U.S.-China Trade Relations: Entering a New Phase of Greater Accountability and Enforcement, 2006

Thirty years ago, China was a nation mostly closed to international commerce. Today, it is the world’s third largest trading power. China’s emergence over this period as a major international player has not only redefined the global trading system, but also has far-reaching economic and political impact on China, the United States, East Asia and the world.
China’s integration into the global economy and progressive embrace of market principles have been encouraged by more than 25 years of U.S. political and economic engagement, pursued on a largely bipartisan basis across administrations. These developments have helped broaden and deepen relationships between the United States and China at all levels, to the benefit of both countries. But they have also caused some friction.

The trade relationship between our two countries has become increasingly central to the economies of both our countries. China’s economy has been growing at roughly ten percent a year for more than two decades, and its growth has been closely tied to the open trade and investment regimes of the major economies of the world. Exports account for 40 percent of China’s gross domestic product (GDP), and China has depended on the growth of its export sector to spur modernization of its economy and support improved standards of living. The World Bank estimates that during the past two decades (1980s and 1990s), nearly 400 million people in China have been lifted out of poverty. According to Chinese data, the United States market has directly accounted for 22 percent of China’s phenomenal export growth over the last twenty years.

The United States has also derived certain benefits from the trade relationship. American consumers now have access to a wider variety of less costly goods, and low-cost consumer and industrial goods from China have helped spur U.S. economic growth while keeping a check on inflation. Together, the United States and China have accounted for roughly half of the economic growth globally in the past four years.

American manufacturers, service providers, and farmers continue to eye China’s increasingly fast growing middle class and new businesses as potential consumers of U.S. products, ranging from capital equipment to financial services to high-quality and efficiently produced brand name and specialty consumer products, services, agricultural products, and technology. Indeed, since 2001, U.S. exports to China have grown five times faster than they have to the rest of the world, and China has gone from being the 9th to the 4th biggest export market for the United States. America’s exports to China increased by an impressive 20% in 2005, building on 22% growth in 2004 and making China our fastest growing export market among our major trading partners. Market forces continue to drive broader and deeper economic ties between our two countries.

That said, the enormous scope and scale of the changes that have occurred in China’s trading posture and in our bilateral trade relationship pose continual challenges. In particular, there is concern that the U.S.-China trade relationship lacks balance in opportunity, as well as equity and durability, with China’s focus on export growth and developing domestic industries not being matched by a comparable focus on fulfilling market opening commitments and on the protection of intellectual property and internationally recognized labor rights. Specific U.S. concerns

include: continued Chinese barriers to some U.S. exports; failure to protect intellectual property rights; failure to protect labor rights and enforce labor laws and standards; unreported and extensive government subsidies and preferences for its own industries; environmental concerns; spotty compliance with some international trade rules; and a large and growing imbalance in our bilateral trade flows, resulting in a trade deficit of almost $202 billion in 2005. Chinese barriers to U.S. exports that contribute to this deficit and appear inconsistent with China’s multilateral and bilateral commitments have a corrosive effect on political support for the bilateral trade relationship. Absent tangible evidence that China is acting responsibly with respect to these issues, popular support for a twenty-five-year-old trade policy of constructive economic engagement with China could be in danger, with potentially damaging consequences for both countries.

China’s emergence has also created opportunities and challenges for the Asia Pacific region. China has become both the largest single goods export market and the largest single supplier of imports for developing countries in Asia, helping to spur broader regional growth. At the same time, China has emerged as a tough competitor for third countries that traditionally have been major suppliers to the United States. Indeed, while our trade deficit has widened with China, it has narrowed with other Asian trading partners. China’s share of U.S. imports has grown from 5.8 percent to 14.6 percent over the past 11 years, while the share of the U.S. global trade deficit represented by the Asia Pacific Rim as a whole (including China) has actually fallen from 57% in 1999 to 43% in 2005. Moreover, China is competing with these Asian neighbors not only for sales to the United States, but also for foreign direct investment.

China’s ascendancy as a major international trading partner brings with it certain responsibilities for the maintenance of the multilateral, global trading system. As the size of its market and trade flows have increased, China’s constructive participation is increasingly critical to the international regimes governing trade practices – regimes that foster free and open markets, a level playing field, and transparent regulations.
Given the importance of our trade relationship with China and the challenges that confront us in that relationship, it is an appropriate time to review U.S. trade policies toward China. To that end, the United States Trade Representative (USTR) has led an interagency “top-to-bottom” review of our China trade policy, drawing upon input received from Congressional hearings; Government Accountability Office (GAO) reports; discussions with industry associations; and written submissions and oral testimony on China’s compliance with its World Trade Organization (WTO) obligations, provided pursuant to notice in the Federal Register.

