Updated April 8, 2019
U.S.-China Trade Issues
Background
U.S. annual economic losses from global IPR theft. The
The U.S.-China trade and economic relationship has
U.S. Customs and Border Protection reported that China
expanded significantly over the past three decades. In 2018,
and Hong Kong together accounted for 78% of counterfeit
China was the United States’ largest U.S. merchandise
goods it seized in FY2017.
trading partner (total trade at $660 billion), third-largest
In 2011, the U.S. Office of the National Counterintelligence
export market ($120 billion), and largest source of imports
Executive described Chinese actors as “the world’s most
($540 billion). China is also the largest foreign holder of
active and persistent perpetrators of economic espionage”
U.S. Treasury securities (at $1.1 trillion year-end 2018)
and as aggressive collectors of sensitive U.S. business
However, tensions have grown sharply in recent years over
information and technologies. In May 2014, the U.S. Justice
a number of economic and trade issues.
Department indicted five members of the Chinese People’s
Key U.S. Issues
Liberation Army for government-sponsored cyber-
The Trade Deficit. President Trump has complained about
espionage against U.S. companies and theft of proprietary
the U.S. bilateral trade imbalances. The U.S. merchandise
information to aid state-owned enterprises. During Chinese
trade deficit with China in 2018 was $419 billion (up from
President Xi Jinping’s state visit to the United States in
$376 billion in 2017), and is by far the largest U.S. bilateral
September 2015, the two sides reached an agreement on
trade imbalance. Some U.S. policymakers view large U.S.
cyber security, pledging that neither country’s government
bilateral trade deficits as an indicator of an “unfair” trade
would conduct or knowingly support cyber-enabled theft of
relationship. Others, however, view conventional bilateral
intellectual property for commercial purposes and to
trade deficit data as misleading, given the growth of global
establish a joint dialogue on cybercrime and related issues.
supply chains used by multinational firms. Products may be
In October 2018, Crowdstrike, a U.S. cybersecurity
invented or developed in one country and manufactured or
technology company, identified China as “the most prolific
assembled elsewhere using imported components from
nation-state threat actor during the first half of 2018.” It
multiple foreign sources and then exported. Conventional
found that Chinese entities had made targeted intrusion
U.S. trade data may not fully reflect the value added in each
attempts against multiple sectors of the economy. In
country, and thus are often a relatively poor indicator of the
November 2018, FBI Director Christopher Wray stated:
beneficiaries of its global trade. Also, most economists
“No country presents a broader, more severe threat to our
argue that the overall size of the trade balance is what really
ideas, our innovation, and our economic security than
matters to the economy (not bilateral balances), and that
China.” In December 2018, U.S. Assistant Attorney
this is largely a function of macroeconomic forces, such as
General John C. Demers stated at a Senate hearing that
low U.S. domestic savings relative to total investment, not
from 2011-2018, China was linked to more than 90% of the
trade barriers.
Justice Department’s cases involving economic espionage
Figure 1. U.S.-China Merchandise Trade Balances
and two-thirds of its trade secrets cases.
($ billions)
Industrial Policies. Many U.S.-China trade tensions arise
from China’s incomplete transition to a market economy,
including the use of industrial policies to support and
protect domestic firms, especially state-owned enterprises
(SOEs). Major Chinese government practices of concern to
U.S. stakeholders include subsidies, tax breaks, and low-
cost loans given to Chinese firms; foreign trade and
investment barriers; discriminatory intellectual property
(IP) and technology policies; and technology transfer
mandates. Several recently issued economic plans, such as
the “Made in China 2025” plan, appear to indicate a sharply
expanded government role in the economy. The Trump
Administration has characterized such policies as
“economic aggression.” Some officials have expressed
concerns that participation by Chinese firms in certain
global supply chains, such as for information and
Source: USITC Dataweb.
communications technology products and services, could
Intellectual Property Rights (IPR) and Cyber-Theft.
pose risks to U.S. IP and national security interests.
U.S. firms cite the lack of effective protection of IPR as one
Foreign Direct Investment (FDI). U.S.-China FDI flows
of the biggest impediments that they face in conducting
are relatively small given the high level of bilateral trade,
business in China. A May 2013 study by the Commission
although estimates of such flows differ. The U.S. Bureau of
on the Theft of American Intellectual Property estimated
Economic Analysis (BEA) is the official U.S. agency that
that China accounted for up to 80% (or $240 billion) of
collects and reports FDI data. BEA estimates the stock of
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link to page 2 U.S.-China Trade Issues
Chinese FDI in the United States through 2017 at $40
discriminatory licensing policies (which it did on March 23)
billion and the stock of U.S. FDI in China at $108 billion.
and impose new restrictions on certain Chinese investment
Some analysts contend BEA’s methodology for measuring
in the United States.
