipment and accessories
over imports.
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Chinese WTO Cases Against the United States
• On April 17, 2009, China brought a WTO case against the United States over a
provision in the Omnibus Appropriations Act of 2009 that effectively prohibits
the establishment or implementation of any measures that would allow poultry
products to be imported from China.
• On 14 September 2007, China requested consultations with the United States on
the preliminary anti-dumping and countervailing duty determinations on free
sheet paper from China.
• On September 19, 2008, China initiated a WTO case against the United States in
regards to its use of antidumping and countervailing measures against certain
Chinese-made steel pipes, tires and laminated woven sacks.
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 its accession to the World Trade Organization (WTO) in 2001, China agreed to
immediately bring its IPR laws in compliance with the WTO’s Trade-Related Aspects of
Intellectual Property Rights (TRIPS) agreement, which include a commitment to establish an
effective IPR enforcement regime. The U.S. Trade Representative’s (USTR) office has stated on a
number of occasions that China has made great strides in improving its IPR protection regime,
noting that it has passed several new IPR-related laws, closed or fined several assembly
operations for illegal production lines, seized millions of illegal audio-visual products, curtailed
exports of pirated products, expanded training of judges and law enforcement officials on IPR
protection, and expanded legitimate licensing of film and music production in China. However,
the USTR has indicated that much work needs to be done to improve China’s IPR protection
regime, especially in terms of deterrence.
Many business groups contend that poor IPR protection is one of the most significant obstacles
for doing business in China. To illustrate:
• According to IPR industry groups, China has some of the highest piracy rates in
the world: 95% for entertainment software, 90% for records and music, and 82%
for business software. Piracy in China for business and entertainment software
alone is estimated to cost U.S. firms $3.5 billion in lost trade annually, which
were was than losses from any other foreign country.50
50 Estimates made by the International Intellectual Property Rights Alliance for 2007.
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• The U.S. Customs and Border Protection (CBP) reported that China accounted
for 81% ($221 million domestic value) of pirated goods seized by the agency in
FY2008.51
Piracy also has a number of negative effects on China’s economy. For example:
• The Chinese government estimates that counterfeits constitute between 15% and
20% of all products made in China and are equivalent to about 8% of China’s
annual gross domestic product.
• A study by the Motion Picture Association of America estimated that China’s
domestic film industry lost about $1.5 billion in revenue to piracy in 2005 (and
that the combined losses of both foreign and Chinese film makers totaled $2.7
billion).52 It also found that about half of pirated films in China are Chinese
movies.
• A Business Software Alliance study estimates that a 10 percentage point
reduction in China’s PC software piracy rates would raise its GDP by $20.5
billion and create an additional 355,179 jobs.
Opinions differ as to why the Chinese government has been unable (or unwilling) to make a
significant reduction in the level of piracy in China. Some explanations put forward by various
analysts include the following:
• China’s transformation from a Soviet-style command economy (in which the
government owned and controlled nearly every aspect of the economic life) to
one that is becoming more market-based is a very recent occurrence. IPR is a
relatively alien or unfamiliar concept for most people in China to grasp (as is the
concept of private property rights) and thus it is difficult for the government to
convince the public that piracy is wrong.53
• Chinese leaders want to make China a major producer of capital-intensive and
high-technology products, and thus, they are tolerant of IPR piracy if its helps
Chinese firms become more technologically advanced.54
• Although the central government may be fully committed to protect IPR, local
government officials are often less enthusiastic to do so because production of
pirated products generates jobs and tax revenue, and some officials may be
obtaining bribes or other benefits which prompts them to tolerate piracy. The
USTR’s April 2009 report on IPR stated it was concerned by reports that
government officials in China were urging more lenient enforcement of IPR laws
because of the impact of the global financial crisis.
• As a developing country, China lacks the resources and a sophisticated legal
system to go after and punish IPR violators, and establishing an effective
enforcement regime will take time.55
51 See CBP website at http://www.CBP.gov.
52 Reuters, “China Piracy Costs Film Industry $2.7 Billion in 2005,” June 19, 2006.
53 Some Chinese officials have noted that some individuals who were arrested for IPR piracy violations expressed
shock at their arrest because in their minds they were not harming anybody.
