U.S.-China Trade Issues

U.S.-China Trade Issues

Updated June 23, 2019
U.S.-China Trade Issues
Background
U.S. Customs and Border Protection reported that China
The U.S.-China trade and economic relationship has
and Hong Kong together accounted for 78% of counterfeit
expanded significantly over the past three decades. In 2018,
goods it seized in FY2017. In May 2014, the U.S. Justice
China was the United States’ largest U.S. merchandise
Department indicted five members of the Chinese People’s
trading partner (total trade at $660 billion), third-largest
Liberation Army for government-sponsored cyberespionage
export market ($120 billion), and largest source of imports
against U.S. companies and theft of proprietary information
($540 billion). China is also the largest foreign holder of
to aid state-owned enterprises. During Chinese President Xi
U.S. Treasury securities (at $1.1 trillion as of April 2019
Jinping’s state visit to the United States in September 2015,
2018). However, tensions have grown sharply in recent
the two sides reached an agreement on cybersecurity,
years over a number of economic and trade issues.
pledging that neither country’s government would conduct
Key U.S. Issues
or knowingly support cyberenabled theft of intellectual
The Trade Deficit. President Trump has complained about
property for commercial purposes and to establish a joint
the U.S. bilateral trade imbalances with various countries,
dialogue on cybercrime and related issues. In October 2018,
including China. The U.S. merchandise trade deficit with
Crowdstrike, a U.S. cybersecurity technology company,
identified China as “the most prolific nation
China in 2018 was $419 billion (up from $376 billion in
-state threat
actor during the first half of 2018.” It found that Chinese
2017), and is by far the largest U.S. bilateral trade
imbalance. Some U.S. policymakers view large U.S.
entities had made targeted intrusion attempts against
bilateral trade deficits as an indicator of an “unfair” trade
multiple sectors of the economy. In November 2018, FBI
relationship. Others, however, view conventional bilateral
Director Christopher Wray stated, “No country presents a
trade deficit data as misleading, given the growth of global
broader, more severe threat to our ideas, our innovation,
supply chains used by multinational firms. Products may be
and our economic security than China.” In December 2018,
invented or developed in one country, assembled elsewhere
U.S. Assistant Attorney General John C. Demers stated
(using imported components from multiple foreign
that, from 2011 to 2018, China was linked to more than
90% of the Justice Department’s cases involving economic
sources), and then exported. Conventional U.S. trade data
may not fully reflect the value added in each country or the
espionage and two-thirds of its trade secrets cases.
main beneficiaries of global production and trade flows. In
Industrial Policies. Many U.S.-China trade tensions arise
addition, most economists argue that the overall size of the
from China’s incomplete transition to a market economy,
U.S. trade imbalance deficit is largely a function of low
including the use of industrial policies to support and
U.S. domestic savings relative to its investment needs,
protect domestic firms, especially state-owned enterprises
rather than the result of foreign trade barriers.
(SOEs). Major Chinese government practices of concern to
Figure 1. U.S.-China Merchandise Trade Balances
U.S. stakeholders include subsidies, tax breaks, and low-
2000-2018 ($ billions)
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
communications technology products and services, could
pose risks to U.S. IP and national security interests.
Foreign Direct Investment (FDI). U.S.-China FDI flows
are relatively small given the high level of bilateral trade,
although estimates of such flows differ. The U.S. Bureau of
Economic Analysis (BEA) is the official U.S. agency that
Source: USITC Dataweb.
collects and reports FDI data. BEA estimates the stock of
Intellectual Property Rights (IPR) and Cybertheft. U.S.
Chinese FDI in the United States through 2017 at $40
firms cite the lack of effective protection of IPR as one of
billion and the stock of U.S. FDI in China at $108 billion.
the biggest impediments that they face in conducting
Some analysts contend BEA’s methodology for measuring
business in China. A May 2013 study by the Commission
FDI significantly undercounts the level of actual U.S.-
on the Theft of American Intellectual Property estimated
China FDI, in large part because it does not capture all FDI
that China accounted for up to 80% (or $240 billion) of
that is made through other countries, territories, or tax
U.S. annual economic losses from global IPR theft. The
havens, as well as acquisitions made by U.S. affiliates of
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link to page 2 U.S.-China Trade Issues
foreign firms. The Rhodium Group (RG), a private advisory
attempted to backtrack on previous trade commitments. He
firm, attempts to identify FDI by Chinese firms in the
then ordered the U.S. Trade Representative to begin the
United States, regardless of where they are based or where
process of levying increased 25% tariffs on nearly all
the money for investment comes from. RG’s data on U.S.-
remaining imports from China (worth $300 billion).
China FDI are much higher than BEA’s data. For example,