FDI significantly undercounts the level of actual U.S.-
On May 19, 2018, the United States and China released a
China FDI, in large part because it does not capture all FDI
joint statement announcing that that progress was made on
that is made through other countries, territories or tax
a number of trade issues, including a Chinese commitment
havens, as well as acquisitions made by U.S. affiliates of
to “significantly increase purchases of United States goods
foreign firms. The Rhodium Group (RG), a private advisory
and services,” including U.S. agricultural and energy
firm attempts to identify FDI by Chinese firms in the
products. On May 21, U.S. Secretary of the Treasury
United States, regardless of where they are based or where
Steven Mnuchin stated that both sides had suspended
the money for investment comes from. RG’s data on U.S.-
threatened tariff hikes. However, on May 29, the United
China FDI are much higher than BEA’s data. For example,
States said it would implement the proposed Section 301
RG estimates the stock of China’s FDI in the United States
tariff hikes against China. It subsequently imposed three
through 2017 at $140 billion and the stock of U.S. FDI in
rounds of tariff increases on a total of $250 billion worth
China at $256 billion. RG estimates that China’s FDI flows
imports from China, while China retaliated with tariff hikes
to the United States rose from $14.9 billion in 2015 to
on $110 billion worth of U.S. products (see Table 1).
$45.6 billion in 2016, but fell to $29.4 billion in 2017 and
President Trump has warned that he may increase tariffs on
to $4.8 billion in 2018. The decline in Chinese FDI flows to
an additional $267 billion worth of imports from China.
the United States may reflect Beijing’s efforts rein in
Table 1. Section 301-Related Tariff Hikes
“irrational” capital outflows, as well as enhanced scrutiny
by the Trump Administration, which contends that the
Effective
Import
China’s
Chinese government seeks to obtain U.S. cutting-edge
Date
Tariff Hike
Value
Reaction
technologies and IP in order to further its industrial policy
July 6
25%
$34 bil ion
Ful retaliation
goals. For example, in September 2017, President Trump
prohibited a group of investors, with alleged links to the
August 23
25%
$16 bil ion
Ful retaliation
Chinese government, from acquiring U.S. firm Lattice
Semiconductor Corporation.
September 24 10% (further $200 bil ion 5%-10% tariff
rate hikes
hikes on $60
Congressional concerns over the ability of the Committee
put on hold)
bil ion worth
on Foreign Investment in the United States (CFIUS) to
of imports
adequately screen foreign investment in terms of U.S.
national security led to the enactment of the Foreign
Source: USTR and Chinese Ministry of Commerce.
Investment Risk Review Modernization Act of 2018
On December 1, 2018, President’s Trump and Xi met at the
(FIRRMA) (P.L. 115-232) in August 2018. The act seeks to
G20 Summit in Argentina where the two sides announced
modernize CFIUS and expand the types of investment
they would hold intensive negotiations over 90 days.
subject to review, including certain non-controlling
President Trump agreed to suspend the planned Stage 3
investments in “critical technology.” In November 2018 the
Section 301 tariff rate increases (from 10% to 25%) that
U.S. Commerce Department issued a notice requesting
were planned to take effect on January 1, 2019, but stated
public comment on criteria for identifying emerging and
that the increases would go into effect if no agreement was
foundational technologies deemed essential to U.S. national
reached by March 1, 2019. On February 24, he announced
security that could be subject to new export controls.
that tariff hikes would be suspended because of progress in
Tariffs on Steel and Aluminum. On March 8, 2018,
recent trade talks. U.S. officials have indicated that the talks
President Trump issued a proclamation increasing U.S.
are focused on structural changes to China’s economy,
import tariffs on steel (by 25%) and aluminum (by 10%),
including on IP and innovation policies, market barriers,
based on “national security” justifications (§232 of the 1962
and currency. The talks also focused on reducing the
Trade Act). In response, China on April 2 raised tariffs by
bilateral trade imbalance, including obtaining a Chinese
15% to 25% on $3 billion worth of imported U.S. products.
commitment to purchase a “substantial amount” of
Section 301 Case on China’s IPR Policies. On August 14,
agricultural, energy, manufactured goods from the United
2017, President Trump issued a memorandum directing the
States. The U.S. side has indicated that it also wants a final
USTR to determine if China’s policies on IPR protection
agreement to include an enforcement mechanism.
and forced technology requirements “may be harming
Long Term Challenges. China’s emergence as a major
American intellectual property rights, innovation, or
economic power poses number of challenges for the United
technology development,” and thus warranted a Section 301
States. These include China’s efforts to become more
investigation. On August 18th, the USTR launched a Section
technologically advanced in a number of dual-use industries
301 investigation, and on March 22, President Trump
(including through state intervention and IPR theft),
signed a Memorandum on Actions by the United States
attempts to use its financial resources to advance its
Related to the Section 301 Investigation. It listed four IPR-
interests globally (such as through the Belt and Road
related policies that justified U.S. action, including China’s
initiative) and promote its soft power, and attempts to
forced technology transfer requirements, cyber-theft of U.S.
present China’s economic model of authoritarian capitalism
trade secrets, discriminatory licensing requirements, and
as an alternative to the U.S. economic model.
attempts to acquire U.S. technology to advance its industrial
policies. The United States said it would propose to boost
Wayne M. Morrison, Specialist in Asian Trade and
tariffs by 25% on about $50 billion worth of Chinese goods,
Finance
initiate a WTO dispute settlement case against China’s
IF10030
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U.S.-China Trade Issues


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