![[CRS Issue Brief for Congress]](iblogo.gif)
The growing U.S.-Chinese trade imbalance and China's alleged unfair trade practices have become focal points in congressional debate over China's most-favored-nation (MFN) status (along with other non-trade issues, such as human rights and weapons proliferation). Over the past few years, efforts have been made in Congress to pass legislation terminating or conditioning China's MFN status, although none have succeeded
The United States has pressed China to improve its IPR protection regime. In February 1995, the U.S. Trade Representative (USTR) threatened to impose trade sanctions against China for failing to stop rampant piracy of U.S. intellectual property. Sanctions were averted when a bilateral agreement was reached on February 26, 1995. China pledged to take a wide range of steps to crack down on piracy and to afford greater market access to U.S. firms. However, on April 30, 1996, the USTR stated that China had failed to fully abide by the agreement and on May 15, 1996, the USTR threatened to impose $2 billion in sanctions against Chinese products by June 17, 1996, unless China took action against major producers of pirated products. These sanctions were averted after China closed 15 plants that produced pirated compact disks, and pledged to take more effective action to combat IPR piracy and to improve market access for IPR-related products.
The United States has also pressed China to significantly reform its trade regime to improve market access for U.S. goods and services. A market access agreement was reached in October 1992 in which China pledged to reduce trade barriers on a wide variety of products and to make its trade regime more transparent. The USTR has stated that China has implemented several trade reforms, but has not fully complied with all aspects of the agreement.
China has made its entry into the World Trade Organization (WTO) a top priority. The U.S. position has been that China needs to substantially reform its trade regime before it is allowed to enter the WTO, while China has argued that it should be treated as a developing country, allowing it to implement reforms over time.
It is likely that trade issues will continue to be sources of tension between the United States and China in the near future, especially if the U.S. trade deficit with China continues to rise sharply, and if it is deemed that China has failed to fully comply with its trade agreements. U.S. concerns over China's proliferation of nuclear materials, human rights record, and threats against Taiwan could also lead to U.S. trade sanctions against China.
On September 6, 1996, the USTR announced that the United States would impose $19 million in punitive triple charges against China's 1996 textile quota allowance due to illegal transshipments by Chinese textile exporters seeking to avoid U.S. quotas. China in turned threatened to impose sanctions on U.S. products.
On June 27, 1996, the House voted to disapprove H.J.Res. 182, which would have denied the renewal extension of China's most-favored-nation (MFN) status. Instead, the House passed a resolution (H.Res. 461) calling on various committees to hold hearings and report out appropriate legislation to deal with China on a variety of issues, including trade, weapons proliferation, human rights, and military policy.
On June 17, 1996, Acting United States Trade Representative (USTR) Charlene Barshevsky announced that the United States was satisfied that China was taking steps to fulfill the 1995 bilateral agreement on intellectual property rights protection. As a result, the United States did not carry out a threat to impose sanctions in the form of 100% tariffs on $2 billion worth of Chinese products.
U.S. trade with China rose rapidly after the two nations established diplomatic relations (January 1979), signed a bilateral trade agreement (July 1979), and provided mutual MFN benefits beginning in 1980. Total trade (exports plus imports) between the two nations rose from $4.8 billion in 1980 to $57.3 billion in 1995 -- making China the 6th largest U.S. trading partner (see table 1). Over the past few years, the U.S. trade deficit with China has grown significantly, due largely to a surge in U.S. imports of Chinese goods relative to U.S. exports to China (see figure 1). Between 1990 and 1995 U.S. exports to China increased by 144.4%, while U.S. imports from China surged by 199.2%. The U.S. trade deficit with China has been rising at a faster rate than that of any other major U.S. trading partner. In 1986, the United States had a $1.7 billion trade deficit with China; in just 10 years it surged to $33.8 billion (1995), making China the second largest deficit trading partner of the United States, behindJapan. On a monthly basis, the U.S. trade deficit with China exceeded that of Japan three times from January-September 1996, leading many analysts to project that the U.S. trade deficit with China will exceed that with Japan in a few years. The U.S.- China trade imbalance for 1996 could reach $40 billion.
