China-U.S. Trade Issues

December 15, 2015 (RL33536)
Jump to Main Text of Report





U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.-China trade rose from $2 billion in 1979 to $591 billion in 2014. China is currently the United States' second-largest trading partner, its third-largest export market, and its biggest source of imports. In addition, according to one estimate, sales by foreign affiliates of U.S. firms in China totaled $364 billion in 2013. Many U.S. firms view participation in China's market as critical to staying globally competitive. General Motors (GM), for example, which has invested heavily in China, sold more cars in China than in the United States each year from 2010 to 2014. In addition, U.S. imports of low-cost goods from China greatly benefit U.S. consumers, and U.S. firms that use China as the final point of assembly for their products, or use Chinese-made inputs for production in the United States, are able to lower costs. China is the largest foreign holder of U.S. Treasury securities ($1.26 trillion as of September 2015). China's purchases of U.S. government debt help keep U.S. interest rates low.

Despite growing commercial ties, the bilateral economic relationship has become increasingly complex and often fraught with tension. From the U.S. perspective, many trade tensions stem from China's incomplete transition to a free market economy. While China has significantly liberalized its economic and trade regimes over the past three decades, it continues to maintain (or has recently imposed) a number of state-directed policies that appear to distort trade and investment flows. Major areas of concern expressed by U.S. policymakers and stakeholders include China's alleged widespread cyber economic espionage against U.S. firms; relatively poor record of intellectual property rights (IPR) enforcement; discriminatory innovation policies; mixed record on implementing its World Trade Organization (WTO) obligations; extensive use of industrial policies (such as financial support of state-owned firms and trade and investment barriers) in order to promote and protect industries favored by the government; and interventionist policies to control the value of its currency. Many U.S. policymakers argue that such policies negatively impact U.S. economic interests and have contributed to U.S. job losses. There are a number of U.S. views on how to better address commercial disputes with China:

China-U.S. Trade Issues

Economic and trade reforms begun in 1979 have helped transform China into one of the world's fastest-growing economies. China's economic growth and trade liberalization, including comprehensive trade commitments made upon entering the World Trade Organization (WTO) in 2001, have led to a sharp expansion in U.S.-China commercial ties. Yet, bilateral trade relations have become increasingly strained in recent years over a number of issues, including a large and growing U.S. trade deficit with China, resistance by China to appreciate its currency to market levels, China's mixed record on implementing its WTO obligations, infringement of U.S. intellectual property (including through cyberespionage), and numerous Chinese industrial policies that appear to impose new restrictions on foreign firms or provide unfair advantages to domestic Chinese firms (such as subsidies). Several Members of Congress have called on the Obama Administration to take a tougher stance against China to induce it to eliminate trade and economic policies deemed harmful to U.S. economic interests and/or inconsistent with WTO rules. This report provides an overview of U.S.-China commercial relations, including major trade disputes.

Most Recent Developments

On December 8, 2015, the United States initiated a WTO dispute settlement case against China over its hidden and discriminatory tax exemption given to certain Chinese aircraft producers.

From November 21-23, 2015, the United States and China held talks under the Joint Commission on Commerce and Trade (JCCT). China stated that it would: boost market access for new biotechnology varieties of U.S. soybeans and corn; increase cooperation in biotechnology innovation, and boost IP protection for certain cheese products; increase cooperation on food safety; expand protection of trade secrets; improve market access for U.S. pharmaceuticals and medical devices; implement reforms to its anti-monopoly laws; engage in discussion on overcapacity of its steel and aluminum industries; implement its semiconductor development plan according to market principles and not discriminate against foreign firms; and allow banks to purchase ICT products of their own choosing.

From September 22 to 25, 2015, Chinese President Xi Jinping visited the United States, including Washington State and Washington, DC (where he was hosted by President Obama as part of his state visit). The two sides reached agreements on numerous issues, including cybersecurity. The United States and China agreed that neither country's government will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors. They also agreed to set up a high-level dialogue mechanism to address cybercrime and to improve two-way communication when cyber-related concerns arise (including the creation of a hotline). Business deals were also announced during Xi's visit, including China's order for 300 Boeing aircraft (valued at $38 billion) and an agreement between Boeing and Commercial Aircraft Corporation of China, Ltd. to establish a completion and delivery center in China; and an agreement by Chinese buyers to purchase $5.3 billion worth of U.S. soybeans. Other announcements were made shortly before Xi's visit. On September 10, 2015, Dell Inc. announced it would invest $125 billion in China over the next five years, which, it said, would contribute $175 billion in trade, and sustain 1 million jobs in China. On September 16, General Electric and China National Machinery Industry Corporation signed an agreement to cooperate on clean energy projects in Africa. On September 17, Xpress West announced a joint venture project with China Railway International USA CO., LTD, to build a high-speed train line between Las Vegas, NV and Los Angeles, CA.

From June 22 to 24, 2015, U.S. and Chinese officials held the seventh round of the U.S.-China Strategic and Economic Dialogue (S&ED). Major topics included negotiations for reaching a bilateral investment treaty, U.S. concerns over China's proposed technology regulations, and cyber theft.

On March 2, 2015, President Obama reportedly raised concerns with Chinese President Xi about certain aspects of a proposed Chinese anti-terror law that could require high technology companies to hand over encryption keys and install security backdoors in their systems to give Chinese authorities surveillance access to the users (and data) of those services. On February 27, 2015, USTR Michael Froman raised concerns that China's proposed banking regulations would require companies that sell equipment to Chinese banks to turn over sensitive technologies and intellectual property to the Chinese government.

On February 11, 2015, the United States initiated a WTO dispute settlement case against China over its use of certain measures providing subsidies contingent upon export performance to enterprises in several industries in China.

On February 9, 2015, Qualcomm Incorporated announced that it had reached a resolution with China's NDRC over its determination that Qualcomm had violated China's AML. Qualcomm agreed to pay a $975 million fine and to reduce license fees in China.

U.S. Trade with China1

U.S.-China trade rose rapidly after the two nations reestablished diplomatic relations (in January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation (MFN) treatment beginning in 1980.2 In 1979 (when China's economic reforms began), total U.S.-China trade (exports plus imports) was $2 billion; China ranked as the United States' 23rd-largest export market and its 45th-largest source of imports. In 2014, total bilateral trade (exports plus imports) reached $591 billion. In addition, sales by foreign affiliates of U.S. multinational corporations in China totaled $364 billion in 2013. China is currently the second-largest U.S. trading partner (after Canada), the third-largest U.S. export market (after Canada and Mexico), and the largest source of U.S. imports.3 Over the past 10 years of so, China has been one of the fastest-growing U.S. export markets. The importance of the Chinese market for the United States is expected to grow significantly in the years ahead

A major concern among some U.S. policymakers has been the size of the U.S. trade deficit with China. That deficit rose from $10 billion in 1990 to $344 billion in 2014 (see Table 1 and Figure 1). For the past several years, the U.S. trade deficit with China has been significantly larger than that with any other U.S. trading partner and several trading groups. Some analysts contend that the large U.S. trade deficit is an indicator that the trade relationship is unbalanced, unfair, and damaging to the U.S. economy. Others argue the large trade deficit with China is more of a reflection of global supply chains, where China is often the final point of assembly for export-oriented multinational firms (discussed more fully later in the report). A joint study by the Organization for Economic Cooperation and Development (OECD) and the WTO estimated that the U.S trade deficit in China would be reduced by 25% (in 2009) if bilateral trade flows were measured according to the value-added that occurred in each country before it was exported.4

Table 1. U.S. Merchandise Trade with China: 1980-2014

($ in billions)


U.S. Exports

U.S. Imports

U.S. Trade Balance





















































2015 (projections)




Source: U.S. International Trade Commission DataWeb.

Note: Projections for 2015 are based on actual data for January-July 2015.

Figure 1. U.S. Merchandise Trade with China: 2002-2015*

($ in billions)

Source: U.S. International Trade Commission

Note: Projections for 2015 are based on actual data for January-July 2015.

U.S. Merchandise Exports to China

U.S. merchandise exports to China in 2014 were $123.7 billion, up 1.6% over 2013 levels. In 2014, China was the third-largest U.S. merchandise export market after Canada and Mexico (see Figure 2). From 2000 to 2014, the share of total U.S. exports going to China rose from 2.1% to 10.6%. As indicated in Table 2, the top five merchandise U.S. exports to China in 2014 were oilseeds and grains; aircraft and parts; motor vehicles; waste and scrap; and semiconductors and other electronic components. As indicated in Table 3, and Figure 3, from 2005 to 2014, U.S. exports to China increased by 196%, which was the fastest growth rate for U.S. exports among its top 10 export markets. During the first seven months of 2015, U.S. merchandise exports to China fell by 3.6% over the same period in 2014.5

China was the second-largest U.S. agricultural export market in 2014 at $24.5 billion. China is also a significant market for U.S. exports of services. These totaled $41.5 billion in 2014, making China the fourth-largest export market for U.S. services.6

Figure 2. Top 5 U.S. Merchandise Export Markets: 2014

($ in billions)

Source: U.S. International Trade Commission DataWeb.

Table 2. Major U.S. Exports to China: 2013-2014

($ in millions and percent change)

NAIC 4-Digit Commodity



2013-2014 % change

Total Exports to China




Oilseeds and grains




Aerospace products and parts




Motor vehicles




Waste and scrap




Semiconductors and other electronic components




Navigational, measuring, electro-medical, and controlling instruments




Basic chemicals




Resin, synthetic rubber, & artificial & synthetic fibers & filament




Other general purpose machinery




Meat products and meat packaging products




Source: USITC DataWeb.

Note: Top 10 U.S. exports to China in 2014 using the North American Industry Classification (NAIC) System.

Table 3. Major U.S. Merchandise Export Markets: 2005-2014

($ in billions and percent change)




Percent Change: 2013-2014

Percent Change: 2005-2014





















United Kingdom

























Hong Kong





Source: U.S. International Trade Commission DataWeb.

Note: Ranked according to the top 10 U.S. export markets in 2014.

Figure 3. Percentage Change in U.S. Merchandise Exports to Major Trading Partners: 2005-2014


Source: USITC Dataweb.

Notes: Based on top 10 U.S. export markets in 2014.

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 healthy economic growth is projected to continue in the years ahead, provided that it implements new comprehensive economic reforms.7 China's goals of modernizing its infrastructure, upgrading its industries, boosting the services sector, 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. In addition, China's growing economy, large foreign exchange reserves (at nearly $3.6 trillion as of August 2015), and its 1.37 billion population, make it a potentially enormous market. To illustrate:

Major U.S. Imports from China

China was the largest source of U.S. merchandise imports in 2014, at $467 billion. China's share of total U.S. merchandise imports rose from 8.2% in 2000 to 19.9% in 2014. The importance (ranking) of China as a source of U.S. imports has risen sharply, from eighth largest in 1990, to fourth in 2000, to second in 2004-2006, and to first in 2007-present. During the first seven months of 2015, U.S. merchandise imports from China rose by 5.3% over the same period in 2014.17 The top five U.S. imports from China in 2014 were computer equipment, communications equipment, miscellaneous manufactured products (such as toys and games), apparel, and semiconductors and other electronic parts (see Table 4). China was also the third-largest source of U.S. agricultural imports (at $9.9 billion) and the eighth-largest source of U.S. imports of services (at $14.7 billion).18

Table 4. Major U.S. Merchandise Imports From China: 2013-2014

($ in millions and percent change)

NAIC Commodity 4-digit level



2013-2014 Percent change

Total imports from China


Computer equipment




Communications equipment




Miscellaneous manufactured commodities








Semiconductors and other electronic components








Audio and video equipment




Household and institutional furniture and kitchen cabinets




Household appliances and miscellaneous machines




Motor vehicle parts




Source: U.S. International Trade Commission DataWeb.

Note: Top 10 U.S. imports from China in 2014 using the (NAIC) System on a 4-digit level.

Throughout the 1980s and 1990s, nearly all 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 have been comprised of more technologically advanced products (see text box below).

U.S.-China Trade in Advanced Technology Products

According to the U.S. Census Bureau, U.S. imports of "advanced technology products" (ATP) from China in 2014 totaled $154.6 billion. ATP products accounted for 33.1% of total U.S. imports from China, compared with 19.2% ($29.3 billion) in 2003. In addition, ATP imports from China accounted for 36.7% of total U.S ATP imports (compared with 14.1% in 2003). U.S. ATP exports to China in 2014 were $30.8 billion; these accounted for 24.8% of total U.S. exports to China and 9.2% of U.S. global ATP exports. In comparison, U.S. ATP exports to China in 2003 were $8.3 billion, which accounted for 29.2% of U.S. exports to China and 4.6% of total U.S. ATP exports.

The United States ran a $123.8 billion deficit in its ATP trade with China in 2014, up from a $21.0 billion deficit in 2003. Some see the large and growing U.S. trade deficit in ATP with China as a source of concern, contending that it signifies the growing international competitiveness of China in high technology. Others dispute this, noting that a large share of the ATP imports from China are in fact relatively low-end technology products and parts, such as notebook computers, or are products that are assembled in China using imported high technology parts that are largely developed and/or made elsewhere.

China as a Major Center for Global Supply Chains

Many analysts contend that the sharp increase in U.S. imports from China (and hence the growing bilateral trade imbalance) is largely the result of movement in production facilities from other (primarily Asian) countries to China. That is, various products that used to be made in such places as Japan, Taiwan, Hong Kong, etc., and then exported to the United States, are now being made in China (in many cases, by foreign firms in China). To illustrate, in 1990, 47.1% of the value of U.S. manufactured imports came from Pacific Rim countries (including China); this figure declined to 46.3% in 2013.19 Over this period, the share of total U.S. manufactured imports that came from China increased rose from 3.6% to 25.9%. In other words, while China was becoming an increasingly important source for U.S. manufactured imports, the relative importance of the rest of the Pacific Rim (excluding China) as a source of U.S. imports was declining, in part because many multinational firms were shifting their export-oriented manufacturing facilities to China (see Figure 4). In 1990, China accounted for 7.7% of U.S. manufactured imports from all Pacific Rim countries, but by 2014, this figure grew to 55.9%.