RG estimates the stock of China’s FDI in the United States
Table 1. U.S. Section 301 Tariff Hikes in Effect
through 2017 at $140 billion and the stock of U.S. FDI in
China at $256 billion. RG estimates that China’s FDI flows
Tariff
Import
China’s
to the United States rose from $14.9 billion in 2015 to
Effective Date
Hike
Value
Reaction
$45.6 billion in 2016, but fell to $29.4 billion in 2017 and
July 6, 2018
25%
$34 bil ion
Ful retaliation
to $4.8 billion in 2018. The decline in Chinese FDI flows to
the United States may reflect Beijing’s efforts to rein in
August 23, 2018 25%
$16 bil ion
Ful retaliation
“irrational” capital outflows, as well as enhanced scrutiny
by the Trump Administration, which contends that the
September 24;
10%, then $200 bil ion 5%-10% tariff
Chinese government seeks to obtain U.S. cutting-edge
then June 1 (by
25%
hikes on $60
technologies and IP in order to further its industrial policy
China) and June
bil ion worth
goals. For example, in September 2017, President Trump
15 (by U.S.)
of imports;
prohibited a group of investors, with alleged links to the
then some
Chinese government, from acquiring U.S. firm Lattice
items raised to
Semiconductor Corporation.
up to 25%
Congressional concerns over the ability of the Committee
Source: USTR and Chinese Ministry of Commerce.
on Foreign Investment in the United States (CFIUS) to
Advanced Technology Issues. The Trump Administration
adequately screen foreign investment in terms of U.S.
has raised national security concerns over global supply
national security led to the enactment of the Foreign
chains of advanced technology products, such as
Investment Risk Review Modernization Act of 2018
information, communications, and telecommunications
(FIRRMA) (P.L. 115-232) in August 2018. The act seeks to
(ICT) equipment, where China is a major global producer
modernize CFIUS and expand the types of investment
and supplier. China is the largest foreign supplier of ICT
subject to review, including certain non-controlling
equipment to the United States. In 2018, U.S. ICT imports
investments in “critical technology.” In November 2018,
from China totaled $157 billion, or 60% of total U.S. ICT
the U.S. Commerce Department issued a notice requesting
imports. Citing a "national emergency," President Trump,
public comment on criteria for identifying emerging and
on May 15, 2019, issued Executive Order 13873 on
foundational technologies deemed essential to U.S. national
Securing the Information and Communications Technology
security that could be subject to new export controls.
and Services Supply Chain. The order stated the
Tariffs on Steel and Aluminum. On March 8, 2018,
Administration's view that U.S. purchases of ICT goods and
President Trump issued a proclamation increasing U.S.
services from "foreign adversaries" posed a national
import tariffs on steel (by 25%) and aluminum (by 10%),
security risk to the United States and authorized the Federal
based on “national security” justifications (§232 of the 1962
government to ban certain ICT transactions deemed to pose
Trade Act). In response, China on April 2 raised tariffs by
an "undue risk." On the same day, the U.S. Commerce
15% to 25% on $3 billion worth of imported U.S. products.
Department announced that it would add Chinese
Section 301 Case on China’s IPR Policies. On August 14,
telecommunications firm Huawei and 68 of its non-U.S.
2017, President Trump issued a memorandum directing the
affiliates to the Department's Bureau of Industry and
USTR to determine if China’s policies on IPR protection
Security Entity List, which would require an export license
and forced technology requirements “may be harming
for the sale or transfer of U.S. technology to such entities.
American intellectual property rights, innovation, or
technology development,” and thus warranted a Section 301
Long-Term Challenges
investigation. On August 18, the USTR launched a Section
U.S. policies have sought to induce China reduce the role of
301 investigation, and on March 22, President Trump
the state in the economy, remove trade and investment
signed a Memorandum on Actions by the United States
barriers, and boost its IPR protection. Supporters of the
Related to the Section 301 Investigation. It listed four IPR-
Trump Administration’s use of Section 301increased tariffs
related policies that justified U.S. action, including China’s
(and other punitive commercial measures) against China
forced technology transfer requirements, cyber-theft of U.S.
contend that they will ultimate produce positive results,
trade secrets, discriminatory licensing requirements, and
such as a more level playing field for U.S. firms doing
attempts to acquire U.S. technology to advance its industrial
business in China and greater market access for U.S.
policies (such as the Made in China 2025 initiative).
exporters. Critics of the Administration’s commercial
Subsequently, the Trump Administration has imposed
actions against China warn that a protracted and escalating
increased 25% tariffs on three tranches of imports from
trade dispute could occur, leading to numerous new rounds
China with combined worth about $250 billion. China in
of tit-for-tat for retaliation, sharply reduced commercial
turn has raised tariffs (at rates ranging from 5% to 25%) on
flows, and a gradual decoupling of the two economies.
$110 billion worth of products from the United States (see
Table 1). These tariff hikes appear to be affecting bilateral
Wayne M. Morrison, Specialist in Asian Trade and
trade flows. During the first three months of 2019, total
Finance
U.S.-China merchandise fell by 15% year-over-year. On
IF10030
May 10, 2019, President Trump tweeted that China had
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U.S.-China Trade Issues

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https://crsreports.congress.gov | IF10030 · VERSION 42 · UPDATED