U.S. exports to China in 1995 totalled $11.7 billion, accounting for 2.0% of total U.S. exports to the world, and making China the 13th largest market for U.S. exports. The top five U.S. exports to China in 1995 were (1) fertilizers (2) transport equipment (mainly aircraft and parts), (3) cereals and cereal preparations, (4) textile fibers, and (5) telecommunication and sound equipment. Together, these five commodities accounted for over 45% of total U.S. exports to China (see table 2).
While China, in absolute terms is a smaller market for U.S. exports than various other East Asian markets (such as Hong Kong, Singapore, South Korea, and Taiwan), in recent years it has been one of the fastest growing markets for U.S. exporters. U.S. exports to China grew by over 144% between 1990 and 1995. U.S. exports to China surged by 26.5% in 1995 over the previous year.
Many trade analysts argue that China will likely prove to be a significant market in the future. China is one of the world's fastest growing economies, and its efforts to reform and modernize its economy could result in a significant increase in demand for imports. The Chinese government has announced extensive plans to upgrade and modernize the economy. Infrastructure development, in particular, has been made a major priority, and the Chinese government has announced that foreign firms will be allowed to participate in a wide variety of projects. Priority development sectors include energy, transportation, and telecommunications. The United States and Foreign Commercial Service (US&FCS) projects that the top five best commercial prospects (based on size and growth potential) for U.S. firms in China for 1995-1996 will be (1) aircraft and parts, (2) electric power systems , (3) computers and peripherals, (4) telecommunications equipment, and (5) automotive parts and service equipment.
China is a relatively large source of many U.S. imports. In 1995, imports from China accounted for 6.1% of total U.S. imports, making China the fourth largest supplier of U.S. imports. The level of U.S. imports from China more than doubled between 1991 and 1995. The top five U.S. imports from China in 1995 were (1) miscellaneous manufactured articles (such as toys, games, etc.); (2) clothing and apparel; (3) footwear; (4) telecommunications equipment, sound recording, and reproducing equipment (such as telephone answering machines, radios, tape recorders and players, televisions, VCRs, etc.); and (5) electrical machinery (see table 3). Together, imports of these five commodities accounted for over two-thirds of total U.S. imports from China.
The surge in U.S. imports of Chinese products over the past few years can be largely explained by two factors. First, China's production of low-cost, labor-intensive products (such as consumer goods) has increased sharply in recent years (due to China's comparative advantage in such sectors); U.S. demand for such products has steadily increased as well. Secondly, countries such as Hong Kong and Taiwan have shifted production of a wide variety of labor-intensive products (such as shoes, toys, and electronic products) into China to take advantage of China's relatively low-cost labor supply. As a result, many of the products that used to be produced in Taiwan and Hong Kong (a large share of which were exported to the United States) are now being produced by Hong Kong and Taiwanese firms in China, then exported.
China's economic reforms began in 1978 with the introduction of price and ownership incentives for farmers and the establishment of four special economic zones (SEZs) in China for the purpose of attracting foreign investment, boosting exports, and importing high tech products into China. Additional reforms followed in stages which sought to decentralize economic policymaking in several economic sectors (mainly those involving trade). Economic control of various enterprises was given to provincial and local governments, foreign-funded joint ventures, and private enterprises. Such enterprises were generally allowed to operate and compete on free-market principles, rather than under the direction and guidance of state planning. In addition, state price controls on a wide range of products were eliminated. Finally, the government established additional economic zones in several Chinese coastal cities that were given extensive autonomy to experiment with various free-market reforms.
China's economic reforms and open investment policies have contributed to a surge in economic growth. Between 1979 and 1995, China's real gross domestic product (GDP) more than quadrupled. Over the past 10 years, China's real GDP has grown by an average rate of 9.6% annually, making it one of the world's fastest growing economies. China's real GDP grew by 9.9% in 1995. Over the next 5 years (1996-2000) China's real GDP is projected to average over 8.2%; and between 2000 and 2010 it is expected to average 7.4%. At these growth rates, China will more than double its GDP in less than 10 years.