Figure 4. U.S. Manufactured Imports from Pacific Rim Countries as a Percent of Total U.S. Manufactured Imports: 1990, 2000, and 2014


Source: U.S. International Trade Commission DataWeb.

Notes: Standard International Trade Classification (SITC) definition of manufactured imports.

Another illustration of the shift in production can be seen in the case of U.S. computer equipment imports, which constitute the largest category of U.S. imports from China (on an NAIC basis, 4-digit level). In 2000, Japan was the largest foreign supplier of U.S. computer equipment (with a 19.6% share of total U.S. imports), while China ranked fourth (with a 12.1% share). By 2014, Japan's ranking had fallen to fourth; the value of its shipments dropped by 73.1% over 2000 levels, and its share of U.S. computer imports declined to 3.4% (2014). China was by far the largest foreign supplier of computer equipment in 2014 with a 64.0% share of total U.S. computer equipment imports, compared to 12.0% in 2000 (see Figure 5). While U.S. imports of computer equipment from China from 2000 to 2014 rose by 725.1%, the total value of U.S. computer imports worldwide rose by only 52.4%.20 A study by the U.S. International Trade Commission (USITC) estimated that in 2002 over 99% of computer exports in China were from foreign-invested firms in China.21 Taiwan, one of the world's leaders in sales of information technology, produces over 90% of its information hardware equipment (such as computers) in China. Computer equipment, like many other globally traded products, often involves many stages of production, using parts and other inputs made by numerous multinational firms throughout the world, a significant share of which is assembled in China. The globalization of supply chains makes it increasingly difficult to interpret conventional U.S. trade statistics (see text box below).

Figure 5. U.S. Computer Imports from China as a Percent of
Total U.S. Computer Imports: 2000-2014


Source: U.S. International Trade Commission DataWeb.

Global Supply Chains, China, and the Apple iPod: Who Benefits?

Many U.S. companies sign contracts with Taiwanese firms to have their products manufactured (mainly in China), and then shipped to the United States where they are sold by U.S. firms under their own brand name. In many instances, the level of value-added that occurs in China (often it simply involves assemblage) can be quite small relative to the overall cost/price of the final product. One study by researchers at the University of California looked at the production of a 2005 Apple 30 gigabyte video iPod, which is made in China by Foxconn, a Taiwanese company, using parts produced globally (mainly in Asia). The study estimated that it cost about $144 to make each iPod unit. Of this amount, only about $4, or 2.8% of the total cost, was attributable to the Chinese workers who assembled it; the rest of the costs were attributable to the numerous firms involved in making the parts (for example, Japanese firms provided the highest-value components—the hard drive and the display).22 From a trade aspect, U.S. trade data would have recorded the full value of each iPod unit imported from China at $144 (excluding shipping costs) as originating from China, even though the value added in China was quite small. The retail price of the iPod sold in the United States was $299, meaning that there was a mark-up of about $155 per unit, which was attributable to transportation costs, retail and distributor margins, and Apple's profits. The study estimated that Apple earned at least $80 on each unit it sold in its stores, making it the single largest beneficiary (in terms of gross profit) of the sale of the iPod. The study concluded that Apple's innovation in developing and engineering the iPod and its ability to source most of its production to low-cost countries, such as China, has helped enable it to become a highly competitive and profitable firm (as well as a source for high-paying jobs in the United States). The iPod example illustrates that the rapidly changing nature of global supply chains has made it increasing difficult to interpret the implications of U.S. trade data. Such data may show where products are being imported from, but they often fail to reflect who benefits from that trade. Thus, in many instances, U.S. imports from China are really imports from many countries.

U.S.-China Investment Ties23

Investment plays a large and growing role in U.S.-China commercial ties.24 China's investment in U.S. assets can be broken down into several categories, including holdings of U.S. securities, foreign direct investment (FDI), and other non-bond investments. A significant share of China's investment in the United States is comprised of U.S. securities, while FDI constitutes the bulk of U.S. investment in China. The Department of the Treasury defines foreign holdings of U.S. securities as "U.S. securities owned by foreign residents (including banks and other institutions) except where the owner has a direct investment relationship with the U.S. issuer of the securities." U.S. statutes define FDI as "the ownership or control, directly or indirectly, by one foreign resident of 10% or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise, including a branch."25 BEA reports data on FDI flows to and from the United States.26 China has also invested in a number of U.S. companies, projects, and various ventures which do not meet the U.S. definition of FDI, and thus, are not reflected in BEA's data.

China's Holdings of U.S. Public and Private Securities27

China's holdings of U.S. public and private securities are significant.28 These include U.S. Treasury securities, U.S. government agency (such as Freddie Mac and Fannie Mae) securities, corporate securities, and equities (such as stocks). China's large holdings of U.S. securities can be largely attributed to its policy of intervening in exchange rate markets to limit the appreciation of its currency to the U.S. dollar (discussed in more detail below). For example, the Chinese government generally requires Chinese exporters (who are often paid in dollars) to turn over their dollars in exchange for Chinese currency. As a result, the Chinese government has accumulated a significant amount of dollars.29 Rather than holding onto U.S. dollars, which earn no interest, the Chinese government has chosen to invest many of them into U.S. Treasury securities because they are seen as a relatively safe investment.30 China's investment in public and private U.S. securities totaled $1.8 trillion as of June 2014.31

U.S. Treasury securities, which help the federal government finance its budget deficit, are the largest category of U.S. securities held by China.32 As indicated in Table 5 and Figure 6, China's holdings of U.S. Treasury securities increased from $118 billion in 2002 to $1.24 trillion as of July 2015, making it the largest foreign holder of U.S. Treasury securities (it overtook Japan as the largest holder in 2008). China's holdings of U.S. Treasury securities as a share of total foreign holdings rose from 9.6% in 2002 to 26.1% in 2010 (year-end), but then declined to 21.9% in December 2013, 20.2% in December 2014, and to 20.6% as of September 2015.33

Table 5. China's Holdings of U.S. Treasury Securities: 2002-2014 and as of September 2015









Sept 2015

China's Holdings ($ billions)









China's Holdings as a Percent of Total Foreign Holdings









Source: U.S. Department of the Treasury.

Note: Annual data are year-end.

In the past, some analysts have raised concerns that China's large holdings of U.S. debt securities could give China leverage over U.S. foreign policy, including trade policy. They argue, for example, that China might attempt to sell (or threaten to sell) a large share of its U.S. debt securities as punishment over a policy dispute, which could damage the U.S. economy. Others counter that China's holdings of U.S. debt give it very little practical leverage over the United States. They argue that, given China's economic dependency on a stable and growing U.S. economy, and its substantial holdings of U.S. securities, any attempt to try to sell a large share of those holdings would likely damage both the U.S. and Chinese economies. Such a move could also cause the U.S. dollar to sharply depreciate against global currencies, which could reduce the value of China's remaining holdings of U.S. dollar assets. Analysts also note that, while China is the largest foreign owner of U.S. Treasury securities, those holdings are equal to only 6.8% of total U.S. public debt (as of December 2014). Finally, it is argued that, as long as China continues to largely peg the RMB to the U.S. dollar, it has little choice but to purchase U.S. dollar assets in order to maintain that peg.

Figure 6. China's Holdings of U.S. Treasury Securities: 2002-September 2015

($ in billions)

Source: U.S. Department of the Treasury.

Notes: Annual data are year-end.

In the 112th Congress, the conference report accompanying the National Defense Authorization Act of FY2012 (H.R. 1540, P.L. 112-81) included a provision requiring the Secretary of Defense to conduct a national security risk assessment of U.S. federal debt held by China. The Secretary of Defense issued a report in July 2012, stating that "attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States." As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war.34

Bilateral Foreign Direct Investment Flows

The level of foreign direct investment (FDI) flows between China and the United States is relatively small given the large volume of trade between the two countries. Many analysts contend that an expansion of bilateral FDI flows could greatly expand commercial ties. The U.S. Bureau of Economic Analysis (BEA) is the main U.S. federal agency that collects data on FDI flows to and from the United States.35 It reported that in 2014 the flow of Chinese FDI to the United States was $968 million, (in comparison, Japanese FDI was $33.8 billion), while U.S. FDI in China in 2014 was $6.3 billion. Annual U.S. FDI flows to China have changed significantly from year to year (the peak year for U.S. FDI in China was 2008 at $16 billion), and in some years, U.S. net FDI flows to China have been negative (reflecting an outflow of funds by U.S. investors in China back to the United States).

At the end of 2014, the stock of Chinese FDI in the United States on a historical-cost basis (i.e., the book value), was estimated by BEA at $9.5 billion (up 12.4% over the previous year), making China the 22nd largest overall source of U.S. FDI inflows through 2014.36 The stock of U.S. FDI in China (on a historical-cost basis,) through 2014 was estimated at $65.8 billion (up 9.7% over the previous year), making China the 17th largest destination of U.S. FDI.37 In 2013, total sales of foreign affiliates of U.S. multinational corporations were $364 billion, and such firms employed 1.7 million workers. Chinese-invested firms had $10.6 million in sales in 2012 (most recent year available) in the United States and employed 14,400 workers.

The Rhodium Group, a private consulting firm, estimates Chinese FDI in the United States to be significantly higher than BEA estimates. The Rhodium Group notes that: "Official data often exhibit a 1-2 year time lag and do not capture major trends, due to problems such as significant round tripping and trans-shipping of investments." For example, Rhodium's approach is to calculate the full value of a Chinese acquisition in the year it was made and to attribute that acquisition to China if it was made by a Chinese entity, regardless of where the financing of the deal originated from (such as through Hong Kong and Caribbean offshore centers, which often occurs). The Rhodium Group estimates that Chinese FDI flows to the United States in 2014 totaled $11.9 billion and that the stock through 2014 was $47.6 billion (see Figure 7).38

China's official data on FDI flows with the United States differ from U.S. data, due largely to different methodologies used.39 Chinese data report the stock of U.S. FDI in China through 2014 at $27.1 billion, and the flow of FDI to the United States in 2014 at $5.2 billion. China's reported annual FDI flows to and from the United States for 2005-2014 are shown in Figure 8. These data would indicate that Chinese FDI in the United States has exceeded FDI in China annually since 2012, which some analysts contend is an indicator that the United States is more "open" to Chinese investment than China is for U.S. investors. As indicated in the text box, a number of Chinese firms have invested in the United States in recent years.

Figure 7. U.S. Estimates of the Stock of FDI Flows between the United States and China: 2002-2014

($ in billions)

Source: Bureau of Economic Affairs and the Rhodium Group.

Notes: BEA and the Rhodium Group use different methodologies to measure China's FDI in the United States. China and U.S. data on FDI flows differ as well.

Figure 8. Official Chinese Data on Annual FDI Flows to and from the United States: 2005-2014

($ in millions)

Source: Chinese Ministry of Commerce.

Chinese Companies in the United States

Although the level of Chinese FDI in the United States is relatively small, it appears to be growing rapidly. Some examples of Chinese FDI in the United States include the following:

Volvo Cars (which is owned by the Chinese firm, Geely Holdings) announced in May 2015 that it would invest up to build $500 million to build an assembly plant in South Carolina with a capacity to initially produce up to 100,000 cars per year.40

Anbang Insurance Group Co. purchased Waldorf Astoria New York in October 2014 for nearly $2 billion.

Shandong Tranlin Paper Company announced in June 2014 that it would build a $2 billion paper and fertilization plant in Chesterfield County, Virginia, generating 2,000 jobs by 2020.

The Dalian Wanda Group Corporation Ltd. announced in May 2012 that it had signed a merger and acquisition agreement to acquire AMC Entertainment (the world's second-largest theater chain) for $2.6 billion.

Suntech Power Holdings Co., Ltd., the world's largest producer of solar panels, opened a solar plant in Goodyear, Arizona, in October 2010, employing 100 workers. However, in March 2013, the company announced it planned to close the plant, citing higher production costs exacerbated by U.S. anti-dumping import duties imposed on solar cells and aluminum, as well as global solar module oversupply.41

Sany Group, a global producer of construction equipment, founded Sany America Inc. in 2006, headquartered in Peachtree City, Georgia. In 2007, it announced it would invest $100 million to create and establish a manufacturing facility for constructing and engineering Sany products, with expected employment of 300 workers by the time the project is completed.42

Wanxiang Group, an automotive parts manufacturer, established Wanxiang America Corporation in 1994, based in Illinois. Over the past decade, Wanxiang America reportedly has purchased or invested in more than 20 U.S. firms and employs 5,000 U.S. workers—more than any other Chinese company.43 In January 2013, Wanxiang America acquired nearly all of A123 Systems, a manufacturer of advanced lithium-ion batteries, for $256.6 million.

Pacific Centuries Motor (a subsidiary of AVIC Automobile Industry Co., Ltd..), purchased Nexteer Automotive, a Michigan-based firm that producers steering and driveline systems, for an estimated $450 million.44

Tianjin Pipe Corporation, China's largest steel pipe-maker, announced in 2009 that it planned to spend $1 billion to construct a mini-mill facility in Gregory, Texas, that will manufacture steel products from recycled scrap steel. Over the first 10 years of operation, the project is projected to boost the local economy by $2.7 billion and generate $327 million in direct employee salaries.45

Haier Group, a major global appliance and electronics firm, maintains its corporate headquarters for Haier America in New York City, has sales offices in 13 U.S. states, and operates a $40 million refrigerator plant in Camden, South Carolina (employing 120 people), reportedly the first U.S. manufacturing facility built by a Chinese firm (2000).

Huawei Technologies is a leading global information and communications technology solutions provider. Since gaining a U.S. presence in 2011, Huawei has reportedly partnered with 280 U.S. technology providers, with total procurement contracts exceeding $30 billion, covering such items as software, components, chipsets, and services. In February 2012, Huawei announced procurement contracts with U.S. firms worth $6 billion.46

Golden Dragon Precise Copper Tube Group Inc. in February 2012 announced plans to build a $100 million manufacturing facility in Alabama. The copper tubing plant began production in 2014, employing 150 workers.

