U.S.-China Trade and Economic Relations: Overview

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Updated January 29, 2020
U.S.-China Trade and Economic Relations: Overview
As U.S.-China economic ties have grown, so have U.S.
and state subsidies to phase two. Most Members assess the
concerns about China’s trade and investment practices,
deal to be only a first step. U.S. businesses are warning that
including the state’s increasingly direct and powerful role in
China is doubling down on industrial policies.
the economy and policies requiring many U.S. firms to
China committed to purchase at least $200 billion above a
disclose sensitive proprietary information to operate in
2017 baseline amount of U.S. agriculture ($32 billion),
China. Beijing’s slowness to acknowledge and address
energy ($52 billion), goods ($77.7 billion) and services
priority U.S. concerns while Chinese firms expand offshore
($37.9 billion) between January 2020 and December 2021,
has highlighted uneven levels of market openness,
but stated that purchases will be market-based, suggesting
divergent approaches to global rules, and significant
amounts could be lower. Official Chinese and U.S. trade
differences in the operating conditions and tenets of the
data will be used and the deal is silent on valuing purchases,
U.S. and Chinese economic systems, including clear
opening potential disagreement on implementation.
separation of government and business interests, protections
Both sides delayed proposed December 15 tariffs. For U.S.
of freedom of information and expression, privacy and
tariffs enacted on September 1, 2019, the United States is to
intellectual property (IP), and the impartial rule of law.
on February 14, 2020, cut the rate from 15% to 7.5%. China
Feeding U.S. concerns are an uptick in reports of Chinese
extended September tariff exemptions for autos, auto parts,
corporate espionage, Beijing’s tightening of information
pork, and soybeans, and may selectively exempt rather than
controls (and pressure on U.S. firms to abide by these
cut tariffs. Other U.S. and Chinese tariffs enacted since
controls), tit-for-tat retaliation, and industrial policies
March 2018 remain in effect. The United States has
incentivizing the transfer of U.S. IP to the government and
imposed increased 25% tariffs on three tranches of imports
military.
from China worth approximately $250 billion. China, in
turn, raised tariffs (at rates ranging from 5% to 25%) on
To address these issues, the Trump Administration has
$110 billion worth of U.S. products.
undertaken policy actions that include invoking Section 301
of the Trade Act of 1974 (19 U.S.C. §2411) to target
Figure 1. U.S.-China Trade in 2018
Chinese industrial policies and IP abuses, strengthening
U.S. investment and export control authorities, and stepping
up efforts to stem Chinese espionage. The Administration
has sanctioned Chinese firms for violations of U.S.
sanctions, theft of U.S. IP, ties to the Chinese military in
dual-use sectors, and provision of surveillance technology
to the authorities in the western Chinese region of Xinjiang.
Supporters of the Administration’s stance assess these
actions will better position U.S. firms and advance U.S.
economic interests. Others warn that frictions could reduce
commercial flows and threaten U.S. growth. Some
Members seek additional action to address China’s coercion
of U.S. firms, use of a “social credit system” to influence
corporate behavior, and adoption of military-civil fusion

policies that blur commercial and military distinctions.
Source: CRS: data from U.S. Bureau of Economic Analysis (BEA).
Section 301
Bilateral Trade and Investment
In March 2018, the U.S. Trade Representative (USTR)
U.S.-China commercial ties expanded greatly over three
issued its investigation findings of Chinese policies related
decades. In 2018, China was, in terms of goods, the largest
to technology transfer, IP, and innovation under Section
U.S. trading partner (with total trade at $660 billion), the
301 of the Trade Act of 1974. USTR concluded that four
third-largest U.S. export market (at $120 billion), and the
practices justified U.S. action: forced technology transfer
largest source of U.S. imports (at $540 billion) (Figure 1).
requirements, cyber-enabled theft of U.S. IP and trade
China is the second-largest foreign holder of U.S. Treasury
secrets, discriminatory and nonmarket licensing practices,
securities (at $1.11 trillion as of June 2019). As the United
and state-funded strategic acquisition of U.S. assets.
States and China have increased tariffs since 2018, year-to-
date (YTD) bilateral trade flows decreased in the first three
The United States and China signed a phase one trade
quarters of 2019, with U.S. goods exports to China falling
agreement on January 15, 2020, to resolve some issues
by 16%, while U.S. imports from China fell by 13%,
raised through Section 301. China committed to strengthen
according to official U.S. data (Figure 2).
IP enforcement and improve access in agriculture and
financial services—sectors important to the U.S. economy,
but outside the 301 investigation’s scope—leaving most
U.S. concerns on IP, technology transfer, industrial policies,
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U.S.-China Trade and Economic Relations: Overview
Figure 2. U.S.-China Trade in 2018 and 2019
United States has strong comparative advantages. These
policies, such as Made in China 2025, feature a heavy
government role in directing and supporting Chinese
business and include government-set targets, government-
guided funds, subsidies, tax breaks, low-cost loans, trade
and investment barriers, and discriminatory IP,
procurement, and standards practices. U.S. companies are
also concerned about China’s cyber and data policies that
require the disclosure of sensitive information. In 2018, the
U.S. National Counterintelligence and Security Center
warned that China’s “expansive efforts in place to acquire
U.S. technology to include sensitive trade secrets and
proprietary information,” if not addressed, “could erode