China has quickly become a major world trading power and a recipient of foreign investment. In 1978, total Chinese trade (imports plus exports) was $20.7 billion, making China the world's 27th largest trading country. In 1995, total trade equalled $280.9 billion, making China the world's 11th largest trading country. Over the past 10 years, China's trade has increased substantially. Its merchandise exports grew from $31.4 billion in 1986 to $148.8 billion in 1995, while merchandise imports grew from $43.2 billion to $132.1 billion. Political and Economic Risk Consultancy, Ltd. (an economic consulting firm) projects China's exports and imports by 1997 will rise to $243.3 billion and $191.1 billion, respectively.
The large influx of foreign investment into China has been a key factor in China's rapid economic growth, much of which has gone into export-oriented production facilities. Utilized foreign direct investment (FDI) in China has grown from $636 million in 1983 to $33.8 billion in 1994. Cumulative foreign investment in China at the end of 1994 was $95.7 billion. A significant share of China's foreign investment has come from overseas Chinese. Hong Kong/Macau was the largest investor in China in 1994 (59.7% of total utilized FDI), followed by Taiwan (10.0%), the United States (7.3%), and Japan (6.1%). Chinese data indicate that foreign invested firms in China account for about 39% of its total trade.
While China's economy is projected to continue to grow rapidly in the near future, it faces several problems which could undermine that growth:
Inflation in China is currently running at over 20%. The central government has attempted to tighten its control over credit and has imposed price controls on some products in an effort to slow inflation without severely dampening economic growth. Past efforts to control inflation have often led to sharp declines in economic growth.
Infrastructure bottlenecks, such as inadequate transportation, communications, and energy systems , have contributed to China's rising inflation rate, and pose a serious challenge to China's ability to maintain rapid economic growth. China has announced plans to spend hundreds of billions of dollars over the next 5 years on foreign imports to upgrade its infrastructure. Financing such projects could prove difficult, however. China hopes to attract foreign investment for much of its infrastructure needs.
Uneven economic growth has led to increasing social strains in China. Economic reforms in China have mainly benefitted the coastal areas and major cities but have had less an impact on the inland regions and rural areas. In addition, the central government has reduced its support of the "iron rice bowl" system of cradle to the grave benefits, requiring Chinese citizens to pay for a larger share of their own medical costs and to save for their own retirement.
State-run enterprises continue to put a heavy strain on China's economy; nearly half of them lose money. The Chinese government, however, is reluctant to cut off financial support of such enterprises out of concern that doing so would lead to employment disruptions which could lead to social unrest. Government support for these industries has led to a sharp increase in government budget deficits and has put inflationary pressures on the economy.
Government control, both central and provincial, over many sectors of the economy has led to wide-spread corruption, financial speculation, and misallocation of funds.
Congressional concerns over the growing U.S. trade deficit with China and unfair Chinese trade practices have been major factors during congressional debate in recent years over whether or not to deny or condition China's MFN status, along with human rights, weapons proliferation, and foreign policy issues. As a result, efforts have been made in Congress to revoke China's MFN status or to condition it to a Presidential certification that China has made improvements in these areas. This policy was opposed by the Bush Administration, which sought to deal with these issues outside the MFN process. As a result, President Bush vetoed congressional attempts to revoke or condition China's MFN, and such vetoes were consistently sustained in the Senate. As a presidential candidate, Bill Clinton criticized the Bush Administration's China policy and pledged to take a tougher approach to U.S.-China trade relations, including conditioning China's MFN renewal.
On May 28, 1993, President Clinton issued an executive order effectively continuing China's unconditional MFN status for an additional year, but placing conditions on China's MFN status thereafter. Specifically, the Secretary of State could not recommend an extension of China's MFN unless he determined that China had abided by its 1992 agreement to halt exports of prison labor products to the United States, and that an extension would substantially promote freedom of emigration objectives of the Jackson-Vanik amendment to the 1974 Trade Act. In addition, the Secretary of State had to consider whether China had made overall significant progress in specific areas of human rights.
On May 26, 1994, President Clinton announced his decision to extend China's MFN status for an additional year, even though China did not achieve overall significant progress in human rights. The President also announced that human rights conditions (other than freedom of emigration) would not be linked to China's continued MFN status, but instead would be addressed by other means. However, the President announced that the United States would impose sanctions on U.S. imports of Chinese munitions due to alleged violations of human rights in China.