In addition to China's FDI in the United States and its holdings in U.S. Treasury securities, China (as of June 2014) held $361 billion in U.S. equities (such as stocks), up from $3 billion in June 2005. It also held $168 billion in U.S. agency securities, many of which are asset-backed (such as Fannie Mae and Freddie Mac securities),47 and $24 billion in corporate bonds. The China Investment Corporation (CIC), a sovereign wealth fund established by the Chinese government in 2007 with $200 billion in registered capital to help better manage China's foreign exchange reserves, had financial assets totaling $482 billion at the end of 2011. CIC has been one of the largest Chinese purchasers of U.S. equities and other U.S. assets; it has stakes in such firms as Morgan Stanley, the Blackstone Group, and J.C. Flowers & Co.48 It appears that many of the investments by the CIC and other Chinese entities have attempted to avoid political controversy in the United States by limiting their ownership shares to less than 10%.

According to the National Association of Realtors (NAR), Chinese investors have been the largest foreign buyers of U.S. real estate over the past two years. From March 2014 to March 2015, U.S. property sales to Chinese buyers totaled $28.6 billion (up from $12.8 billion 2013) and accounted for 27.5% of the total value of U.S. international sales.49

Issues Raised by Chinese FDI in the United States

Many U.S. analysts contend that greater Chinese FDI in the United States, especially in "greenfield" projects (new ventures) that manufacture products or provide services in the United States and create new jobs for U.S. workers, could help improve bilateral economic relations and might lessen perceptions among some critics in the United States that growing U.S.-China trade undermines U.S. employment and harms U.S. economic interests.50 A number of analysts note that China's outward FDI has been growing rapidly since 2004 and is likely to continue in the years ahead.51

Such analysts contend that greater efforts should be made by U.S. policymakers to encourage Chinese firms to invest in the United States rather than block them for political reasons. In June 2011, President Obama issued an executive order establishing the "SelectUSA Initiative" to coordinate federal efforts to promote and retain investment in the United States. According to a White House factsheet issued during the U.S. visit of then Chinese Vice President Xi Jinping in February 2012, China was already one of SelectUSA's top 10 focus markets, and the Administration was planning a significant expansion of the initiative, including with resources dedicated to attracting Chinese investors and facilitating their investment. The two sides further pledged to deepen cooperation on infrastructure financing.52 At the July 2013 session of the U.S.-China S&ED, the United States pledged to welcome investment from China, including those made by Chinese state-owned enterprises (SOEs). This pledge has been repeated several times by U.S. officials since, including at the September 2015 summit between President Obama and Chinese President Xi.

Some critics of China's current FDI policies and practices contend that they are largely focused on mergers and acquisitions that are geared toward boosting the competitive position of Chinese firms and enterprises favored by the Chinese government for development (some of which also may be receiving government subsidies). Some argue that such investments are often made largely to obtain technology and know-how for Chinese firms, but do little to boost the U.S. economy by, for example, building new factories and hiring workers. Another major issue relating to Chinese FDI in the United States is the relative lack of transparency of Chinese firms, especially in terms of their connections to the central government. When Chinese SOEs attempt to purchase U.S. company assets, some U.S. analysts ask what role government officials in Beijing played in that decision. Chinese officials contend that investment decisions by Chinese companies, including SOEs and publicly held firms (where the government is the largest shareholder), are solely based on commercial considerations, and have criticized U.S. investment policies as "protectionist."

According to the Foreign Investment and National Security Act (FINSA) of 2007 (P.L. 110-149), the Committee on Foreign Investment in the United States (CFIUS) may conduct an investigation on the effect of an investment transaction on national security if the covered transaction is a foreign government-controlled transaction (in addition to if the transaction threatens to impair national security, or results in the control of a critical piece of U.S. infrastructure by a foreign person).53 The House report on the bill (H.Rept. 110-24, H.R. 556) noted: "The Committee believes that acquisitions by certain government-owned companies do create heightened national security concerns, particularly where government-owned companies make decisions for inherently governmental—as opposed to commercial—reasons."

There have been several instances in which efforts by Chinese firms (oftentimes these have been SOEs or state-favored firms) have raised concerns of some U.S. policymakers and/or U.S. stakeholders:

Chinese Restrictions on U.S. FDI in China

U.S. trade officials have urged China to liberalize its FDI regime in order to boost U.S. business opportunities in, and expand U.S. exports to, China. Although China is one of the world's top recipients of FDI, the Chinese central government imposes numerous restrictions on the level and of types of FDI allowed in China. According to the U.S.-China Business Council, China imposes ownership barriers on nearly 100 industries.79 The OECD's 2014 FDI Regulatory Restrictiveness Index, which measures statutory restrictions on foreign direct investment in 57 countries (including all OECD and G20 countries, and covering 22 sectors), ranked China's FDI regime as the most restrictive, based on foreign equity limitations, screening or approval mechanisms, restrictions on the employment of foreigners as key personnel, and operational restrictions (such as restrictions on branching, capital repatriation, and land ownership).80

To a great extent, China's investment policies appear to be linked to industrial policies that seek to promote the development of sectors identified by the government as critical to future economic development. For example, since the early 1980s, the Chinese government has encouraged foreign auto companies to invest in China, but has limited FDI in that sector to 50-50 joint ventures with domestic Chinese partners.81 In addition, the central government maintains a "Guideline Catalogue for Foreign Investment" (the latest revision was issued in March 2015), which lists FDI categories that are encouraged, restricted, or prohibited.82 Many of the sectors under the "encouraged" category include high technology, green technology, and energy conservation, and pollution control.83 Several of the sectors under the "restricted" category limit FDI to joint ventures (such as for rare earth smelting) or where the Chinese parties are the controlling shareholders (such as railway passenger transport companies). "Prohibited" sectors are those that fall under "national security" concerns (such as manufacturing of ammunition and weapons) or are categories where the government seeks to preserve state monopolies (such as postal companies) or protect Chinese firms from foreign competition (such as mining of rare earth elements).

The Chinese government also sets restrictions on FDI inflows during the investment screening process, or through its mergers and acquisition regulations, especially when seeking to protect pillar or strategic industries that the central government (as well as many provincial and local governments) seeks to promote. Many critics of China's investment policies contend that the Chinese government often requires foreign firms to transfer technology to their China partners, and sometimes to set up research and development facilities in China, in exchange for access to China's markets.84 Foreign-invested firms in China face a number of challenges, including local protectionism, lack of regulatory transparency, IPR theft, and discriminatory license practices. A 2013 business survey by the American Chamber of Commerce in China (AmCham China) found that 35% of respondents stated that they were at a competitive disadvantage as a result of Chinese industrial policies that favored state-owned enterprises.85 Some U.S. policymakers have suggested that Chinese investment in certain U.S. sectors should be restricted in response to Chinese policies that limit U.S. FDI in China in similar sectors.86

At the Communist Party of China's third plenum meeting in November 2013, the government stated that it would reduce regulations on FDI in China and create a number of free trade zones that may open up certain sectors to foreign investment. Progress on this commitment has been slow to date.

Some recent surveys by U.S. business groups suggest that foreign firms in China may be less optimistic about the Chinese market than in the past, due in part to perceived growing protectionism. To illustrate:

China's Anti-Monopoly Law and FDI

China passed an anti-monopoly law (AML) in 2007, which became effective in 2008. Article 1 of the law states: "this Law is enacted for the purpose of preventing and restraining monopolistic conducts, protecting fair competition in the market, enhancing economic efficiency, safeguarding the interests of consumers and social public interest, and promoting the healthy development of the socialist market economy."90 Reportedly, the next few years were spent establishing a regime to implement the law and develop regulations. Enforcement responsibilities were divided among three Chinese agencies: the Ministry of Commerce (MOFCOM), responsible for reviewing mergers; the National Development and Reform Commission (NDRC), responsible for reviewing monopoly activities, abuse of dominance, and abuse of administrative power involving pricing; and the State Administration for Industry and Commerce (SAIC), which oversees certain activities that are not price-related. An Anti-Monopoly Commission was established to coordinate anti-monopoly policies among the three agencies.91 U.S. government agencies provided technical assistance to Chinese anti-monopoly agencies starting in 2008.92

Foreign business groups have become increasingly vocal regarding the increased enforcement of China's AML.93 An August 2014 European Chamber of Commerce press release stated that it had "received numerous alarming anecdotal accounts from a number of sectors that administrative intimidation tactics are being used to impel companies to accept punishments and remedies without full hearings. Practices such as informing companies not to challenge the investigations, bring lawyers to hearings or involve their respective governments or chambers of commerce are contrary to best practices." It further stated that, while a number of Chinese companies had also been investigated for anti-competitive violations, questions were increasingly being raised over whether foreign firms were being disproportionately targeted in the investigations:

In some of the industries under investigation, domestic companies have not been targeted for similar violations. Furthermore, in some cases that involve joint ventures, it has only been the foreign partner that has been named as being a party to the investigations. A core tenet of a globalized economy is that all business operators, regardless of nationality, should be held accountable to the same criteria and be treated equally. Competition law should not be used as an administrative instrument to harm targeted companies or serve other aims, such as administratively forcing price reductions.94

A September 2014 report by the USCBC reached a similar conclusion, stating that "China's increased level of competition enforcement activity and the high-profile reporting of competition investigations have prompted increasing attention, questions, and concerns among US companies." The USCBC noted that a 2013 survey found that 86% of the companies surveyed indicated they are at least somewhat concerned about China's enforcement of its competition laws, and 56% stated it was a primary concern.95 In addition, 21% reported they had undergone MOFCOM merger reviews, and 18% said they had experienced a competition-related investigation. The USCBC identified a number of challenges faced by foreign firms in response to China's competition enforcement policy, including obtaining fair treatment and nondiscrimination, lack of due process and regulatory transparency,96 lengthy time periods for merger reviews, the role of noncompetitive factors in competition enforcement,97 how remedies and fines are determined, and the broad definition of monopoly agreements.98

An analysis by the U.S. Chamber of Commerce of China's enforcement of its AML stated that while the law has been used to enhance the overall competitive environment, "in many cases involving foreign companies, China's anti-monopoly enforcement agencies (AMEAs) have skewed the implementation of the AML and related statues to support China's industrial policy goals, including through discrimination and protectionism." It further stated that the AML appears to "promote industrial policy goals, even at the expense of competition—the very goal that other countries' competition laws are designed to enforce." In addition, the Chamber claimed that the NDRC had forced foreign firms to reduce prices, even when it appeared that such prices were the result of market forces rather than noncompetitive conduct.99

During the July 2014, U.S.-China Strategic Economic Dialogue (S&ED), China pledged that economic efficiency, rather than the promotion of individual competitors or industries would be the focus of China's AML and that enforcement would be fair, objective, transparent, and nondiscriminatory.

The Chinese government on several occasions has denied that it is targeting foreign firms in it AML investigations, noting that action has been taken against a number of Chinese firms, including SOEs.100 In September 2014, Chinese Premier Li Keqiang stated that foreign firms accounted for only 10% of recent anti-trust investigations.101

On February 9, 2015, Qualcomm Incorporated announced that it had reached a resolution with China's NDRC over its determination that Qualcomm had violated China's AML. Qualcomm agreed to pay a $975 million fine and to reduce license fees in China.

Negotiations for a Bilateral Investment Treaty (BIT)

The United States and China have held negotiations on reaching a bilateral investment treaty (BIT) with the goal of expanding bilateral investment opportunities. U.S. negotiators hope such a treaty would improve the investment climate for U.S. firms in China by enhancing legal protections and dispute resolution procedures, and by obtaining a commitment from the Chinese government that it would treat U.S. investors no less favorably than Chinese investors.

In April 2012, the Obama Administration released a "Model Bilateral Investment Treaty" that was developed to enhance U.S. objectives in the negotiation of new BITs.102 The new BIT model establishes mechanisms to promote greater transparency, labor and environment requirements, disciplines to prevent parties from imposing domestic technology requirements, and measures to boost the ability of investors to participate in the development of standards and technical regulations on a nondiscriminatory basis.103

During the July 10-11, 2013, session of the S&ED, China indicated its intention to negotiate a high-standard BIT with the United States that would include all stages of investment and all sectors, a commitment U.S. official described as "a significant breakthrough, and the first time China has agreed to do so with another country."104 A press release by the Chinese Ministry of Commerce stated that China was willing to negotiate a BIT on the basis of nondiscrimination and a negative list, meaning the agreement would identify only those sectors not open to foreign investment on a nondiscriminatory basis (as opposed to a BIT with a positive list which would only list sectors open to foreign investment).

During the July 9-10, 2014, S&ED session, the two sides agreed to a broad timetable for reaching agreement on core issues and major articles of the treaty text and committed to initiate the "negative list" negotiation early in 2015.105 During BIT negotiations held in June 2015, each side submitted their first negative list proposals, and later agreed to submit a revised list in September 2015. While some progress was reportedly made in September 2015, a breakthrough was not achieved in time for President's Xi's summit visit to the United States.

Many analysts contend the negotiation of a U.S.-China BIT could have significant implications for bilateral commercial relations and the Chinese economy. According to USTR, Michael Froman, such an agreement "offer a major opportunity to engage on China's domestic economic reforms and to pursue greater market access, a more level playing field, and a substantially improved investment environment for U.S. firms in China."106 For China, a high-standard BIT could help facilitate greater competition in China and result in more efficient use of resources, factors which economists contend could boost economic growth. Some observers contend that China's pursuit of a BIT with the United States represents a strategy that is being used by reformers in China to jumpstart widespread economic reforms (which appear to have been stalled in recent years). This strategy, it is argued, is similar to that used by Chinese reformers in their efforts to get China into the WTO in 2001. Such international agreements may give political cover to economic reformers because they can argue that the agreements build on China's efforts to become a leader in global affairs. This may make it harder for vested interests in China who benefit from the status quo to resist change.

