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Monday, March 25, 2013

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 1981 to $536 billion in 2012. China is currently the United States’ second-largest trading partner, its third-largest export market, and its biggest source of imports. According to one estimate, China is currently a $250 billion market for U.S. firms (i.e., U.S. exports to China plus sales by U.S.-invested firms in China). China’s large population and booming economy have made it a large and growing market for U.S. exporters and investors. Many U.S. firms view participation in China’s market as critical to staying globally competitive. General Motors (GM), for example, which has invested heavily in China, sold more cars in China than in the United States from 2010 to 2012. In addition, U.S. imports of low-cost goods from China greatly benefit U.S. consumers, and U.S. firms that use China as the final point of assembly for their products, or use Chinese-made inputs for production in the United States, are able to lower costs and become more globally competitive. China is the largest foreign holder of U.S. Treasury securities (which totaled over $1.2 trillion at the end of 2012). China’s purchases of U.S. government debt help keep U.S. interest rates low.

Despite growing commercial ties, the bilateral economic relationship has become increasingly complex and often fraught with tension. From the U.S. perspective, many trade tensions stem from China’s incomplete transition to a free market economy. While China has significantly liberalized it’s economic and trade regimes over the past three decades, it continues to maintain, (or has recently imposed) a number state-directed policies that appear to distort trade and investment flows. Major areas of concern expressed by U.S. policymakers and stakeholders include China’s efforts to maintain an undervalued currency, its mixed record on implementing its World Trade Organization (WTO) obligations, its relatively poor record of protecting intellectual property rights (IPR), alleged widespread cyber espionage against U.S. firms, and its extensive use of industrial policies (such as financial support of state-owned firms, discriminatory government regulations, pressure on foreign-invested firms in China to transfer technology, and export restrictions on raw materials) to promote Chinese firms and sectors favored by the government. Many U.S. policymakers argue that such policies are harmful to U.S. economic interests and have contributed to U.S job losses. For example, one U.S. government study estimated that IPR infringement in China cost U.S. IPR-intensive firms $48 billion in 2009. Some U.S. policymakers have expressed concern that China’s large holdings of U.S. public debt could give it leverage against the United States.

Some Members of Congress advocate a more assertive U.S. trade policy towards China, such as increasing the number of dispute settlement cases brought against China in the WTO, where the United States has prevailed on a number of issues. During his State of the Union Address in January 2012, President Obama announced plans to create a new Trade Enforcement Unit “charged with investigating unfair trade practices in countries like China.” Some analysts caution that taking a more aggressive stance against China over its trade policies could induce it to retaliate against U.S. exports to, and investment in, China. They further contend that major economic disputes should be dealt with through established high-level bilateral dialogues, such as the Strategic & Economic Dialogue (S&ED) and the U.S.-China Joint Commission on Commerce and Trade (JCCT). Many trade observers contend that the United States should also continue to press China to rebalance its economic growth model by boosting domestic consumption and decreasing the country’s reliance on exports for its economic growth, which could significantly boost Chinese imports. This report provides an overview of U.S.-China trade ties and major issues.

Date of Report: March 13, 2013
Number of Pages: 51
Order Number: RL33536
Price: $29.95

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