On June 2, 1995, President Clinton announced his decision to renew China's MFN status for an additional year. On July 20, 1995, the House tabled legislation (H.J.Res. 96), which would have terminated China's MFN status, and instead passed H.R. 2058, which urges the President to press China on human rights, trade, and arms exports, and to report his efforts to the Congress every 6 months. The Senate has not considered the bill.
On May 31, 1996, President Clinton announced his intention to renew China's MFN status. S.J.Res. 56 and H.J.Res. 182 to disapprove the renewal were introduced on June 6 and June 12, respectively. On June 27, 1996, the House voted to disapprove H.J.Res. 182, which would have denied the renewal extension of China's MFN status. Instead, the House passed a resolution (H.Res. 461) calling on various committees to hold hearings and report out appropriate legislation to deal with China on a variety of issues, including trade, weapons proliferation, human rights, and military policy.
Several Members have questioned whether or not the annual congressional debate over China's MFN status has been an effective means for dealing with China on various issues of concern to Congress. As a result, some Members have indicated that they may introduce legislation extending permanent MFN status to China, while seeking other legislative vehicles to deal with China on trade, human rights, and other political issues. Some recent press reports have indicated that the Clinton Administration may seek to extend permanent MFN status to China once it becomes a member of the World Trade Organization (WTO). A legislative proposal to significantly change U.S. MFN policy was offered by congressman Doug Bereuter: H.R. 4289, the Fair Trade Opportunities Act. The bill would essentially eliminate Title IV of the 1974 Trade Act, but would give authority to the president to apply pre-Uruguay Round tariffs rates on imports from countries which are not members of the WTO and "do not accord adequate trade benefits to the United States, including substantially equal competitive opportunities for the commerce of the United States, as well as non-market economies which maintain restrictions on emigration (similar to those described in the Jackson-Vanik amendment).
Some Members may seek to influence future U.S.-China policy by introducing legislation dealing with China's accession to the WTO. For example, Representative Gephardt introduced legislation (H.R. 4065) on September 12, 1996, which would require prior congressional approval before the President could support China's accession to the WTO, and would provide for the withdrawal of the United States from the WTO if China is accepted into the WTO without U.S. support.
Section 182 of the Trade Act of 1974, as amended by section 1303 of the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418), requires the USTR to identify "priority foreign countries" that violate U.S. intellectual property rights (IPR), including patents, copyrights, trademarks, and trade secrets. Under this provision, also known as "Special 301," the USTR is required to initiate a Section 301 investigation of "priority foreign countries" that fail to provide adequate and effective protection of U.S. intellectual property rights (IPR) or deny fair and equitable market access to U.S. firms that rely on IPR protection. The USTR is directed to seek negotiations with the priority nations to end such violations and, under certain circumstances, to recommend retaliatory measures to the President if such violations have not ceased within 6 to 9 months of the USTR's investigation.
In April 1991, China (along with India and Thailand) was named as a priority foreign country under Special 301. A formal Section 301 investigation was launched by the USTR on May 26, 1991, of four specific deficiencies in China's IPR practices that were responsible for the denial of adequate and effective protection for U.S. property:
--deficiencies in the patent law, in particular, the failure to provide product patent protection for chemicals, including pharmaceuticals and agrichemicals;
--lack of copyright protection for U.S. works not first published in China;
--deficient levels of protection under the copyright law and regulations; and
--inadequate protection of trade secrets.
On November 26, 1991, the USTR determined that insufficient progress had been made in resolving Chinese IPR violations. The USTR decided to extend the investigation, but threatened to impose $1.5 billion in trade sanctions if an agreement was not reached by January 16, 1992. However, last-minute negotiations yielded an Memorandum of Understanding (MOU) on January 16, 1992 and, as a result, the USTR terminated the Section 301 case. Under the MOU, China agreed to strengthen its patent, copyright, and trade secret laws, and to improve protection of U.S. intellectual property, including computer software, sound recordings, agrichemicals, and pharmaceuticals.