Major U.S.-China Trade Issues

China's economic reforms and rapid economic growth, along with the effects of globalization, have caused the economies of the United States and China to become increasingly integrated.107 Although growing U.S.-China economic ties are considered by most analysts to be mutually beneficial overall, tensions have risen over a number of Chinese economic and trade policies that many U.S. critics charge are protectionist, economically distortive, and damaging to U.S. economic interests. According to the USTR, most U.S. trade disputes with China stem from the consequences of its incomplete transition to a free market economy. Major areas of concern for U.S. stakeholders include China's:

Chinese "State Capitalism"

Currently, a significant share of China's economy is thought to be driven by market forces. According to a 2010 WTO report, the private sector now accounts for more than 60% of China's gross domestic product (GDP).108 However, the Chinese government continues to play a major role in economic decision-making. For example, at the macroeconomic level, the Chinese government maintains policies that induce households to save a high level of their income, much of which is deposited in state-controlled Chinese banks. This enables the government to provide low-cost financing to Chinese firms, especially SOEs. At the microeconomic level, the Chinese government (at the central and local government level) seeks to promote the development of industries that are deemed critical to the country's future economic development by using various policies, such as subsidies, tax breaks, preferential loans, trade barriers, FDI restrictions, discriminatory regulations and standards, export restrictions on raw materials (such as rare earths), technology transfer requirements imposed on foreign firms, public procurement rules that give preferences to domestic firms, and weak enforcement of IPR laws.

Many analysts contend that the Chinese government's intervention in various sectors through industrial policies has intensified in recent years. The December 2013 U.S. Trade Representative's (USTR's) report on China's WTO trade compliance states:

During most of the past decade, the Chinese government emphasized the state's role in the economy, diverging from the path of economic reform that had driven China's accession to the WTO. With the state leading China's economic development, the Chinese government pursued new and more expansive industrial policies, often designed to limit market access for imported goods, foreign manufacturers and foreign service suppliers, while offering substantial government guidance, resources and regulatory support to Chinese industries, particularly ones dominated by state-owned enterprises. This heavy state role in the economy, reinforced by unchecked discretionary actions of Chinese government regulators, generated serious trade frictions with China's many trade partners, including the United States.109

The extent of SOE involvement in the Chinese economy is difficult to measure due to the opaque nature of the corporate sector in China and the relative lack of transparency regarding the relationship between state actors (including those at the central and non-central government levels) and Chinese firms. According to one study by the U.S.-China Economic and Security Review Commission:

The state sector in China consists of three main components. First, there are enterprises fully owned by the state through the State‐owned Assets and Supervision and Administration Commission (SASAC) of the State Council and by SASACs of provincial, municipal, and county governments. Second, there are SOEs that are majority owners of enterprises that are not officially considered SOEs but are effectively controlled by their SOE owners. Finally, there is a group of entities, owned and controlled indirectly through SOE subsidiaries based inside and outside of China. The actual size of this third group is unknown. Urban collective enterprises and Government‐owned Township and village enterprises (TVEs) also belong to the state sector but are not considered SOEs. The state‐owned and controlled portion of the Chinese economy is large. Based on reasonable assumptions, it appears that the visible state sector—SOEs and entities directly controlled by SOEs, accounted for more than 40 percent of China's nonagricultural GDP. If the contributions of indirectly controlled entities, urban collectives, and public TVEs are considered, the share of GDP owned and controlled by the state is approximately 50 percent.110

According to the Chinese government, at the end of 2011, there were 144,700 state-owned or state-controlled enterprises, excluding financial institutions, with total assets worth $13.6 trillion.111 Chinese SOEs have undergone significant restructuring over the years. More than 90% of SOEs have reportedly become corporations or shareholding companies.112 The Chinese government has identified a number of industries where the state should have full control or where the state should dominate. These include autos, aviation, banking, coal, construction, environmental technology, information technology, insurance, media, metals (such as steel), oil and gas, power, railways, shipping, telecommunications, and tobacco.113

Many SOEs are owned or controlled by local governments. According to one analyst:

The typical large industrial Chinese company is ...wholly or majority-owned by a local government which appoints senior management and provides free or low-cost land and utilities, tax breaks, and where possible, guarantees that locally made products will be favored by local governments, consumers, and other businesses. In return, the enterprise provides the local state with a source of jobs for local workers, tax revenues, and dividends.114

China's banking system is largely dominated by state-owned or state-controlled banks. In 2011, the top five largest banks in China, all of which were shareholding companies with significant state ownership, accounted for 57.5% of Chinese banking assets. The Chinese government also has four banks that are 100% state-owned and holds shares in a number of joint stock commercial banks.115 SOEs are believed to receive preferential credit treatment by government banks, while private firms must often pay higher interest rates or obtain credit elsewhere. According to one estimate, SOEs accounted for 85% ($1.4 trillion) of all bank loans in 2009.116

Not only are SOEs dominant players in China's economy, many are becoming quite large by global standards. In 2013, 84 Chinese companies (excluding Hong Kong firms) made Fortune Magazine's Global 500 list of the world's largest firms based on revenues. Of the 84 Chinese companies listed, 77 firms or 88.1% were state-owned or state-controlled enterprises (defined as where the state owned 50% of the company). Of the 10 non-SOE companies listed, at least 3 are partially owned by the government. For example, the government owns 26.5% of the Bank of Communications, 15.7% of China Minsheng Banking Corp., and 20% of Shanghai Pudong Development Bank.117 Another company, Huawei (a major telecommunications company) describes itself as an employee-owned firm. However, many U.S. analysts contend that Huawei has strong links with the Chinese government, including the Chinese People's Liberation Army (PLA), and has not published a full breakdown of its ownership structure. In addition, in the past, the Chinese government reportedly ordered state banks to extend loans to the company early in its development so that it could compete against foreign firms in the domestic telecommunications market.118

China's Plan to Modernize the Economy and Promote Indigenous Innovation

Many of the industrial policies that China has implemented or formulated since 2006 appear to stem largely from a comprehensive document issued by China's State Council (the highest executive organ of state power) in 2006 titled the National Medium-and Long-Term Program for Science and Technology Development (2006-2020), often referred to as the MLP. The MLP appears to represent an ambitious plan to modernize the structure of China's economy by transforming it from a global center of low-tech manufacturing to a major center of innovation (by the year 2020) and a global innovation leader by 2050.119 It also seeks to sharply reduce the country's dependence on foreign technology. The MLP includes the stated goals of "indigenous innovation, leapfrogging in priority fields, enabling development, and leading the future."120 Some of the broad goals of the MLP state that by 2020:

The document states that "China must place the strengthening of indigenous innovative capability at the core of economic restructuring, growth model change, and national competitiveness enhancement. Building an innovation-oriented country is therefore a major strategic choice for China's future development." This goal, according to the document, is to be achieved by formulating and implementing regulations in the country's government procurement law to "encourage and protect indigenous innovation," establishing a coordination mechanism for government procurement of indigenous innovative products, requiring a first-buy policy for major domestically made high-tech equipment and products that possess proprietary intellectual property rights, providing policy support to enterprises in procuring domestic high-tech equipment, and developing "relevant technology standards" through government procurement.

Reaction by U.S. Stakeholders

Beginning in 2009, several U.S. companies began to raise concerns over a number of Chinese government circulars that would establish an "Indigenous Innovation Product Accreditation" system. For example, in November 2009, the Chinese government released a "Circular on Launching the 2009 National Indigenous Innovation Product Accreditation Work," requiring companies to file applications by December 2009 for their products to be considered for accreditation as "indigenous innovation products." Similar proposed circulars were issued at the provincial and local government levels as well. U.S. business representatives expressed deep concern over the circulars, arguing that they were protectionist in nature because they extended preferential treatment for Chinese government procurement to domestic Chinese firms that developed and owned intellectual property (IP) and thus largely excluded foreign firms.122 AmCham China described China's attempt to link IP ownership with market access as "unprecedented worldwide."123 A letter written by the U.S. Chamber of Commerce and 33 business associations to the Chinese government on December 10, 2009, stated that the indigenous innovations circulars would "make it virtually impossible for any non-Chinese companies to participate in China's government procurement market—even those that have made substantial and long-term investments in China, employ Chinese citizens, and pay taxes to the Chinese government."124 Such groups contend that a large share of their technology is developed globally and thus it would be difficult to attribute the share of technology developed in China needed to obtain accreditation.125

A 2011 AmCham China survey found that 40% of respondents believed that China's indigenous innovation policies would hurt their businesses and 26% said their businesses were already being hurt by such policies. At a November 2011 WTO review of China's IPR policies, the U.S. WTO representative stated that China's policies of adopting indigenous innovation had "created a troubling trend toward increased discriminatory policies which were aimed at coercing technology transfer." He stated that "Chinese regulations, rules and other regulatory measures frequently called for technology transfer, and in certain cases, conditioned, or proposed to condition, the eligibility for government benefits or preferences on intellectual property being owned or developed in China, or being licensed, in some cases exclusively, to a Chinese party."126

China's Response to U.S. Concerns

The Chinese government responded to U.S. concerns over its indigenous innovation policies by arguing that they did not discriminate against foreign firms or violate global trade rules.127 However, during the visit of (then) Chinese President Hu Jintao to the United States in January 2011, the Chinese government stated that it would not link its innovation policies to the provision of government procurement preferences.128 During the May 2011 session of the U.S.-China Strategic and Economic Dialogue (S&ED), China pledged that it would eliminate all of its indigenous innovation products catalogs.129 During the November 2011 talks held under the U.S.-China JCCT, the Chinese government announced that the State Council had issued a measure requiring governments of provinces, municipalities, and autonomous regions to eliminate by December 1, 2011, any catalogues or other measures linking innovation policies to government procurement preferences.130 This occurred after foreign business groups raised concerns that discriminatory indigenous innovation policies might continue to be implemented at the local level even after Hu Jintao's commitment. For example, the U.S.-China Business Council (USCBC) reported in February 2011 that it had identified 22 municipal and provincial governments that had issued at least 61 indigenous innovation catalogues. U.S. business representatives sought to ensure that Beijing's pledge on indigenous innovation would apply at all levels of government in China.

In May 2013, the USCBC reported that, although the central government had largely been successful in ensuring that sub-national governments complied with Hu Jintao's January 2011 commitments, 13 provinces had not yet issued any measures to comply.131 In addition, an October 2012 USCBC survey found that 85% of respondents said they had seen little impact on their businesses resulting from China's commitments delinking indigenous innovation with government procurement.132

Remaining U.S. Concerns

While many U.S. business leaders have applauded China's pledge to delink indigenous innovation from government procurement, some remain wary that China will implement new policies that attempt to provide preferences to local Chinese firms over foreign firms. According to Adam Segal with the Council on Foreign Relations: "Even if China reverses certain policies under U.S. pressure, it will remain dedicated to those goals. U.S. policy is likely to become a game of Whac-a-Mole, beating down one Chinese initiative on indigenous innovation only to see another pop up."133 U.S. business groups are also concerned with how the MLP blueprint will affect China's commitment to enforcing foreign IPR. They note, for example, that the MLP states: "Indigenous innovation refers to enhancing original innovation, integrated innovation, and re-innovation based on assimilation and absorption of imported technology, in order to improve our national innovation capability." To some, this seems to indicate that China intends to take existing technology, make some changes and improvements on it, and then claim it as its own without acknowledging or compensating the original IPR holders. A 2011 report by the U.S. Chamber of Commerce stated that China's indigenous innovation policies led many international technology companies to conclude that the MLP is a "blueprint for technology theft on a scale the world has never seen before."134

U.S. officials have attempted to convince Beijing that, while its desire to increase innovation in China is a commendable goal, its efforts to limit the participation of foreign firms in such efforts, or attempting to condition market access in China to the development of IPR by foreign firms in China will hinder, not promote, the advancement of innovation in China. The direction China takes on this issue could have a significant impact on U.S. economic interests as noted by a study by the U.S. International Trade Commission (USITC):

To the extent that China's policies succeed in accelerating technological progress, productivity, and innovation in the Chinese economy, they could provide spillover benefits for other countries. But if indigenous innovation policies act as a form of technological import substitution, systematically favoring Chinese domestic firms over foreign firms in relevant industries, they would be expected to have a negative effect on foreign firms and economies roughly analogous to what would occur if China simply imposed a protective tariff on imports of goods in the relevant sectors or levied a discriminatory excise tax on the sales of FIEs in the Chinese market.135

Intellectual Property Rights (IPR) Issues

U.S. business and government representatives have voiced growing concern over economic losses suffered by U.S. firms as a result of IPR infringement in China (and elsewhere), including those that have resulted from cyberattacks. U.S. innovation and the intellectual property that is generated by such activities have been cited by various economists as a critical source of U.S. economic growth and global competitiveness.136 For example, according to the Department of Commerce, in 2010, U.S. IP-intensive industries supported at least 40 million jobs and contributed $5.1 trillion (or 34.8%) to U.S. gross domestic product (GDP).137 A study by NDP Consulting estimated that in 2008, workers in IP-intensive production earned 60% more than workers at similar levels in non-IP industries.138 A study on the Apple iPod concluded that Apple's innovation in developing and engineering the iPod and its ability to source most of its production to low-cost countries, such as China, have helped enable it to become a highly competitive and profitable firm as well as a creator of high-paying jobs (such as engineers engaged in the design of Apple products) in the United States.139

Lack of effective and consistent protection of IPR has been cited by U.S. firms as one of the most significant problems they face in doing business in China. Other U.S. firms have expressed concern over pressures they often face from Chinese government entities to share technology and IPR with a Chinese partner. Although China has significantly improved its IPR protection regime over the past few years, U.S. IP industries complain that piracy rates in China continue to remain unacceptably high and economic losses are significant, as illustrated by studies and estimates made by several stakeholders:

Chinese officials contend that they have significantly improved their IPR protection regime, but argue that the country lacks the resources and a sophisticated legal system to effectively deal with IPR violations. They also contend that IPR infringement is a serious problem for domestic Chinese firms as well. However, some analysts contend that China's relatively poor record on IPR enforcement can be partially explained by the fact that Chinese leaders want to make China a major producer of capital-intensive and high-technology products, and thus, they are tolerant of IPR piracy if it helps Chinese firms become more technologically advanced. According to an official at the U.S. Chamber of Commerce:

The newer and emerging challenge to U.S. IPR is not a function of China's lack of political will to crackdown on infringers. Rather, it is a manifestation of a coherent, and government-directed, or at least government-motivated, strategy to lessen China's perceived reliance on foreign innovations and IP. China is actively working to create a legal environment that enables it to intervene in the market for IP, help its own companies to "re-innovate" competing IPR as a substitute to American and other foreign technologies, and potentially misappropriate U.S. and other foreign IP as components of its industrial policies and internal market regulation.... The common themes throughout these policies are: 1) undermine and displace foreign IP; 2) leverage China's large domestic market to develop national champions and promote its own IP, displacing foreign competitors in China; and 3) building on China's domestic successes by displacing competitors in foreign markets.145

An illustration of alleged IPR theft in China involves American Superconductor Corporation (AMSC). On September 14, 2011, AMSC announced that it was filing criminal and civil complaints in China against Sinovel Wind Group Co. Ltd. (Sinovel), China's largest wind turbine producer, and other parties, alleging the illegal use of AMSC's intellectual property. According to an AMSC press release, Sinovel illegally obtained and used AMSC's wind turbine control software code to upgrade its 1.5 megawatt wind turbines in the field to meet proposed Chinese grid codes and to potentially allow for the use of core electrical components from other manufacturers.146 In addition, AMSC claimed that Sinovel had refused to pay for past shipments from AMSC and was now refusing to honor contracts for future shipments of components and spare parts as well.147 AMSC has brought several civil cases against Sinovel, seeking to recover more than $1.2 billion for contracted shipments and damages caused by Sinovel's contract breaches.148

According to a specialist in intellectual property at Tufts University, "Chinese companies, once they acquire the needed technology, will often abandon their Western partners on the pretext the technology or product failed to meet Chinese governmental regulations. This is yet another example of a Chinese industrial policy aimed at procuring, by virtually any means, technology in order to provide Chinese domestic industries with a competitive advantage."149

Market access in China remains a significant problem for many U.S. IP industries (such as music and films) and is considered to be a significant cause of high IPR piracy rates. For example, until recently, China limited imports of foreign films to 20 per year. During the visit to the United States by then-Chinese Vice President Xi Jinping (February 13-17, 2012), China agreed that it would allow more American exports to China of 3D, IMAX, and similar enhanced format movies on favorable commercial terms; strengthen the opportunities to distribute films through private enterprises rather than the state film monopoly; and ensure fairer compensation levels for U.S. blockbuster films distributed by Chinese SOEs.150

The USTR's 2014 Special 301 report stated that China had made comprehensive improvements to its trade laws and regulations, and that some IPR stakeholders reported positive results from China's judicial system. However, IPR infringement remains a significant problem for all forms of IPR in China, including patents, copyrights, trademarks, trade secrets, and technical data.151 As a result, sales of U.S. IPR-intensive goods and services in China remain disproportionately low relative to other countries.152 The USTR stated that commercial trade secret theft against U.S. firms by Chinese entities, both in and outside China in order to commercially benefit Chinese firms, remain a significant U.S. concern (discussed in more detail below).

Technology Transfer Issues

When China entered the WTO in 2001, it agreed that foreign firms would not be pressured by government entities to transfer technology to a Chinese partner as part of the cost of doing business in China. However, many U.S. firms argue that this is a common Chinese practice, although this is difficult to quantify because, oftentimes, U.S. business representatives appear to try to avoid negative publicity regarding the difficulties they encounter doing business in China out of concern over retaliation by the Chinese government.153 In addition, Chinese officials reportedly pressure foreign firms through oral communications to transfer technology (for example as a condition to invest in China), avoiding putting such requirements in writing in order to evade being accused of violating WTO rules.

In 2011, then-U.S. Treasury Secretary Timothy Geithner charged that "we're seeing China continue to be very, very aggressive in a strategy they started several decades ago, which goes like this: you want to sell to our country, we want you to come produce here. If you want to come produce here, you need to transfer your technology to us." A 2012 AmCham China survey reported that 33% of its respondents stated that technology transfer requirements were negatively affecting their businesses.154 A 2010 study by the U.S. Chamber of Commerce stated that growing pressure on foreign firms to share technology in exchange for market access in China was forcing such firms to "anguish over balancing today's profits with tomorrow's survival."155

However, a 2011 survey by the USCBC found that technology transfer requirements by Chinese entities (both government and private) did not rank among the top 10 challenges faced by the Council's members in 2010. Among U.S. firms where technology was an issue, when asked if their company had been asked to transfer technology to China over the past three years, 18% answered yes. Among the respondents that had been asked to transfer technology, 20% said the pressure came from a government entity, while 80% said that it came from a Chinese company.156 Of the respondents who said they were asked to transfer technology, 40% stated that they found the requests acceptable, 30% refused the requests, 15% negotiated to mitigate the amount of technology transfer, and 10% said they had to transfer the technology requested in order to gain access to the Chinese market. As noted by the USCBC:

The PRC [People's Republic of China] certainty has a long-term strategy to bring in foreign technology. But technology is not simply "given to China." Instead, technology is typically licensed to a China-based entity in which the foreign company has an ownership stake. In many cases the foreign company owns 100 percent of the entity in China; in some cases, the foreign company must form a joint venture with a Chinese partner. In exchange, the company determines a value of the technology to be transferred and negotiates a payment—the technology is rarely "given" for free.157

Press reports indicate that the USTR's office is currently seeking information from U.S. manufacturers on examples of efforts by the Chinese government to force the transfer of technology from U.S. companies operating in China. This issue was discussed during President Obama's meeting with then-Chinese Vice President Xi Jinping on February 14, 2012.158 A White House Factsheet of the meeting stated: "China reiterates that technology transfer and technological cooperation shall be decided by businesses independently and will not be used by the Chinese government as a pre-condition for market access."

In the 112th Congress, S. 2063 (Webb) would have prohibited the transfer by a U.S. commercial entity of any proprietary technology or intellectual property that was researched, developed, or commercialized using a contract, grant, loan, loan guarantee, or other financial assistance provided or awarded by the U.S. government to certain foreign entities (such as those that are owned or controlled by a foreign government) unless the Secretary of Commerce determined (and issued a waiver) that the transfer would not compromise the U.S. economic interests or competitiveness.

Cybersecurity Issues

Cyberattacks against U.S. firms have raised concerns over the potential large-scale theft of U.S. IPR and its economic implications for the United States. A 2011 report by McAfee (a U.S. global security technology company) stated that its investigation had identified targeted intrusions into more than 70 global companies and warned that "every conceivable industry with significant size and valuable intellectual property has been compromised (or will be shortly), with the great majority of the victims rarely discovering the intrusion or its impact."159 Many U.S. analysts and policymakers contend that the Chinese government is a major source of cyber economic espionage against U.S. firms. For example, Representative Mike Rogers, chairman of the House Permanent Select Committee on Intelligence, stated at an October 4, 2011, hearing that

Attributing this espionage isn't easy, but talk to any private sector cyber analyst, and they will tell you there is little doubt that this is a massive campaign being conducted by the Chinese government. I don't believe that there is a precedent in history for such a massive and sustained intelligence effort by a government to blatantly steal commercial data and intellectual property. China's economic espionage has reached an intolerable level and I believe that the United States and our allies in Europe and Asia have an obligation to confront Beijing and demand that they put a stop to this piracy.160

A 2011 report by the U.S. Office of the Director of National Intelligence (DNI) stated: "Chinese actors are the world's most active and persistent perpetrators of economic espionage. U.S. private sector firms and cybersecurity specialists have reported an onslaught of computer network intrusions that have originated in China, but the IC (Intelligence Community) cannot confirm who was responsible." The report goes on to warn that

China will continue to be driven by its longstanding policy of "catching up fast and surpassing" Western powers. The growing interrelationships between Chinese and U.S. companies—such as the employment of Chinese-national technical experts at U.S. facilities and the off-shoring of U.S. production and R&D to facilities in China—will offer Chinese government agencies and businesses increasing opportunities to collect sensitive US economic information.161

On February 19, 2013, Mandiant, a U.S. information security company, issued a report documenting extensive economic cyberespionage by a Chinese unit (which it designated as APT1) with alleged links to the Chinese People's Liberation Army (PLA) against 141 firms, covering 20 industries, since 2006. The report stated:

Our analysis has led us to conclude that APT1 is likely government-sponsored and one of the most persistent of China's cyber threat actors. We believe that APT1 is able to wage such a long-running and extensive cyber espionage campaign in large part because it receives direct government support. In seeking to identify the organization behind this activity, our research found that People's Liberation Army (PLA's) Unit 61398 is similar to APT1 in its mission, capabilities, and resources. PLA Unit 61398 is also located in precisely the same area from which APT1 activity appears to originate.162

On March 11, 2013, Tom Donilon, National Security Advisor to President Obama, stated in a speech that the United States and China should engage in a constructive dialogue to establish acceptable norms of behavior in cyberspace; that China should recognize the urgency and scope of the problem and the risks it poses to U.S. trade relations and the reputation to Chinese industry; and that China should take serious steps to investigate and stop cyberespionage.163 Following a meeting with Chinese President Xi Jinping in June 2013, President Obama warned that if cybersecurity issues are not addressed and if there continues to be direct theft of United States property, then "this was going to be a very difficult problem in the economic relationship and was going to be an inhibitor to the relationship really reaching its full potential."

On May 19, 2014, the U.S. Department of Justice issued a 31-count indictment against five members of the Chinese People's Liberation Army (PLA) for cyberespionage and other offenses that allegedly targeted five U.S. firms and a labor union for commercial advantage, the first time the Federal government has initiated such action against state actors. The named U.S. victims were Westinghouse Electric Co. (Westinghouse); U.S. subsidiaries of SolarWorld AG (SolarWorld); United States Steel Corp. (U.S. Steel); Allegheny Technologies Inc. (ATI); the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW); and Alcoa Inc. The indictment appears to indicate a high level of U.S. government concern about the extent of Chinese state-sponsored cyber commercial theft against U.S. firms. It is not clear how the U.S. indictment will impact U.S.-China relations.164

China strongly condemned the U.S. indictment and announced that it would suspend its participation in the U.S.-China Cyber Working Group, established in 2013. Some Members of Congress have called on the USTR to initiate a case against China in the World Trade Organization (WTO). Others have called for new measures to identify foreign governments that engage in cyberespionage and to impose sanctions against entities that benefit from that theft. Bills in Congress to address foreign economic and industrial cyber theft include H.R. 2281, S. 111, S. 884, and S. 2384. Some analysts warn that growing U.S.-China disputes over cyber theft could significantly impact commercial ties. The Obama Administration has sought ways to enhance U.S. commercial cybersecurity at home, develop bilateral and global rules governing cyber theft of commercial trade secrets, strengthen U.S. trade policy tools, and promote greater cooperation with trading partners that share U.S. concerns.

On April 1, 2015, President Obama issued Executive Order 13964 authorizing certain sanctions against "persons engaging in significant malicious cyber-enabled activates."165 Shortly before Chinese President Xi's state visit to the United States in September 2015, some press reports indicated that the Obama Administration was considering imposing sanctions against Chinese entities over cyber theft, even possibly before the arrival of President Xi, which, some analysts speculated might have caused Xi to cancel his visit. This appears to have prompted China to send a high-level delegation (headed by Meng Jianzhu, Secretary of the Central Political and Legal Affairs Commission of the Chinese Communist Party) to Washington, DC to hold four days of talks (September 9-12) with U.S. officials over cybersecurity.166

On September 25, 2015, Chinese President Xi and President Obama announced that they had reached an agreement on cybersecurity. The agreement stated that neither country's government will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors. They also agreed to set up a high-level dialogue mechanism (which would meet twice a year) to address cybercrime and to improve two-way communication when cyber-related concerns arise (including the creation of a hotline). Analysts differ on how the agreement will address bilateral cyber theft issues. Some have called it a good first start to developing rules governing cyber theft of commercial IPR. Others are more skeptical, noting that the Chinese government denies engaging in cyber theft of trade secrets for gaining a competitive advantage and instead claims China is the "biggest victim" of such activity. In addition, critics contend, it is often extremely difficult to identify hackers, let alone trace it back to a government entity.

China's Obligations in the World Trade Organization

Negotiations for China's accession to the General Agreement on Tariffs and Trade (GATT) and its successor organization, the WTO, began in 1986 and took over 15 years to complete. During the WTO negotiations, Chinese officials insisted that China was a developing country and should be allowed to enter under fairly lenient terms. The United States insisted that China could enter the WTO only if it substantially liberalized its trade regime. In the end, a compromise was reached that required China to make immediate and extensive reductions in various trade and investment barriers, while allowing it to maintain some level of protection (or a transitional period of protection) for certain sensitive sectors. China's WTO membership was formally approved at the WTO Ministerial Conference in Doha, Qatar, on November 10, 2001. On November 11, 2001, China notified the WTO that it had formally ratified the WTO agreements, and on December 11, 2001, it formally joined the WTO.167 Under the WTO accession agreement, China agreed to the following:

WTO Implementation Issues

Getting China into the WTO under a comprehensive trade liberalization agreement was a major U.S. trade objective during the late 1990s. Many U.S. policymakers at the time maintained that China's WTO membership would encourage the Chinese government to deepen market reforms, promote the rule of law, reduce the government's role in the economy, further integrate China into the world economy, and enable the United States to use the WTO's dispute resolution mechanism to address major trade issues. As a result, it was hoped, China would become a more reliable and stable U.S. trading partner. U.S. trade officials contend that in the first years after it joined the WTO, China made noteworthy progress in adopting economic reforms that facilitated its transition toward a market economy and increased its openness to trade and FDI. However, beginning in 2006, progress toward further market liberalization appeared to slow. By 2008, U.S. government and business officials noted evidence of trends toward a more restrictive trade regime.168 The USTR's 12th annual report to China on WTO compliance (issued in December 2013) identified several areas of concern, including169

As of December 2015, the United States has brought 17 dispute settlement cases against China, several of which have been resolved or ruled upon.170 China has brought nine WTO cases against the United States as well.171 The U.S. cases are summarized below.