This review focused on:

(i) Identifying the core principles and key objectives of our trade policy with China;
1 This is not to say that the growth of U.S. imports from China is a zero-sum proposition for the Asian region. To a large extent, these statistics reflect China’s growing role as final assembler of components and products manufactured in other economies in Asia. Though U.S. trading partners such as Malaysia, Indonesia and the Philippines have seen their relative shares of direct U.S. imports decrease, they have seen rapid growth in exports of components to China that are re-exported as finished goods to the United States and other destinations.

(ii) Assessing the current status and establishing priority goals for each key objective; and

(iii) Identifying specific action items that will help us achieve our priority goals.
This report summarizes the results of the review. It concludes that the United States is entering an important new phase in our trade relationship with China. For the past 20 years, U.S. trade policy was focused principally on encouraging market-based reforms in China and bringing China into the international trading system. Now, as we near the end of China’s transition period as a new WTO member, the report recommends that U.S. trade resources and priorities should be readjusted to meet new challenges.
Specifically, in addition to strengthening our current focus on China’s WTO compliance and adherence to international norms, this report urges that more focus be put on ensuring that: (1) the bilateral trade relationship offers more balanced opportunities and is equitable and durable; (2) U.S. trade policymaking is more proactive and informed by more comprehensive information regarding China’s economic trends and developments and stronger coordination within the Executive branch and between the Executive and Congressional branches; (3) China participates more fully in the global trading system as a responsible trading partner; and (4) the United States remains an active and influential economic and trading power in the Asia Pacific region.

Based on the results of the review, the Administration will take a series of actions to help ensure that we are best positioned to meet our key China trade objectives. The list below includes initial steps we will be taking. Additional action items will be developed and implemented in consultation with Congress and other stakeholders to ensure meaningful progress in achieving these key objectives.

• Expanding USTR trade enforcement capacity to better ensure China’s compliance with trade obligations, including through establishment of a China Enforcement Task Force at USTR, to be headed by a Chief Counsel for China Trade Enforcement;

• Expanding USTR capability to obtain and apply comprehensive, forward-looking information regarding China’s trade regime and practices to U.S. trade policy formulation and implementation, by: (1) adding personnel to USTR’s China office to coordinate collection and integration of information on current and potential China trade issues from other U.S. government agencies and other sources; and (2) establishing an Advisory Committee for Trade Policy and Negotiation (ACTPN) China Task Force to provide strategic advice and recommendations related to U.S.-China trade policy;

• Expanding U.S. trade policy and negotiating capacity in Beijing and other resources in China to more effectively pursue top priority issues, especially the protection of intellectual property rights;

• Increasing coordination with other trading partners on China trade issues of common interest, such as enforcement of intellectual property rights;

• Deepening and strengthening trade relations with other Asian economies, and within the Asia-Pacific Economic Cooperation (APEC) forum, to maintain and enhance U.S. commercial relationships in the region;

• Increasing the focus on regulatory reform in China, including through initiating a high-level dialogue on steel with China under the U.S.-China Joint Commission on Commerce and Trade (JCCT), deepening and expanding the State Department’s high-level dialogue with China’s economic planners regarding structural reform, launching an initiative to evaluate, assess and engage on China’s subsidies issues, expanding initiatives led by the U.S. Department of Agriculture (USDA) to improve China’s transparency and compliance with its sanitary and phytosanitary (SPS) obligations under the WTO, and focusing intensive interagency efforts to address China’s development of standards and of an anti-monopoly law;

• Increasing effectiveness of high-level meetings with China’s leaders, including through holding annual, elevated meetings of the JCCT prior to presidential-level meetings where possible and conducting mid-year reviews of goals and progress under the JCCT at the Vice Minister/Deputy level;

• Strengthening and expanding US-China dialogue on numerous other specific issues of significance to the global trading system and on bilateral trade issues that pose potential problems for the relationship, including, e.g., China’s participation in global institutions; market access and standards issues related to telecommunications, financial services, healthcare and direct sales; subsidies and structural issues, especially in the steel industry; standards; labor; environmental protection; and transparency and the rule of law;

• Strengthening U.S. government interagency coordination, including through monthly review, by the Trade Policy Review Group and Trade Policy Staff Committee, of strategies and progress made in achieving the key objectives identified in this report; and

• Strengthening the Executive-Congressional partnership on China trade, through initiation by USTR of a program of regular briefings for Congressional members and staff, to update them on progress in pursuing the objectives outlined in this report and to ensure that the Administration’s China trade policy is informed by Congressional priorities.

Click here for the full report.