On June 30, 1994, the USTR again designated China as a "priority foreign country" under Special 301, noting that, while China had implemented several new laws protecting intellectual property, it had failed to enforce such laws. In particular, the USTR cited the establishment of 26 compact disk (CD) and laser disk factories in China allegedly producing pirated CDs, as an example of China's "egregious" violation of U.S. IPR. In addition, the USTR stated that trade barriers had restricted access to China's market for U.S. movies, videos, and sound recordings, and that such restrictions encouraged piracy of such products in China. The United States called on China to take effective and immediate measures to curb piracy (including making raids on certain CD producers), instituting structural changes to improve IPR protection over time (such as creating a border enforcement regime, instituting a copyright verification system, and providing access to IPR courts), and providing greater market access for U.S. intellectual property-based products.
On February 4, 1995, the USTR announced that insufficient progress had been made in talks with Chinese officials and issued a list of Chinese products, with an estimated value of $1.08 billion, which would be subject to 100% import tariffs, effective on February 26, 1995. China in turn warned that it would issue sanctions against U.S. firms in retaliation. However, a preliminary agreement was reached on February 26, 1995, and a formal agreement was signed on March 11, 1995.
The new agreement pledged China to substantially beef up its IPR enforcement regime and to remove various import and investment barriers to IPR-related products. Specifically, China agreed to:
Take immediate steps to stem IPR piracy in China over the course of the next three months by taking action against large-scale producers and distributors of pirated materials, and prohibiting the export of pirated products such as CDs, LDs, and CD-ROMs.
Establish mechanisms to ensure long-term enforcement of IPR laws, such as banning the use of pirated materials by the Chinese government, establishing a coordinated IPR enforcement policy among each level of government, beefing up IPR enforcement agencies, creating an effective customs enforcement system, establishing a title verification system in China to ensure that U.S. audio visual works are protected against unauthorized use, reforming China's judicial system to ensure that U.S. firms can obtain access to effective judicial relief, establishing a system of maintaining statistics concerning China's enforcement efforts and meeting with U.S. officials on a regular basis to discuss those efforts, improving transparency in Chinese laws concerning IPR, and strictly enforcing IPR laws.
Provide greater market access to U.S. products by removing import quotas on U.S. audio visual products, allowing U.S. record companies to market their entire works in China (subject to Chinese censorship concerns), and allowing U.S. intellectual property-related industries to enter into joint production arrangements with Chinese firms in certain Chinese cities.
The agreement established timetables and procedures for regular U.S-Chinese meetings on IPR enforcement and market access issues; China agreed to maintain and release statistics on its efforts to combat piracy. The U.S. government and IPR trade associations agreed to provide extensive technical assistance to Chinese officials to help establish an effective enforcement regime.
Several U.S. firms charged that IPR piracy in China worsened in 1995, despite the 1995 IPR agreement, and pressed the USTR to take tougher action against China. The International Intellectual Property Alliance (IIPA), an association of eight U.S. copyright-based industries, estimated that IPR piracy by Chinese firms cost U.S. firms $2.3 billion in lost trade during 1995, making China the largest foreign pirate of U.S. intellectual property. The IIPA estimated that Chinese piracy of various copyrighted materials in China runs from 50% to 90%.
On April 30, 1996, the USTR designated China as a "priority foreign country" under Special 301, noting that, while China had made some progress in cracking down on IPR violations, it had not yet fully complied with the February 1995 IPR agreement. In particular, China had cracked down on piracy at the retail level, launching raids and destroying millions of pirated CDs and hundreds of thousands of pirated books, sound recordings, and computer software. However, China had failed to take effective action against the estimated 30 or so factories in China that were mass-producing and exporting pirated products. U.S. officials called on the Chinese government to close such factories, prosecute violators, and destroy equipment used in the production of pirated products. Further, the USTR stated that China failed to establish an effective border enforcement mechanism within its customs service to prevent the export of pirated products. Finally, The USTR indicated that China failed to provide sufficient market access to U.S. firms, due to high tariffs, quotas, and regulatory restrictions.
On May 15, 1996, the USTR published a preliminary list of Chinese products under consideration for U.S. sanctions and warned that the United States would impose 100% prohibitive tariffs on approximately $2 billion worth of Chinese products (drawn from the preliminary list) by June 17, 1996, unless China took more effective action to fully implement the IPR agreement. China threatened to impose counter sanctions against a similar level of U.S. products.