54 On the other hand, IPR piracy may prevent foreign firms from investing in high-tech production in China.
55 Some critics of this argument note that China seems to be very efficient at going after political dissenters and others
(continued...)
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• As a practical matter, IPR enforcement in China will be problematic until
Chinese-owned companies begin to put pressure on the government to protect
their own brands and other IPR-related products. U.S. trade officials note that the
Chinese government took aggressive action during the 2008 summer Olympics in
Beijing to stop infringement activities.
• Chinese trade barriers and regulatory restrictions on IPR-related products and
their distribution are so onerous that they prevent legitimate products from
entering the market, or raise costs so high that they are unaffordable to the
average individual, thus creating a huge demand for low-cost pirated products.
The U.S. WTO Cases Against China on IPR
On April 10, 2007, the USTR brought two IPR cases against China in the WTO involving a
number of complaints: 56
• The thresholds for criminal prosecutions of IPR violations in China are too high,
meaning the government will only pursue cases it considers to be serious or
excessively large, creating a safe harbor for smaller producers or violators. In
addition, the thresholds for prosecuting IPR violations are based on the value of
the pirated products rather than the value such legitimate products would fetch in
the marketplace. Such thresholds make it very difficult to pursue cases against
many commercial producers of illegal IPR-related products.
• China often allows seized imported pirated goods to re-enter the market rather
than disposing of them.
• China’s copyright laws fail to protect imported works (such as movies) that are
under review by Chinese censorship authorities (and must be approved before the
works can be distributed in China). As a result, pirated copies of the works can be
widely distributed without violating copyright law and thus do not face
prosecution.
• Chinese IPR laws do not appear to allow producers of pirated products to be
prosecuted unless they also illegally distribute such products.
• China has not abided by its 2001 WTO accession agreement to liberalize its rules
on trading rights and distribution services. As a result, U.S. IPR-related products
face significant trade barriers in China, and such barriers are a major factor for
causing the high rate of piracy in China.
On January 26, 2009, a WTO panel ruled on the case dealing with IPR enforcement issues,
finding that China failed to protect IPR works under review by the government for content and in
regards to the disposal of seized pirated products. However, the panel determined that it needed
more evidence on the issue of thresholds for criminal prosecutions of IPR piracy before a
determination could be made. The USTR, while admitting disappointment on the WTO findings
(...continued)
deemed to be “threats” to social stability.
56 See USTR April 9, 2007, Press Release and related documents at http://www.ustr.gov/index.html.
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on thresholds, noted that, right before it filed the WTO case on China’s IPR enforcement, China
lowered its threshold criminal copyright threshold from 1,000 to 500 infringing copies.
Applying U.S. Countervailing Laws to China57
Many critics of Chinese trade policies contend that the Chinese government provides a significant
level of subsidies to many of its industries, such as preferential bank loans and grants, debt
forgiveness, and tax breaks and rebates.58 In addition, some analysts charge that China’s currency
policy constitutes a form of government export subsidy.59 Such critics contend that U.S.
countervailing laws, which seek to address the negative impact foreign government subsides on
exported products may have on U.S. producers in the United States, should be applied to
nonmarket economies such as China.60
Until very recently, the Commerce Department contended that U.S. countervailing laws could not
be applied to a non-market economy because of the assumption that most production and prices
in such an economy are determined by the government, and thus it would be impractical to
determine the level of government subsidy that might be conveyed to various exported products.
However, in November 2006, the Commerce Department decided to pursue a countervailing case
against certain imported Chinese coated free sheet paper products. On March 30, 2007, the
Commerce Department issued a preliminary ruling to impose countervailing duties (ranging from
11% to 20%) against the products in question. Commerce contends that, while China was still a
non-market economy for the purposes of U.S. trade laws, economic reforms in China have made
several sectors of the economy relatively market based, and therefore it is possible to identify the
level of government subsidies given to the Chinese paper firms in question.61 Thirteen
countervailing cases have been brought against a number of other Chinese products since 2006.62
Many Members of Congress have called on the Administration to expand its use of countervailing
measures against Chinese products. Some have proposed codifying the use of countervailing laws
against non-market economies, and others have sought to make China’s undervalued currency a
factor in determining the level of countervailing duties (see “U.S.-China Trade Legislation in the
111th Congress”).