America’s long-term competitive economic advantage.”
Source: CRS: data from U.S. Bureau of Economic Analysis (BEA).
National Security. Congress and the Administration have
Foreign direct investment (FDI) flows in both directions
responded to national security concerns about China’s
have slowed since 2017. RhG estimates China FDI into the
industrial policies and role in technology supply chains.
U.S. went from $45.5 billion in 2016 to $29.4 billion in
Citing a “national emergency,” the President in May 2019
2017 and $4.8 billion in 2018, but announced deals show
issued Executive Order 13873, stating that U.S. purchases
China’s sustained interest in U.S. biotech, health, and
of information and communications technology (ICT)
technology sectors through commercial ties not captured in
goods and services from “foreign adversaries” pose a
FDI data (e.g., venture capital, private equity, research and
national security risk and authorizing the federal
development, and open source technology platforms).
government to ban ICT transactions deemed to pose an
“undue risk.” The U.S. Department of Commerce
Figure 3. U.S.-China FDI Flows in 2018
responded by adding Chinese firm Huawei and 68 of its
non-U.S. affiliates to the Bureau of Industry and Security’s
Entity List, generally requiring an export license for the sale
or transfer of U.S. technology, but has issued waivers.
Efforts to tighten gaps in these policies are exposing U.S.
interagency debates about the potential impact on U.S.
technology firms. Legislation enacted in 2018 (P.L. 115-
232) reforms U.S. foreign investment review and export
control authorities. Some Members are concerned about the
delay in establishing new controls on certain emerging and
foundational technologies that are required to implement

Source: CRS with data from BEA and the Rhodium Group (RhG).
both the investment review and export control reforms.
Notes: VC = Venture capital. BEA records net flows and may
Industrial Overcapacity. China is a top global steel and
undercount FDI by not capturing al FDI via other countries,
aluminum producer. In 2009, it issued 13 industry support
territories, or tax havens, or acquisitions made by U.S. affiliates of
plans allowing its firms to expand steel and aluminum
foreign firms. RhG records gross flows and attempts to identify FDI
capacity while much of the world dialed back. Assessing
by Chinese firms regardless of where firms are based or sources of
persistent global overcapacity, the United States in March
money for investment.
2018 announced tariffs on all aluminum (10%) and steel
(25%) imports citing national security concerns (Section
Trade Deficit. President Trump has raised concerns about
232, Trade Expansion Act of 1962, PL 87-794). China
U.S. trade imbalances with China. Some view the bilateral
responded by raising tariffs by 15% to 25% on $3 billion of
trade deficit as an indicator of Chinese trade barriers—
U.S. exports and filing a World Trade Organization case.
including currency manipulation and Chinese policies and
Financial Markets. Some Members are concerned about
practices that discourage direct U.S. exports and incentivize
China’s access to U.S. capital markets. Responding to
manufacturing in China. Others view conventional data on
warnings by the Securities and Exchange Commission and
the trade deficit as misleading because China’s role as a
the Public Company Accounting Oversight Board that they
point of assembly in global supply chains means Chinese
cannot inspect the work of auditing firms in China that
export data includes the value of imported inputs from other
examine U.S. listed firms, S. 1731 and H.R. 3124 would
markets. In August 2019, the United States formally labeled
require Chinese firms that fail to meet U.S. auditing
China a currency manipulator under the terms of the 1988
requirements to delist from U.S. exchanges. H.R. 2903
Trade Act, the first such designation in 25 years, and lifted
would bar the U.S. government’s Thrift Savings Plan (TSP)
the designation in January 2020 in response to China’s
from investing “in any entity in peer or near-peer
currency commitments in the phase one trade deal.
competitor nations,” a category that would include China.
Industrial Policies, Technology, and IP. To further its
national development goals, China’s government employs
Karen M. Sutter, Specialist in Asian Trade and Finance
interrelated industrial policies that seek the transfer of
foreign IP and knowhow to China in sectors in which the
IF11284


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U.S.-China Trade and Economic Relations: Overview


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