On June 17, 1996, Acting USTR Charlene Barshevsky announced that the United States was satisfied that China was taking steps to fulfill the 1995 IPR agreement. As a result of the announcement, the United States did not carry out a threat to impose sanctions. In her announcement, Barshevsky cited the Chinese government's recent closing of 15 plants producing illegal CDs, including 12 in Guangdong Province. She also cited China's pledge to extend a period of focused enforcement of anti-piracy regulations against regions of particularly rampant piracy, such as Guangdong Province. The Chinese government also promised to improve border enforcement to halt exports of pirated products as well as illegal imports of presses used to manufacture CDs. Further, the Chinese government reaffirmed its pledge to open up its market to imports of IPR-related products, such as motion pictures and recordings. Finally, Chinese officials promised to improve monitoring and verification efforts to ensure that products made by Chinese CD plants and publishing houses are properly licensed.
U.S. officials have held negotiations with China over the past several years regarding U.S. concerns over Chinese restrictive trade and investment barriers. In April 1991, the Bush Administration initiated a Section 301 case against four significant unfair trading practices affecting U.S. exports to China:
--selected product-specific and sector-specific import prohibitions and quantitative restrictions;
--selective restrictions on imports made effective through restrictive import license requirements;
--selected technical barriers to trade, including standards, testing and certification requirements, and policy toward phytosanitary and veterinary standards that create unnecessary obstacles to trade; and
--failure to publish laws, regulations, judicial decisions, and administrative rulings of general application pertaining to customs requirements, restrictions, or prohibitions on imports or affecting their sale or distribution in China.
The Section 301 case against China was highly unusual due to its breadth of coverage. Most Section 301 cases involve investigations of certain trade restrictions to specific products. However, the China Section 301 case was the most sweeping market access investigation in the USTR's history; it was essentially aimed at substantially reforming China's entire trade regime. In addition, the USTR linked U.S. support for China's reentry into the General Agreement on Tariffs and Trade (GATT) to a successful resolution of the trade dispute.
On August 21, 1992, the USTR determined that negotiations had failed to resolve the trade dispute and threatened to impose $3.9 billion in U.S. trade sanctions unless an agreement was reached by October 10, 1992. The proposed sanctions were the highest level ever issued by the USTR under a Section 301 case. China in turn threatened retaliation against a comparable level of U.S. products.
On October 10, 1992, the United States and China reached an agreement settling the Section 301 case. Under a Memorandum of Understanding (MOU), China pledged to reduce or eliminate a wide variety of trade barriers over the next 5 years (according to specific timetables), including tariffs, quotas, import restrictions, import licenses, and import substitution laws. In addition, China agreed to take a number of specified steps to make its trade regime more transparent, such as publishing its trade laws and regulations. Finally, China agreed to establish a joint working group to eliminate scientific standards and testing barriers to agricultural imports within 12 months. For its part, the United States pledged to "staunchly support" China's entry into the GATT and to reduce exports controls on computer and telecommunications equipment exports to China.
Failure on the part of China to gain status as a founding member of the WTO at the end of 1994 led China to subsequently announce that it would no longer abide by the market access agreement, due to the U.S. position on conditions for China's entry into the WTO. However, following the signing of the U.S.-Chinese IPR agreement in March 1995, U.S. and Chinese officials announced that an agreement had been reached in which China would resume its implementation of the market access MOU by no later than March 31, 1995, and that talks would be held with the United States concerning liberalizing China's markets for telecommunications services and insurance (see discussion on China and the WTO below).
U.S. trade officials have held several rounds of talks with Chinese officials concerning China's implementation of market access agreement. USTR officials have noted that China has made some progress in reforming its trade regime. It has made its trade regime more transparent, lowered tariffs, and eliminated quotas and license restrictions. However, China has failed to remove all trade barriers to certain commodities and, in some cases, has erected new barriers. In addition, China has failed to eliminate discriminatory sanitary regulations on imported food products. On several occasions, the USTR has threatened to impose trade sanctions against China for failing to comply with certain aspects of the MOU.
The United States has expressed concern over the past several years regarding China's missile and nuclear proliferation activities. Such concerns led the United States in 1991 and 1993 to impose sanctions against China by limiting U.S. exports of supercomputers, satellites and parts, and missile technology (see CRS Issue Brief 92056).