China Safeguard Provisions
As noted earlier, when China entered the WTO, it agreed to allow the United States to continue to
treat it as a non-market economy for 12 years (codified in U.S. law under Sections 421-423 of the
57 For additional information on this issue, see CRS Report RL33550, Trade Remedy Legislation: Applying
Countervailing Action to Nonmarket Economy Countries, by Vivian C. Jones.
58 See USTR 2007 National Trade Estimates of Foreign Trade Barriers, April 2, 2007.
59 They charge that government intervention in currency markets to keep the value of the yuan low vis-a-vis the dollar,
keeps the price of Chinese exports low.
60 The relief comes in the form of additional duties that are imposed on the imported products in question after a
determination is made that a foreign government subsidized export to the United States has harmed a U.S. producer.
The additional duties are intended to offset the impact of the subsidy.
61 Countervailing investigations have also been initiated of Chinese off-the-road tires (June 18, 2007) and Chinese steel
pipe (June 14, 2007).
62 Inside U.S. Trade, “China-Focused Trade Remedy Cases Expected To Increase,” November 26, 2008.
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1974 Trade Act, as amended) for the purpose of safeguards. 63 This provision enables the United
States to impose restrictions (such as quotas and/or increased tariffs) on imported Chinese
products that have increased in such quantities that they have caused, or threaten to cause, market
disruption to U.S. domestic producers.64 The Bush Administration on six different occasions
chose not to extend relief to various industries under the China-specific safeguard (even though in
four cases, the USITC recommended relief). Some Members have called for limits on the
President’s discretion to prevent import relief. On June 18, 2009, the USITC announced that it
had determined that U.S. imports of passenger vehicle and light truck tires cause or threaten to
cause market disruption to U.S. domestic producers of like or directly competitive products. The
USITC will determine potential remedies and send these recommendations to the President.
Textile and Apparel Products65
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 2005.66 According to the U.S. Commerce Department, China is the largest foreign
supplier of textiles and apparel to the United States at $32.7 billion, or 35.1% (2008); from 2002
to 2008, U.S. textile and apparel imports from China rose by 274%.67
The sharp rise in textile and apparel imports from China, and U.S. industry contention that these
imports were disrupting U.S. markets, led the Bush Administration to seek an agreement with
China to limit its exports to the United States. On November 8, 2005, China agreed to restrict
various textile and apparel exports to the United States (according to specified quota levels) from
January 2006 through the end of 2008.
The U.S.-China Strategic and Economic Dialogue
On September 29, 2006, President George Bush and Chinese President Hu Jintao agreed to
establish a Strategic Economic Dialogue (SED) in order to have discussions on major economic
issues at the “highest official level.” According to a U.S. Treasury Department press release, the
intent of the SED was to “discuss long-term strategic challenges, rather than seeking immediate
solutions to the issues of the day,” in order to provide a stronger foundation for pursuing concrete
63 The U.S. International Trade Commission (USITC) is in charge of making market disruption determinations under
the safeguard provisions for most products (with the exception of textiles and apparel, which are handled by the
Committee for the Implementation of the Textile Agreements, an inter-agency committee chaired by the U.S.
Commerce Department). Import relief is subject to presidential approval.
64 Normally, safeguard provisions apply to all imported products. The China safeguard in U.S. trade law applies only to
China.
65 For additional information, see CRS Report RL34106, U.S. Clothing and Textile Trade with China and the World:
Trends Since the End of Quotas, by Michael F. Martin.
66 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.
67 For more detailed data on U.S. imports of textile and apparel products from China, see Department of Commerce,
Office of Textiles and Apparel Office website at http://www.otexa.ita.doc.gov/.
