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Wednesday, June 30, 2010

China-U.S. Trade Issues

Wayne M. Morrison
Specialist in Asian Trade and Finance

U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.- China trade rose from $5 billion in 1980 to $409 billion in 2008. Although commercial ties were sharply affected by the global economic crisis in 2009 (total U.S. trade with China dropped by 10.5% to $366 billion), China remained the second-largest U.S. trading partner, its third-largest export market, and its biggest source of imports. With a large population and a rapidly expanding economy, China is a huge market for U.S. exporters and investors. However, bilateral economic relations have become strained over a number of issues, including large U.S. annual trade deficits with China (the deficit was $266 billion in 2008, but fell to $227 billion in 2009), China's mixed record on implementing its World Trade Organization (WTO) commitments, its resistance to international calls to reform its pegged (and undervalued) currency system, its relatively poor record on enforcing intellectual property rights (IPR), and its extensive use of industrial policies and discriminatory government procurement policies (such as proposed "indigenous innovation" certification regulations) to promote domestic Chinese firms over foreign companies. Some observers contend that the business climate in China has worsened over the past few years. 

Further complicating the U.S.-China bilateral relationship is the growing level of economic integration and mutual commercial dependency between to two economies. U.S. economic ties with China benefit many U.S. groups, such as consumers (through low-cost imports from China) and certain business interests (such as firms who use China as a center for their supply chain operations to assemble inputs into finished products). However, other U.S. groups, primarily U.S. domestic firms and workers that compete with low-cost imported Chinese products, see growing economic ties as damaging to U.S. economic interests, largely because of "unfair" Chinese trading practices. Such groups have urged the U.S. government to take a more assertive trade policy to force China to eliminate unfair economic policies in order to help achieve a level trading field for U.S. firms and workers. Other analysts counter that, although many trade problems exist, the overall economic relationship benefits both sides, and warn that unilateral trade action by either side would harm both economies. They support using high-level talks, such as the Strategic and Economic Dialogue (S&ED), to address long-term bilateral and global economic issues. 

Another example of the complex bilateral economic relationship is China's large holdings of U.S. Treasury securities, which totaled $900 billion as of April 2010, making it the largest foreign holder of such securities. Some U.S. analysts welcome China's purchases of U.S. debt, which enable the federal government to fund its budget deficit and help to keep U.S. interest rates relatively low. Others have expressed concerns that China's large holdings of U.S. debt could give it significant leverage over the United States. For China, a growing and stable U.S. economy is an important component to its own economic growth. Chinese officials have expressed concerns over the "safety" of their U.S. debt holdings. 

Many economists contend that global imbalances, particularly in the United States and China, were a major factor behind the global financial crisis. Until very recently, U.S. domestic savings were very low relative to its investment needs, consumption was the dominant source of economic growth, and the United States had to borrow heavily from abroad, including from China, which helped fuel U.S. demand for imports. China, until recently, had a very high savings rate, a low rate of consumption, and was heavily dependent on its trade sector for economic growth. Both countries contend that they are now seeking to implement policies to rebalance the sources of their economic growth.

Date of Report: June 21, 2010
Number of Pages: 43
Order Number: RL33536
Price: $29.95

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