On February 23, 1996, Secretary of State Warren Christopher requested the U.S. Export-Import Bank (Eximbank) to suspend consideration (for 30 days) of any new commitments on export financing for China while the Administration conducted a review of China's alleged transfers of nuclear-related material and technology (ring magnets) to Pakistan. On April 29, 1996, the State Department issued another request to the Eximbank to temporarily take no final action to approve or disapprove financing for China. However, on May 10, 1996, the State Department announced that it had decided not to impose sanctions against China, after the Chinese government pledged that it would not provide assistance to unsafeguarded nuclear facilities, and would provide a public statement to that effect. The State Department decision effectively ended the Eximbank suspension regarding final action on its programs for China. However, reports of continued nuclear Chinese assistance to Pakistan persist.
The U.S. Customs Service has found evidence on several occasions that China has attempted to circumvent U.S. textile quotas by transshipping Chinese products through other countries to the United States using false country of origin labels, and through misclassification of textile and apparel products. The USTR estimates that such transshipments may total up to $2 billion each year. In addition, the United States has charged that certain Chinese entities have sought to avoid U.S. tariffs by undervaluing textile and apparel shipments.
On January 6, 1994, the USTR announced that China's textile and apparel quota would be significantly reduced (25% to 35% below 1993 levels) due to China's refusal to accept anti-circumvention provisions in a new textile agreement. The new quota levels were set to take effect on January 17, 1994. However, on January 17, 1994, the United States and China concluded a new textile agreement that would effectively reduce the growth rate of China's textile exports to the United States, and allows the United States to significantly reduce China's quotas (under certain conditions) if China violates the agreement through transshipments. However, charges by the U.S. Customs Service of illegal transshipments by China have led the United States on three separate occasions (since the signing of the agreement) to reduce China's textile and apparel quotas on specific products. The most recent occurred on September 6, 1996, when the USTR announced that the United States would impose $19 million in punitive triple charges against China's 1996 textile quota allowance due to China's repeated violations of the U.S.-China textile agreement dealing with illegal transshipments. China in turn has threatened to retaliate by imposing restrictions on imports of certain U.S. products. The current U.S.-China textile agreement expires at the end of 1996.
The use of forced labor is believed to be widespread and a long-standing practice in China. Evidence suggests that China may be utilizing forced labor on a large scale in order to boost its exports, a large portion of which may be targeted to the United States. The importation from any country of commodities produced through the use of forced labor is prohibited by U.S. law, although obtaining proof of actual violations for specific imported products is often extremely difficult.
On August 7, 1992, the United States and China formally signed an MOU to ensure that products made by forced labor in China are not exported to the United States. China agreed to provide U.S. officials with access to forced labor sites suspected of producing products for export to the United States. On March 14, 1994, the United States and China signed an agreement in which China pledged to enhance U.S. access to Chinese production facilities. The President's May 26, 1994 China MFN renewal status report to Congress stated that China had generally abided by the MOU. However, reports by certain human rights groups have charged that China has taken a number of steps to circumvent the MOU on prison labor exports. In March 1996, the U.S. Customs Service determined that pipe fittings produced by the Tianjin Malleable Iron Factory in China were being produced using prison labor. As a result, Customs issued an order banning the release of such imported products into the U.S. market.
The Chinese government has made China's accession to the GATT and becoming a founding member of the WTO a major priority. China believes that accession into the WTO would enable it to gain nondiscriminatory treatment in its trade relations with WTO members and provide it access to the multilateral trade dispute resolution process. Supporters of China's WTO membership argue that it would bring China's trade regime in line with other WTO members and would result in a significant reduction of Chinese trade barriers. Currently at issue are the specific steps China would be required to make to gain accession to the WTO.
The Chinese government has argued that China is a developing country and hence should be allowed to implement reforms gradually over a period of time and be allowed to protect certain industries. The United States and certain other WTO members argue that China is a major trading power and hence should be made to bring its trade regime more in line with basic multilateral trade rules once China is brought into the WTO. Specifically, it is argued that China should make it trade regime more transparent, afford national treatment to foreign firms in China, create a fully market-oriented exchange rate system, remove investment restrictions, provide adequate IPR protection, phase out price controls, limit government protection of infant industries, and convert nontariff trade barriers (such as import licenses, quotas, import substitution regulations, etc.) into tariffs. Chinese officials have viewed many of these conditions as too harsh, and blame the United States for delaying China's entry into the WTO. Chinese officials have also insisted that Taiwan should not enter the WTO before China.