During his State of the Union Address in January 2012, President Obama announced plans to create a new Trade Enforcement Unit "charged with investigating unfair trade practices in countries like China." On February 28, 2012, President Obama issued an executive order establishing the Interagency Trade Enforcement Center within the USTR's office. Many analysts contend that the new enforcement unit could result in a sharp increase in the number of WTO dispute settlement cases brought by the United States against China.

China's Accession to the WTO Government Procurement Agreement (GPA)

Government procurement policies are largely exempt from WTO rules, except for those members which have signed the GPA.178 When China joined the WTO, it indicated its intention to become a member of WTO's GPA as soon as possible, but, to date, has failed to submit an offer acceptable to current GPA members.

China's accession to the GPA is a major U.S. priority. China reports its annual government procurement spending at $179 billion (2011).179 U.S. officials estimate this figure could be as high as $200 billion.180 A study by the European Union Chamber of Commerce in China estimates that this figure could be well over $1 trillion if all levels of government are included, plus SOEs.181 China currently maintains a number of restrictive government procurement practices and policies that favor domestic Chinese firms. Because of China's rapidly growing economy and significant infrastructure needs, China's accession to the GPA could result in significant new opportunities for U.S. firms.

China did not formally enter into negotiations to join the GPA until 2007, and its initial offer was deemed unacceptable by the other WTO GPA parties. China promised to revise its GPA offer, but did not do so until July 2010. That offer was deemed an improvement over the previous offer but was not accepted, in part because it excluded purchases by local and provincial governments as well as SOEs. A revised offer in December 2011 only covered public entities in three cities and two provinces.182 Commenting on China's last offer, the USTR's office stated:

China began its negotiations to join the GPA four years ago this month. Since that time, China has submitted three offers, each an improvement over the last. But China still has some distance to go before the procurement that it is offering is comparable to the extensive procurement that the United States and other Parties cover under the GPA. For example, we are urging China to cover state-owned enterprises, add more sub-central entities and services reduce its thresholds for the size of covered contracts, and remove other broad exclusions.183

China submitted a new offer in November 2012. According to press reports, the U.S. representative to the WTO GPA Committee stated that China's offer was "only another step but far from what we had expected." In particular, the United States and other GPA parties want China to improve its offer by including coverage of SOEs, lowering thresholds above which the GPA's nondiscrimination disciplines apply, removing several broad exclusions to coverage, and expanding coverage of sub-central entities. Some Members also stated opposition to China's proposal that it be allowed a five-year implementation period.184 During the July 2013 S&ED talks, China pledged to submit a new revised GPA offer by the end of 2014 that would include lowering thresholds and increased coverage of sub-central entities. On December 22, 2014, China submitted its fifth offer to join the GPA. On February 11, 2015, China's offer was examined by existing GPA members, who considered it an improved offer, but not comprehensive enough to warrant approval, especially in regards to the sub-national governments and SOEs that China would be allowed to cover under the GPA. China announced that it would be it difficult or impossible for it to make significant further additions to entity coverage. GPA members urged China to submit a new offer in 2016.

China's Currency Policy185

Unlike most advanced economies (such as the United States), China does not maintain a market-based floating exchange rate. For several years, China pegged its currency directly to the U.S. dollar. Each day China's central bank announced a central rate of exchange between the renminbi (RMB) and the dollar and would buy and sell as much currency as needed to reach a targeted exchange rate within a specific band. In order to maintain the targeted exchange rate with the dollar (and other currencies), the Chinese government imposed restrictions and controls over capital flows in and out of China.186 Currency intervention by the Chinese government in the past contributed to a sharp rise in Chinese foreign exchange reserves, some of which were invested in U.S. dollar assets, such as U.S. Treasury securities.

Starting around 1998, the Chinese government set the central target exchange rate at around 8.28 yuan (the base unit of the RMB) per dollar, and this rate was generally maintained consistently through June 2005.187 Due in part to pressure from its trading partners, including the United States, the Chinese government in July 2005 announced reforms to its currency policy. China immediately appreciated the RMB to the dollar by 2.1% and moved to a "managed float" exchange rate system, based on a basket of major foreign currencies that included the U.S. dollar and other major currencies (although the composition of that basket has not been made public).

From July 2005 to July 2008, the official exchange rate went from 8.27 to 6.83 yuan per dollar. However, once the effects of the global financial crisis became apparent, the Chinese government halted its appreciation of the RMB and subsequently kept the yuan/dollar exchange rate relatively constant at 6.83 from July 2008 to June 2010 in order to help limit the impact of the sharp decline in global demand for Chinese products. Currency appreciation was resumed in June 2010, although at a slower pace than in previous years. From June 2005 through July 2015, the RMB appreciated by 35.3% on a nominal basis against the dollar (see Figure 9).

A broader measurement of the RMB's movement involves looking at exchange rates with China's major trading partners by using a trade-weighted index (i.e., a basket of currencies) that is adjusted for inflation, often referred to as the "real effective exchange rate" (REER). Such an index is useful because it reflects overall changes in a country's exchange rate with its major trading partners as a whole—not just the United States. According to the Bank of International Settlements, from July 2005 to July 2015, the RMB's REER rose by 55.5% against a basket of 61 currencies, including a 15.1% rise from July 2014 to July 2015 (while RMB/dollar nominal exchange rate rose by only 0.7%). The RMB's relative peg to the dollar has meant that as the U.S. dollar has appreciated in global markets, so has the RMB (even when the RMB-dollar exchange rate changed little).

Figure 9. Average Annual RMB Exchange Rate with the Dollar: August 2005-August 2015

(yuan per dollar)

On August 11, 2015, China's central bank announced that it was taking new measures to improve the market-orientation of its daily central parity rate of the RMB. However, over the next three days, the RMB depreciated against the dollar by 4.4% (it went from 6.12 yuan to 6.40 yuan) (see Figure 10). On August 27, the exchange rate, at 6.41 yuan, was at the lowest level since August 2011. These events, along with recent sharp declines in China's stock markets, may have contributed to increased volatility in global stock markets, including in the United States. Some analysts speculate that China's economy may be slowing at a much quicker rate than is reflected in official Chinese economic data. They thus view China's action on currency as a "desperate" attempt to jump-start an economy already in trouble. This contention is based on the belief that a sharp depreciation of the RMB was risky because it could spark a "currency war" among China's major competitors, resulting in subsequent rounds of disruptive devaluations. Others warn that the depreciation of the RMB could further antagonize U.S.-China economic relations. Some Members of Congress have issued statements criticizing China's currency moves, arguing that they reinforce the need to include currency provisions in future U.S. free trade agreements. Other analysts contend that China's currency moves represent a genuine effort to reform China's financial sector and to promote the RMB's eventual emergence as a major global reserve currency, including its possible inclusion in IMF's Special Drawing Rights (SDR) currency basket. Some analysts argue that China's recent RMB devaluation has largely been market-driven, while others, noting the recent large decline in China's foreign exchange reserves, contend that China may be heavily intervening in currency markets to prevent the RMB from depreciating further. They argue that China's recent devaluation may have sparked greater outflows of capital from China, thus prompting the intervention.

Figure 10. Movements in the RMB-Dollar Exchange Rate: August 1–September 2, 2015

(yuan per U.S. dollar)

Source: Bank of China "middle rate."

Notes: Graph inverted for illustrative purposes.

Opinions on the RMB's valuation against the dollar and other currencies differ significantly. The International Monetary Fund (IMF) in May 2015 assessed the RMB to be "no longer undervalued" while in April 2015, the Department of the Treasury stated that the RMB remained "significantly undervalued."

U.S. officials have urged China to continue efforts to rebalance its economy by boosting consumer demand (which would increase import demand) and decreasing the reliance on exports and fixed investment for economic growth. They argue that doing so would enable the Chinese government to move more quickly toward adopting a market-based exchange rate since the creation of new jobs in the nontrade sector would offset job losses in the trade sector.

Numerous bills have been introduced in Congress over the past several years that have sought to induce China to reform its currency policy or would attempt to address the perceived effects that policy has on the U.S. economy. For example, one bill in the 108th Congress would have imposed an additional duty of 27.5% on imported Chinese products unless China appreciated its currency to near market levels. In the 111th Congress, the House passed an amended version of H.R. 2378 (Tim Ryan), which would have made certain misaligned currencies (such as the RMB) actionable under U.S. countervailing duty cases on foreign government export subsidies (although the Senate did not take up the bill). In the 112th Congress, the Senate passed S. 1619, which would have provided for the identification of fundamentally misaligned currencies and required action to correct the misalignment for certain "priority" countries. In the 114th Congress, H.R. 820 and S. 433 would seek to treat certain undervalued currencies as an actionable subsidy under U.S. countervailing laws. China's currency policy, including its August 2015 RMB valuation, has led some Members of Congress to support to inclusion of currency provisions in future free trade agreements, including the Trans-Pacific Partnership (TPP).

The U.S.-China Strategic and Economic Dialogue

On September 29, 2006, President George W. Bush and Chinese President Hu Jintao agreed to establish a Strategic Economic Dialogue (SED) to have discussions on major economic issues at the "highest official level." According to a U.S. Department of the Treasury press release, the intent of the SED was to "discuss long-term strategic challenges, rather than seeking immediate solutions to the issues of the day," in order to provide a stronger foundation for pursuing concrete results through existing bilateral economic dialogues.188 The first meeting was held in December 2006. Four subsequent rounds of talks were held (the last was in December 2008).

While attending the G-20 summit in London on the global financial crisis on April 1, 2009, President Obama and Chinese President Hu agreed to continue the high-level forum, renaming it the U.S.-China Strategic and Economic Dialogue (S&ED). The new dialogue is based on two tracks. The first (the "Strategic Track") is headed by the Secretary of State on the U.S. side and focuses on political and strategic issues, while the second track (the "Economic Track") is headed by the U.S. Treasury Secretary on the U.S. side and focuses on financial and economic issues. Areas of discussion include economic and trade issues, counterterrorism, law enforcement, science and technology, education, culture, health, energy, the environment (including climate change), nonproliferation, and human rights.

One of the reported benefits of the U.S-China S&ED process is that it brings together top economic officials from both sides (as well as U.S. Cabinet officials and Chinese heads of ministries) on a regular basis, which enables both sides to identify their major positions and priorities on various issues and to develop long-term working relationships. Some in Congress have criticized the S&ED forum, arguing that it produces few concrete results, and that many of the results described in subsequent fact sheets that are jointly issued simply restate agreements or pledges China has already made. Others counter that U.S. engagement with China occurs on multiple levels throughout the year and that the S&ED meetings are in part a cumulative result of this process. In addition, the two sides hold annual meetings under the U.S.-China Joint Commission on Commerce and Trade (JCCT), established in 1983, which focuses primarily on bilateral trade and investment issues. The JCCT maintains 16 working groups that meet throughout the year and cover such issues as IPR, information technology, pharmaceutical and medical devices, statistics, commercial law, agriculture, and trade and investment.

The June 2015 Economic Track

The session was held June 22-24, 2015, in Washington, DC. China pledged that it would improve transparency and expand consultations with the United States on proposed rules on information and communications technology (ICT). Many foreign ICT firms contend that such rules are discriminatory or could require them to turn over sensitive technologies and intellectual property to the Chinese government. On proposed ICT regulations in the banking sector, China pledged that it would seek and take into account comments from foreign and domestic parties on draft regulations and would ensure that such regulations are nondiscriminatory and do not impose nationality-based conditions or restrictions on foreign firms. The two sides also reaffirmed that reaching a BIT remained a high priority and pledged to intensify negotiations and exchange improved "negative list" offers (i.e., exceptions) in early September 2015. The U.S. side raised the issue of cybersecurity. U.S. Treasury Secretary Jacob Lew stated: "We have a shared interest and a joint responsibility to pursue policies that support the global economy as well as uphold and continue to improve the global economic and financial architecture. That includes responsibilities to abide by certain standards of behavior within cyberspace. We remain deeply concerned about government-sponsored cyber theft from companies and commercial sectors." The cyber issue was also raised by President Obama when he met with a high-level Chinese delegation of government officials. Yet, China does not appear to have made any specific commitments on cyber theft issues.

The July 2014 Economic Track

The July 10-11, 2014, S&ED session addressed a number of issues. The most significant result of the session, according to some analysts, was an agreement to accelerate negotiations for a BIT and to begin the "negative list" negotiation early in 2015. China further pledged that it would:

The May 2013 Economic Track

The fifth round of the S&ED talks was held in Washington, DC, on July 10-11, 2013. China pledged that it would:

The May 2012 Economic Track

The fourth S&ED round was held in Beijing on May 3 and 4, 2012, and focused largely on economic rebalancing and boosting foreign access to China's financial services sector.189 China pledged that it would:

The May 2011 Economic Track

The third round of the S&ED was held in Washington, DC, on May 9-10, 2011. Prior to the meeting, U.S. officials identified several goals for the economic track of the S&ED, including ensuring that China followed through on previous economic and trade commitments (such as on IPR protection and indigenous innovation policies) and encouraging China to make a number of reforms to its financial sector (such as adopting market-based interest rates on bank deposits and expanding market access in China for U.S. financial firms). China pledged to continue to promote domestic consumption, improve IPR enforcement, eliminate all of its indigenous innovation products catalogues, improve transparency of its economic and trade policies, and provide significant new opportunities for U.S. financial services firms in China.

May 2010 Economic Track Session

The May 24-25, 2010, S&ED economic session focused heavily on the continuing efforts relating to the four pillars identified in the July 2009 session. Although few concrete accomplishments were announced at the end of the meetings, the two agreed to intensify talks on a number of bilateral economic and trade issues. The two sides pledged to

The July 2009 Economic Track Session

The first round of the S&ED was held in Washington, DC, on July 27-28, 2009, and involved 12 U.S. Cabinet officials and agency heads and 15 Chinese ministers, vice ministers, and agency heads. The session was focused heavily on issues relating to the global economic crisis. Then-Secretary of the Treasury Timothy Geithner stated: "Recognizing that cooperation between China and the United States will remain vital not only to the well-being of our two nations but also the health of the global economy, we agreed to undertake policies to bring about sustainable, balanced global growth once economic recovery is firmly in place."