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results through existing bilateral economic dialogues.68 The first meeting was held in December
2006. Four subsequent rounds of talks were held (the last was in December 2008).
While attending the G-20 summit in London on the global financial crisis on April 1, 2009,
President Obama and Chinese President Hu agreed to continue the high-level forum, renaming it
the U.S.-China Strategic and Economic Dialogue. The new dialogue will be based on two tracks.
The first (the "Strategic Track”) will be headed up by the Secretary of State on the U.S. side and
focus on political and strategic issues, while the second track (the “Economic Track”) is headed
up by the U.S. Treasury Secretary on the U.S. side and will focus on financial and economic
issues. Areas of discussion will include the economic and trade issues, counterterrorism, law
enforcement, science and technology, education, culture, health, energy, the environment
(including climate change), non-proliferation, and human rights. The first round of talks are
scheduled to be held at the end of July 2009.
U.S.-China Trade Legislation in the 111th Congress
Several bills have been introduced in the 111th Congress to address various concerns over China’s
economic policies:
• H.Res. 44 would condemn China for its “socially unacceptable business
practices, including the manufacturing and exportation of unsafe products, casual
disregard for the environment, and exploitative employment practices.”
• H.R. 471 would limit the President’s discretion to deny relief under the special
China safeguard provision.
• H.R. 496 would ensure that the Commerce Department continued to apply U.S.
countervailing laws to non-market countries (such as China), establish an
alternative method for determining countervailing duties on Chinese products,
and would limit the President’s discretion to deny relief under the special China
safeguard provision.
• H.R. 499 would codify the application of U.S. countervailing laws to non-market
economies, establish an alternative method for determining countervailing duties
on Chinese products, and would require congressional approval before China
(and other non-market economies) could be treated as a market economy.
• H.R. 1105 (P.L. 111-8) contains a provision to continue a prohibition on the U.S.
Department of Agriculture from rulemaking that would allow imports of cooked
chicken from China.
• H.R. 2310 would attempt to boost U.S. exports China, especially by small-and-
medium sized firms. It would provide grants to States to establish and operate
offices to promote exports to China, establish 50 China market advocate
positions in U.S. Export Assistance Centers, and provide assistance to U.S. small-
and medium-sized businesses (such as for trade missions to China).
• H.R. 2312 would authorize the Secretary of Energy to make grants to encourage
cooperation between the United States and China on joint research, development,
68 U.S. Treasury Department press release, December 15, 2006.
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or commercialization of carbon capture and sequestration technology, improved
energy efficiency, or renewable energy sources.
• H.Amdt. 119 to H.R. 1728 would require the requires the Secretary of HUD to
study the effects of the presence of Chinese dry wall on foreclosures and the
availability of property insurance for residential structures where Chinese dry
wall is present.
• S.Res. 76 would express the sense of the Senate that the United States and China
should work together to reduce or eliminate tariff and nontariff barriers to trade
in clean energy and environmental goods and services.
• S.Res. 77 would express the sense of the Senate that the United States and China
should negotiate a bilateral agreement on clean energy cooperation.
• S.Res. 91 would call on the Consumer Product Safety Commission, the Secretary
of the Treasury, and the Secretary of Housing and Urban Development to take
action on Potential safety issues relating to drywall imported from China.
• S. 739 would require the Consumer Product Safety Commission to study drywall
imported from China in 2004 through 2007 in regards to potential safety hazards
and to ban future drywall imports from China.
• S. 1254 would require the Treasury Department to identify currencies that are
fundamentally misaligned and to designate currencies for “priority action” under
certain circumstances. Such action would include factoring currency
undervaluation in U.S. anti-dumping cases, banning federal procurement of
products or services from the designated country, and filing a case against that
country in the WTO.
• S. 1191would require the Secretary of Energy to prepare a report on climate
change and energy policy in China and India.
Author Contact Information
Wayne M. Morrison
Specialist in Asian Trade and Finance
wmorrison@crs.loc.gov, 7-7767
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