China is one of the fastest growing economies in the world. Real GDP in 1995 grew by 9.9%, and it is projected to average over 8% annually through the year 2010, which means that China's GDP will double in less than 10 years. China's rapid economic growth, coupled with economic and trade reforms have led to sharp increases in the level of Chinese imports and exports. The U.S. Commerce Department has designated China as one of the top 10 "Big Emerging Markets" offering the largest potential for U.S. sales of goods and services in the years ahead.
Over the past several years, China has become an increasingly important trading partner of the United States. China is now the fourth largest supplier of U.S. imports and the 13th largest destination for U.S. exports. U.S. exports to China increased by 27% in 1995. The U.S. trade deficit with China ($33.8 billion in 1995) has surged in recent years and is likely to exceed that with Japan. The rising bilateral trade imbalance has been, and will likely remain, a significant source of friction between the United States and China. The growth in the trade deficit will likely lead U.S. policymakers to demand greater market access for U.S. goods and services in China.
IPR enforcement and market access issues continue to be sources of rising friction. IPR piracy in China has been rampant, despite past pledges by the Chinese government to crack down on IPR violators. China's efforts over the past few months to close 15 factories producing pirated CDs, and pledges to improve IPR enforcement and market access, helped to avoid the imposition of trade sanctions by the United States. However, it remains to be seen whether China will maintain a sustained effort to crack down on IPR piracy. China has abided by many aspects of the 1992 market access agreement, but in some instances, has imposed new trade barriers.
The United States has reiterated its support for China's accession into the WTO as a founding member, and has stated that U.S.-Chinese talks in this area would "realistically address the issue of China's developing country status on the basis of the Uruguay Round Agreement." It appears that the United States may support treating China as a developed country for some types of trade practices (thus requiring China to take immediate steps to bring such practices within multilateral rules), while treating China as a developing country for other types of trade practices (thus allowing China to implement reforms over a certain period of time) in order to obtain WTO membership. However, U.S. support to China's WTO accession appears to be strongly linked to China's full compliance with its trade agreements with the United States. China poses a complex challenge for the United States and other WTO members. On the one hand, China is a relatively poor country; yet it is also a major trading country. The challenge for the United States and other WTO countries will be to determine to what extent China can and will submit to multilateral trading rules, while preserving its current efforts to promote and develop certain industries.
The long-term outlook for U.S.-Chinese economic and trade relations remains uncertain. While China has been a growing market for U.S. exporters in recent years, it, according to the USTR, continues to maintain one of the world's most protectionist trade regimes. The Chinese government maintains a wide variety of trade barriers to foreign imports. Foreign firms that want to enter the Chinese market are often pressured to form a joint venture with a Chinese partner. High-tech firms are generally required to share technology as a condition for doing business in China. Many firms must also agree to export a certain proportion of their production. These types of trade barriers are believed to have had a dampening effect on U.S. exports to China. Additionally, China has recently announced intentions to implement policies to promote the development of "pillar industries" (such as autos, aerospace, and electronics), which will likely result in import substitution measures and domestic content requirements that may restrict foreign access to these markets. Despite these restrictions, some U.S. industries (especially aircraft, energy, and telecommunications equipment) have done quite well in China, and project large future sales in China. The degree and scope of future trade and investment opportunities for U.S. firms are likely to be strongly linked to the reduction of Chinese trade and investment barriers in the near future.
The agreement by President Clinton and Chinese President Jiang Zemin to hold state visits sometime in 1997 and 1998 could lead to improvements in U.S.-China relations, especially if such issues as trade, weapons proliferation, human rights, and Taiwan are addressed, or if new high-level forums for discussing such issues are developed. Improved bilateral relations may lead Congress to extend permanent MFN status to China. It is likely that Congress will continue its attempts to influence U.S. policy towards China, including commercial issues, and will likely press the Administration to takes additional steps to pressure China into reducing trade and investment barriers, and providing greater IPR protection. Congress will also likely monitor the Administration's position on China's accession to the WTO.