The two sides agreed to establish a framework of cooperation based on four pillars:

These pillars appear to have been aimed at deepening bilateral cooperation in response to the global economic crisis, continuing commitments on both sides to promote policies that seek to achieve more balanced economic growth, encouraging China to continue economic and financial reforms, expanding China's role and/or participation in international economic forums,192 and attempting to avoid new forms of trade protection.

Some analysts have argued that the S&ED structure should be reformed. For example, a report by the Center for Strategic and International Studies (CSIS) argues that ceremony has come to overwhelm substance in the S&ED, that pressure for short-term deliverables at each event has detracted from the dialogue's objective of fostering long-term strategic cooperation, and that the structure of the S&ED has undermined the efforts of individual agencies to work on critical elements of the relationship.193 Others have complained about the lack of benchmarks in the S&ED process to evaluate outcomes of China's commitments. Others complain that the S&ED process often fails to achieve results on major issues. For example, at the July 2013 S&ED, China made no specific commitment on halting cyber theft.

Concluding Observations

China's rapid economic growth and emergence as a major economic power have given China's leadership increased confidence in its economic model. The key challenges for the United States are to convince China that (1) it has a stake in maintaining the international trading system, which is largely responsible for its economic rise, and to take a more active leadership role in maintaining that system; and (2) further economic and trade reforms are the surest way for China to expand and modernize its economy. For example, by boosting domestic spending and allowing the value of its currency to be determined by the market, China would likely import more, which would help speed economic recovery in other countries, promote more stable and balanced economic growth in China, and lessen trade protectionist pressures around the world. Improving IPR protection in China and providing nondiscriminatory treatment to foreign IP firms would likely foster greater innovation in China and attract more FDI in high technology than has occurred under current policies. Lowering trade barriers on imports would increase competition in China, lower costs for consumers, and boost economic efficiency. Some observers contend that reformist-minded officials in China will continue to push for greater free-market reforms, while others argue that vested interests in China (such as SOEs and export-oriented firms) who benefit from the status-quo will make further economic reforms more difficult to realize.

There are a number of views in the United States over how to more effectively address commercial disputes with China:

Author Contact Information

[author name scrubbed], Specialist in Asian Trade and Finance ([email address scrubbed], [phone number scrubbed])



This report focuses primarily on U.S.-China trade relations. For information on China's economy, see CRS Report RL33534, China's Economic Rise: History, Trends, Challenges, and Implications for the United States, by [author name scrubbed]. For general information on U.S.-China political ties, see CRS Report R41108, U.S.-China Relations: An Overview of Policy Issues, by [author name scrubbed].


The United States suspended China's MFN status in 1951, which cut off most bilateral trade. China's MFN status was conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act, as amended (including the Jackson-Vanik freedom-of-emigration provisions). China's MFN status (which was re-designated under U.S. trade law as "normal trade relations" status, or NTR) was renewed on an annual basis until January 2002, when permanent NTR was extended to China (after it joined the WTO in December 2001).


Reuters, "RPT-U.S. Firms Lower China Expectations as Growth Slows, Scrutiny Rises," November 12, 2014, at


OECD/WTO Trade in value-Added (TIVA) Database: China, at


Total U.S. exports to the world over this period have fallen by 5.4%.


U.S. Bureau of Economic Analysis, International Transactions.


China's real GDP growth from 2006 to 2011 averaged 10.9%. However, that growth has moderated in recent years; it was 7.7% in both 2012 and 2013, and 7.4% in 2014.


McKinsey & Company, Preparing For China's Middle Class Challenge (Part 1). Middle class is defined as those with annual household disposable income of between RMB60,000 ($10,000) and RMB229,000 ($34,000). The Chinese government currently estimates its middle class at 300 million people.


Source: Economist Intelligence Unit.


China Daily, "China to invest 7t Yuan for Urban Infrastructure in 2011-15," May 13, 2013.


Statista, at


Boeing Corporation, Current Market Outlook: 20143-20323, September 4, 2014, available at


South China Morning Post, "There are 668 million internet users in China, and almost all of them are using smartphones," July 23, 2015," available at


Internet World Stats, at


The International Organization of Motor Vehicle Manufacturers, available at


A large share of these vehicles was produced by GM and its joint-venture partners in China. GM's website states that it currently has 11 joint ventures and two wholly owned foreign enterprises (employing 58,000 workers) in China.


In comparison, total U.S. imports declined by 3.7% over this period.


U.S. Bureau of Economic Analysis, International Transactions.


Pacific Rim countries include Australia, Brunei, Cambodia, China, Hong Kong, Indonesia, Japan, South Korea, Laos, Macao, Malaysia, New Zealand, North Korea, Papua New Guinea, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and several small island nations.


China's accession to the WTO (with the reduction of trade and investment barriers) appears to have been a major factor behind the migration of computer production from other countries to China.


USITC, How Much of Chinese Exports Is Really Made In China? Assessing Foreign and Domestic Value-Added in Gross Exports, report number 2008-03-B, March 2008, p. 21.


Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple's iPod, March 2009.


U.S. data on FDI flows to and from China differ from Chinese data on FDI flows to and from the United States. This section examines only U.S. data.


Investment is often a major factor behind trade flows. Firms that invest overseas often import machinery, parts, and other inputs from the parent company to manufacture products for export or sale locally. Other such invested overseas firms may produce inputs and ship them to their parent company for final production.


15 CFRS 806.15(a)(1). The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the management of an enterprise. See BEA, International Economic Accounts, BEA Series Definitions, available at


BEA also reports FDI data according to broad industrial sections, including mining; utilities; wholesale trade; information; depository institutions; finance (excluding depository institutions); professional, scientific, and technical services; nonbank holding companies; manufacturing (including food, chemicals, primary and fabricated metals, machinery, computers and electronic products, electrical equipment, appliances and components, transportation equipment, and other manufacturing); and other industries.


For additional information on this issue, see CRS Report RL34314, China's Holdings of U.S. Securities: Implications for the U.S. Economy, by [author name scrubbed] and [author name scrubbed].


The Department of the Treasury estimates that 70% of China's total holdings of U.S. government and private securities as of June 2014 were in U.S. Treasury securities.


China's large annual trade surpluses and inflows of FDI are major contributors to China's accumulation of foreign exchange reserves.


However, over the past few years, Chinese officials have expressed concern over the "safety" of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China's dollar asset holdings. Some Chinese officials have called for replacing the dollar as the world's major reserve currency with some other currency arrangement, such as through the International Monetary Fund's special drawing rights system, although many economists question whether this would be a feasible alternative in the short run.


China was the second-largest foreign holder of U.S. public and private securities as of June 2014 (after Japan).


Some observers characterize foreign holdings of U.S. Treasury securities as "foreign ownership of U.S. government debt."


China's holdings of U.S. Treasuries could be higher as Department of the Treasury data may not always capture Chinese purchases of U.S. Treasury securities that may occur in global financial centers.


Office of the Secretary of Defense, Report to Congress, Assessment of the National Security Risks Posed to the United States as a Result of the U.S. Federal Debt Owed to China as a Creditor of the U.S. Government, July 2012.


According the BEA, direct investment implies that a person in one country has a lasting interest in, and a degree of influence over, the management of, a business enterprise in another country. As such, it defines FDI as ownership or control of 10% or more of an enterprise's voting securities, or the equivalent, is considered evidence of such a lasting interest or degree of influence over management.


In comparison, the stock of Japanese FDI in the United States on a historical-cost basis was $373 billion.


In comparison, the stock of U.S. FDI in Japan was $108 billion.


The Rhodium Group, China Investment Monitor, available at


China does not report the methodology it uses to measure FDI flows.


Volvo Cars of America Press Release May 11, 2015.


Suntech press release, March 12, 2013, available at


Sany America website at


Washington Post, "Job creation seen as key to China's investment in U.S," January 19, 2011, available at


The purchase reportedly represented China's biggest single investment in the global auto parts-making industry to date and made the Chinese company the largest private employer in Saginaw, Michigan at nearly 3,000 (source: New York Times, G.M. Sells Parts Maker to a Chinese Company, November 29, 2010). The firm owns 20 manufacturing plants worldwide, 5 regional engineering and test centers, and 14 local customer support centers.


Xinhua News Agency, "U.S official hails Chinese Project in Texas, October 11, 2011."



U.S. Department of the Treasury, Foreign Portfolio Holdings of U.S. Securities as of June 30, 2014, April 2015.


For more information on the CIC, see CRS Report R41441, China's Sovereign Wealth Fund: Developments and Policy Implications, by [author name scrubbed].


National Association of Realtors, 2015 Profile of International Home Buying Activity Purchases of U.S. Real Estate by International Clients for the Twelve Month Period Ending March 2015, June 2014, p.10, available at .


During the 1980s, Japanese firms significantly boosted their FDI in the United States, such as in automobile manufacturing, in part to help to alleviate bilateral trade tensions.


According to the United Nation's Conference on Trade and Development, China was the third-largest source of FDI outflow in 2013 at $101 billion, up from being the sixth largest in 2011.


The White House, Joint Fact Sheet on Strengthening U.S.-China Economic Relations, February 14, 2012.


CFIUS is an interagency committee that serves the President in overseeing the national security implications of foreign investment in the U.S. economy. See CRS Report RL33388, The Committee on Foreign Investment in the United States (CFIUS), by [author name scrubbed].


Wall Street Journal, "State-Owned Chinese Chip Maker Tsinghua Unigroup Makes $23 Billion Bid for Micron," July 2015, available at


Letter accessed on Inside U.S. Trade, World Trade Online.


IBM, News Release, October 2014, available at


Lenovo, Press Release, October 30, 2014, available at


Some argued, for example, that, given the relatively poor food safety record of many Chinese firms in China, the acquisition of Smithfield by Chinese investors could undermine food safety in the United States, and some suggested that the acquisition would eventually result in Chinese pork exports to the United States.


The text of the letter can be found at


Senate Committee on Agriculture, Nutrition, and Forestry, available at


The text of the letter can be found at


The letter is available at


A123 Systems, Press Release, January 29, 2013, available at


Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE, A Report by Chairman Mike Rogers and Ranking Member C.A. Dutch Ruppersberger of the Permanent Select Committee on Intelligence, October 22, 2012, available at


New York Times, Obama Orders Chinese Company to End Investment at Sites Near Drone Base, September 28, 2012. Available at


Senator Robert Casey, Press Release, May 10, 2012, available at


The letter is available at


The letter also raised concerns over allegations that Huawei had ties to the Iranian government, had received substantial subsidies from the Chinese government, and had a poor record of protecting intellectual property rights.


Huawei initially stated that it would decline CFIUS's recommendation with the intent of going through all of the procedures of the CFIUS process (including a potential decision by the President) in order to "reveal the truth about Huawei."


Huawei, Open Letter, February 25, 2011, available at


A press release by Ansteel stated that its intensions are "to capitalize on the opportunity to enter into an overseas joint venture with a company that is focused on utilizing advanced technology in an environmentally friendly and highly profitable manner." See,


See letter at


Testimony of Rep. Peter J. Visclosky before the U.S.-China Economic and Security Review Commission on China's State-Owned and State-Controlled Enterprises, February 15, 2012.


Emcore Press Release, June 28, 2010, available at


New York Times, "Chinese Withdraw Offer for Nevada Gold Concern," December 21, 2009.


Although Huawei states that it is a private company wholly owned by its employees, many analysts contend that the company has close connections to the Chinese military. In addition, Huawei has also reportedly received extensive financial support from the Chinese government, including a $30 billion line of credit from China Development Bank.


The Senate report of its version of FINSA (S.Rept. 110-80, S. 1610) noted that CNOOC's attempt to acquire UNOCAL "led many members of Congress to raise questions about the transfer of ownership or control of certain sectors of the U.S. economy to foreign companies, especially to foreign companies located within or controlled by countries the governments of which might not be sympathetic to U.S. regional security interests."


IBM and Lenovo reportedly agreed to address national security concerns by CFIUS. For example, it was agreed that 1,900 employees from a North Carolina research facility, which IBM had shared with other technology companies, would move to another building. See the Financial Times, "US State Department limits use of Chinese PCs," May 18, 2006.


U.S.-China Business Council, China's WTO Compliance, September 20, 2013.


OECD, FDI Regulatory Restrictiveness Index, at


The automotive industry was designated a "pillar industry" by the Chinese government in 1991.


China also maintains a permitted category which represents a neutral position by the government that FDI in that area is neither encouraged nor discouraged. Prior to 2012, FDI in the manufacture of complete automobiles was listed as an encouraged category, but now is listed under the neutral category.


One major function of the Guideline Catalogue for Foreign Investment is to promote FDI in sectors that the government has targeted for growth in its five-year macro-economic plans.


USTR, 2011 Report to Congress on China's WTO Compliance, December 2011, p. 7.


AmCham China, China Business Climate Survey, 2013, p. 9.


For example, in March 2011, Senators Casey, Schumer, Stabenow, and Whitehouse sent a letter to the Obama Administration urging that they oppose Chinese mining projects in the United States because of China's restrictive and anticompetitive policies on rare earth. The letter noted China's prohibition on foreign investment in rare earth mining and requirements that FDI in rare earth smelting and separation can only be in the form of a joint venture. See


USCBC, 2015 China Business Environment Survey Report, September 10, 2015, available at


The Wall Street Journal, U.S. Firms Feel Unwelcome in China, According to Survey, September 2, 2014.


Amcham China, Press Release, September 2, 2014.


A 2005 article in China's People's Daily, a state-run newspaper, defined a socialist market economy as a "fundamental economic system in which the public ownership economy plays the leading role and co-exists and shares opportunities with the economy in various other ownerships." See People's Daily Online, "China has socialist market economy in place," July 13, 2005, at


Office of the U.S. Trade Representative (USTR), 2012 Report to Congress on China's WTO Compliance, December 2012, p. 1.


According to the USTR, the U.S. officials urged China to implement its AML in a manner consistent with global best practices and with a focus on consumer welfare and the protection of the competitive process, rather than consideration of industrial policy or other noncompetition objectives; and to ensure that implementation of the law did not create new trade and investment barriers or result in less favorable treatment to foreign goods and services.


China has reportedly investigated over 30 foreign firms for violating its AML, several of which are in the automotive (including auto and auto parts producers) and technology sectors. Examples of U.S. firms that have been subject to AML investigations include Microsoft, Qualcomm, InterDigital, and GM.


The European Chamber in China, Press Release, "European Chamber releases statement on China AML-related investigations," August 13, 2014, available at


USCBC, Competition Policy and Enforcement in China, September 3, 2014, p. 11.


This includes pressures on foreign firms to admit guilt and restrictions on the ability to have appropriate legal representation during raids and proceedings.


For example, Chinese regulators may consider how a foreign firm's activities may affect Chinese industrial policy goals, such as promoting indigenous innovation.


USCBC, Competition Policy and Enforcement in China, September 3, 2014, p. 1.


The U.S. Chamber of Commerce, Competing Interests in China's Competition Law Enforcement: China's Anti-Monopoly Law and the Role of Industrial Policy, September 9, 2014, p. 1.


China Daily, "China not targeting foreign firms in probes," September 5, 2014, at


China Daily, "Premier: China's anti-trust probes do not target foreign firms," September 10, 2014.


The Administration began efforts to review and revise the U.S. BIT model in 2009. The previous BIT model dated to 2004. The Administration's review process likely meant that negotiations with China for a BIT were someone limited.


U.S. BITs address six core principles or issues for investors, including national treatment and most-favored nation (MFN) treatment, rules on expropriations and compensation if this occurs, ability to transfer funds in and out of the country, limits on performance requirements, international arbitration of disputes, and freedom to appoint senior officials. BITs must be approved by the U.S. Senate by a two-thirds vote (see CRS Report IS10052, U.S. International Investment Agreements).


U.S. Department of the Treasury, Remarks of Treasury Secretary Jacob J. Lew at the Close of the Fifth U.S.-China Strategic and Economic Dialogue, July 13, 2013.


U.S. Department of the Treasury, U.S.-China Joint Fact Sheet Sixth Meeting of the Strategic and Economic Dialogue, July 11, 2014.


USTR, Remarks by Ambassador Michael Froman to AmCham China and the U.S. Chamber of Commerce, April 27, 2015, available at


The impact of globalization has been a somewhat controversial topic in the United States. Some argue that it has made it easier for U.S. firms to shift production overseas, resulting in lost jobs in the United States (especially in manufacturing) and lower wages for U.S. workers. Others contend that globalization has induced U.S. firms to become more efficient and to focus a greater share of their domestic manufacturing on higher-end or more technologically advanced production (while sourcing lower-end production abroad), making such firms more globally competitive. The result has been that the United States continues to be a major global manufacturer in terms of value-added, but there are fewer U.S. workers in manufacturing.


World Trade Organization, Trade Policy Review Body, Trade Policy Review, Report by the Secretariat, China, Revision, 2010, Part 2, p. 1.


U.S. Trade Representative, 2013 USTR Report to Congress on China's WTO Compliance, December 2013, p. 2.


U.S.-China Economic and Security Review Commission, An Analysis of Stateowned Enterprises and State Capitalism in China, by Andrew Szamosszegi and Cole Kyle, October 26, 2011, p. 1.


Xinhua Agency, October 24, 2012.


Xinhua News Agency, October 24, 2010.


Testimony for the U.S.–China Economic and Security Review Commission by Derek Scissors, Ph.D, Chinese State Owned Enterprises and the US Policy on China, February 12, 2012.


Anderson, G.E., PhD, Designated Drivers, How China Plans to Dominate the Global Auto Industry, 2012, p. 2.


Lund University, Lending for Growth? An Analysis of State-Owned Banks in China, by Fredrik N.G. Anderson, Katarzyna Burzynska, and Sonja Opper, June 2013, p. 41.


The Economist, State Capitalism's Global Reach, New Masters of the Universe, How State Enterprise is Spreading, January 21, 2012.


Lund University, Lending for Growth? An Analysis of State-Owned Banks in China, by Fredrik N.G. Anderson, Katarzyna Burzynska, and Sonja Opper, June 2013, p. 41.


McGregor, Richard, The Party, the Secret World of China's Communist Rulers, 2010, p. 204.


As some observers describe it, China wants to go from a model of "made in China" to "innovated in China."


The MLP identifies main areas and priority topics, including energy, water and mineral resources, the environment, agriculture, manufacturing, communications and transport, information industry and modern service industries, population and health, urbanization and urban development, public security, and national defense. The report also identifies 16 major special projects and 8 "pioneer technologies."


R&D Magazine, December 22, 2009.


U.S. business representatives also claim that the Chinese government is using tax incentives, standards setting and requirements, security regulations, subsidies, technology transfer requirements, and other measures to promote the goals of indigenous innovation.


AmCham China,2011 White Paper, April 26, 2011, p. 66.


A copy of the letter can be found at


Some U.S. business representatives argue that one of the main goals of China's indigenous innovation regulations is to induce foreign firms to boost their R&D activities in China in order to qualify for government contracts.


Transitional Review Under Section 18 of the Protocol on the Accession of the People's Republic of China, Report to the General Council by the Chair, November 17, 2011, p. 4.


Wall Street Journal, China Defends Rule On 'Indigenous' Tech, December 15, 2009.


The White House, U.S. - China Joint Statement, January 19, 2011.


According to a U.S. fact sheet on the meeting "China pledged to eliminate all of its government procurement indigenous innovation products catalogues and revise Article 9 of the draft Government Procurement Law Implementing Regulations (which have preferences in government procurement to national indigenous innovation products), in fulfillment of President Hu's January 2011 commitment not to link Chinese innovation policies to government procurement preferences. See U.S. Department of the Treasury, The 2011 U.S.-China Strategic and Economic Dialogue U.S. Fact Sheet – Economic Track, May 10, 2011.


U.S. Department of Commerce, 22nd U.S.-China Joint Commission on Commerce and Trade Fact Sheet, November 21, 2011.


U.S.-China Business Council, Status Report: China's Innovation and Government Procurement Policies, May 1, 2013, at


U.S.-China Business Council, USCBC 2012 China Business Environment Survey Results:

Continued Growth and Profitability; Tempered Optimism Due to Rising Costs, Competition, and Market Barriers, October 2012, p. 6, available at


Foreign Affairs, China's Innovation Wall: Beijing's Push for Homegrown Technology, September 28, 2010.


U.S. Chamber of Commerce, China's Drive for 'Indigenous Innovation' - A Web of Industrial Policies, February 2011, p. 4.


USITC, China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy (Investigation No. 332-514, USITC Publication 4199, November 2010, pp. 6-7.


See CRS Report RL34292, Intellectual Property Rights and International Trade, by [author name scrubbed] and [author name scrubbed].


U.S. Department of Commerce, Intellectual Property and the U.S. Economy: Industries in Focus, March 2012, available at


Nam Pham, The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity, Competitiveness, Jobs, Wages and Exports, 2010, NDP Consulting.


Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple's iPod, March 2009.


The Commission on the Theft of American Intellectual Property, the Report of the Commission on the Theft of Intellectual Property, May 2013.


AmCham China, China Business Climate Survey Report, 2013, p. 11.


The United States International Trade Commission, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, USITC Publication 4226, May 2011, p. xiv.


BSA, Shadow Market, 2011 BSA Global Software Piracy Study, Ninth Edition, May 2012, at


U.S. Customs and Border Protection, Intellectual Property Rights, Fiscal Year 2012 Seizure Statistics, February 2013, available at


Testimony of Jeremie Waterman, Senior Director, Greater China, U.S. Chamber of Commerce, before the U.S. International Trade Commission, Hearing on China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, June 15, 2010.


AMSC claims Sinovel had obtained the intellectual property from a former AMSC employee who was now under arrest in Austria for economic espionage and fraudulent manipulation of data.


AMSC Press Release, "AMSC Filing Criminal and Civil Complaints Against Sinovel," September 14, 2011.


AMSC, Press Release, April 10, 2012, at


"Data Theft Case May Test U.S. China Ties," Boston Globe, September 19, 2011.


The White House, Press Release, February 17, 2012, at


USTR, 2014 Special 301 Report, April 2014, p. 30, available at


The International Intellectual Property Alliance (IIPA), which represents U.S. IPR-related firms, has noted that, despite some improvements in 2013, "the market in China for music, software, publications, films, and video games remains stunted by a combination of piracy and stifling market access and discriminatory barriers. See IIPA, 2014 Special 301 Report on Copyright Protection and Enforcement, February 7, 2014, p. 1.


China denies that public officials exert such pressure and that any technology transfers that do occur in China are the result of commercial agreements between companies.


AmCham China, 2012 China Business Climate Survey Report, March 2012, available at


U.S. Chamber of Commerce, China's Drive for 'Indigenous Innovation' - A Web of Industrial Policies, July 29, 2010.


However, the Council notes that since the Chinese government maintains approval authority for investment decisions, which may be used by Chinese firms as leverage when attempting to negotiate technology transfer agreements with U.S. firms.


U.S.-China Business Council, USCBC 2011 China Business Environment Survey Results: Market Growth Continues, Companies Expand, But Full Access Elusive for Many, November 2011, p. 20.


Inside Trade, USTR Seeks Info From Manufacturers On Forced Technology Transfer To China, January 31, 2012.


The report did not identify China (or any country) as the source of the intrusions. McAfee, Revealed: Operation Shady Rat, An Investigation of Targeted Intrusions Into More Than 70 Global Companies, Governments, and Nonprofit Organizations During the Last Five Years, 2011.


House Permanent Select Committee on Intelligence, Chairman Mike Rogers Opening Statement at the Hearing on Cyber Threats and Ongoing Efforts to Protect the Nation, October 4, 2011.


DNI, Office of the National Counterintelligence Executive, Foreign Spies Stealing U.S. Economic Secrets in Cyberspace, Report to Congress on Foreign Economic Collection and Industrial Espionage: 2009-2011, October 2011.


Mandiant, APT1: Exposing One of China's Cyber, Espionage Units, February 19, 2013, p. 2.


U.S. Asia Society, Complete Transcript: Thomas Donilon at Asia Society, New York March 11, 2013.


U.S. Department of Justice, at


A copy can be found at


The White House, Press Release, September 12, 2015, available


Following China's WTO accession, the United States, in January 2002, granted China permanent normal trade relations (PNTR) status (prior to that time, that status was on a conditional basis) to ensure that the United States and China had a formal trade relationship under the rules of the WTO.


China generally implemented its tariff reductions on schedule.


USTR, 2013 Report to Congress on China's WTO Compliance, December 2013.


For an overview of the WTO's dispute settlement process, see CRS Report RS20088, Dispute Settlement in the World Trade Organization (WTO): An Overview, by [author name scrubbed], [author name scrubbed], and [author name scrubbed].


The United States has been the largest target of China's dispute settlement cases in the WTO. Most of these cases have challenged certain U.S. applications of antidumping and countervailing measures.


USTR Press Release, February 11, 2015, at


For additional information about this issue, see CRS Report R43071, U.S.-Chinese Motor Vehicle Trade: Overview and Issues, by [author name scrubbed] and [author name scrubbed].


WTO, Dispute Settlement—Certain Measures Affecting Electronic Payments, Current Status, August 31, 2012.


A summary of the WTO panel report can be found at


USTR Press Release, June 7, 2011, available at


Some programs gave tax preferences, tariff exemptions, discounted loans, or other benefits to firms that met certain export performance requirements, while others gave tax breaks for purchasing Chinese-made equipment and accessories over imports.


The GPA is a plurilateral agreement among 43 WTO members (including the United States, Japan, and the 28 members of the European Union) that effectively provides market access for various nondefense government procurement projects to signatories to the agreement. Each member of the Agreement submits lists of government entities and goods and services (with thresholds and limitations) that are open to bidding by firms of the other GPA members. WTO members that are not signatories to the GPA, including those that are GPA observers (such as China), do not enjoy any rights under the GPA. Nor are non-GPA signatories in the WTO generally obligated to provide access to their government procurement markets.


Xinhua News Agency, June 29, 2012, at


Testimony of Karen Laney, Acting Director of Operations, U.S. International Trade Commission before the Subcommittee on Terrorism, Nonproliferation, and Trade, Committee on Foreign Affairs, on China's Indigenous Innovation, Trade, and Investment Policies, March 9, 2011.


European Chamber of Commerce in China, Public Procurement in China: European Business Experiences Competing for Public Contracts in China, 2011, p. 15, at


Inside U.S. Trade, December 8, 2011.


USTR Press Release, December 2011.


Inside U.S. Trade, December 12, 2012.


For additional information on this issue, see CRS Report RS21625, China's Currency Policy: An Analysis of the Economic Issues, by [author name scrubbed] and [author name scrubbed].


Much of China's trade is believed to be in U.S. dollars (e.g., exporters are often paid in dollars). The central government requires firms to exchange most of their dollars for RMB.


The official name of China's currency is the renminbi, which is denominated in units of yuan.


U.S. Department of the Treasury, Press Release, December 15, 2006.


The session was somewhat overshadowed by events relating to Chinese human rights advocate Chen Guangcheng who had been temporarily sheltered at the U.S. embassy in Beijing prior to the session.


The United States also pledged that it would review Chinese concerns relating to U.S. restrictions on high technology exports to China resulting from the current U.S. export control regime.


The United States pledged that it welcomed investment from China and confirmed that review of foreign investment by the Committee on Foreign Investment in the United States ensures the consistent and fair treatment of all foreign investment without prejudice to the place of origin. China promised to revise its Catalogue Guiding Foreign Investment in Industries and encourage and expand areas open to foreign investment, including those relating to high-technology, energy, and the environment. China also pledged to streamline the process for investment approval.


The United States is seeking to broaden China's participation in international economic institutions in order to promote the goal of helping to make China a "responsible stakeholder" in the global economy. This implies that, since China greatly benefits from the global trading system and is a major global economy, it should shoulder a greater responsibility in maintaining and promoting that system (rather than just enjoying the benefits of that system.


CSIS, Crafting Asia Economic Strategy in 2013, January 28, 2013, at


The TPP is a proposed regional free trade agreement among 12 countries, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.