Understanding the US-China Trade Relationship | US China Business Council
Trade relations between the United States and China have provided enormous benefits to both countries. But a growing U.S. trade deficit, China's regulation of. China and the United States simply cannot afford to be adversarial. The two countries are each other's largest trading partner, and have grown much of my life to enhancing relations between China and the United States. China's breathtaking economic growth and massive imbalances with the Many myths surround the economic relationship between the United States and China. United States (or other major countries) to more quickly change its policies.
Yet production, distribution, and exports have continued. Not only does domestic sales of pirated goods act as a barrier to US goods, China exports them to third country markets mainly Hong Kong, but also Southeast Asia, Eastern Europe and Latin America inflicting losses on American exporters to those markets as well. For its part, Beijing has pointed out that in the last year it closed 7 CD plants that violated copyright laws and confiscated hundreds of thousands of bootleg CDs.
It has also installed new government inspectors at CD factories. The trade associations that make up the IIPA use different methodologies to estimate losses to piracy in their respective markets. Most share a common defect however in that they assume that the number of units sold in China would be the same regardless of price; in other words they assume that the price elasticity of demand is zero, as illustrated in the top panel of Figure 3.
In this case industry losses are given by the rectangle EFGH, which the industry claims is A more conventional set of assumptions is shown in the lower panel of Figure 3. Here, demand has some negative price elasticity so that it is downward sloping. Supply is upward sloping rather than infinite as the IIPA assumes. In the initial case, the producer surplus the area above the supply curve below the price line is triangle IJK. If the price is increased because of royalty payments, the supply curve shifts back along the demand curve to the new high price and low quantity combination P2, Q2.
Producer surplus is the triangle LMN. The industry might argue that in this case, the supply does not really shift, rather protection of intellectual property rights in the form of royalties is like a tax, with the revenues going to the producing firms. In this case producer surplus would be the trapezoid LMRK. Unfortunately, the determination of the Clinton Administration to pursue its IPR agenda, and the apparent unwillingness of the Chinese government to shut down pirate production as distinct from signing agreements to respect IPR means that the likelihood of actual punitive sanctions being imposed appears to be higher than in past disputes.
Past history suggests that Chinese negotiators will engage in brinkmanship, waiting until the final possible moment before reaching any agreement. Yet the emphasis on enforcement, as distinct from reaching new agreements, increases the likelihood that sanctions may be imposed. Even then, though China often agrees to US conditions, its track record of effective enforcement belies its procedure of superficial compliance.
Its enforcement mechanisms are also less than required under the WTO both with respect to border measures and general procedures and remedies Subramanian, It would also move resolution of disputes from bilateral negotiations to an arguably less politicized multilateral setting.
Multilateral Issues While the US government has little direct influence on China's internal reforms, it has substantial ability to influence the terms on which China is integrated into global economic institutions, most notably the World Trade Organization WTO. The US and other countries are understandably cautious on this issue because of China's enormous size and the likely precedential effect that the terms of China's accession will have on the protocols of approximately 20 other economies in transition which wish to join the WTO.
In the case of China, foreigners have encountered significant difficulties in a lack of transparency in the application of trade restrictions, as well as non-uniform application of trade policy in different parts of China.
China–United States relations - Wikipedia
In these negotiations the US has tended to put more emphasis on obtaining access to the Chinese market this would be consistent with the US domestic political emphasis on exportswhile the EU has put more emphasis on securing liberal safeguard provisions to protect against imports from China. Ironically, the US insistence on market access which is, after all, trade expanding and welfare-enhancing has been criticized in China, while the EU's demands for safeguards which restrict trade and reduce welfare has received less opprobrium.
Beyond these fundamental issues, the main points of contention regarding China's application to join the WTO have been whether China will enter as a developed or developing country and thereby the length of the transitional period granted for bringing domestic practices into compliance with WTO obligations as well as the issue of trading rights and state trading monopolies and the subsidization of state-owned firms.
China has argued that it should be allowed to enter the WTO as a developing country, and China is a developing country on any measure of per capita income. The United States has argued, however, that significant parts of China are sufficiently developed that it would be folly to permit China the additional leeway granted developing countries. China's case is complicated by the fact that Taiwan has indicated that it is prepared to join the WTO as a developed country. The likely outcome will be to classify China as a developing country for some WTO obligations and a developed country for others.
China maintains state trading monopolies, and unless foreigners are freely allowed to import and export, concessions on tariffs and other impediments to trade would be meaningless.
US firms also argue that the "trade balancing requirement" of the current foreign exchange allocation system is in effect a nontariff barrier and a clear violation of the TRIMs agreement. With regard to market access, the United States has asked China to join the "zero for zero" group which eliminated tariffs on construction equipment, medical equipment, steel, beer, distilled spirits, pharmaceuticals, paper, toys, and furniture, and which greatly reduced tariffs on chemicals and electronics.
The European Union has requested that China bind industrial product tariffs at percent. Although neither demand is likely to be satisfied, China will undoubtedly increase market access as part of its WTO accession, and has signalled some willingness to do so as noted below. With regard to investment, foreign investors have to go through a protracted administrative approvals process, which is subject to corruption, and the US has requested a streamlining of this process.
The US has also insisted that China accept international standards on expropriation and compensation, and avail investors to international binding arbitration for settlement of disputes with the state Cheng, The situation in services is more complicated. China has resisted opening up its telecommunications services market to foreign providers on national security grounds. However, without a modern telecommunications system, concessions in other areas, such as banking, are less valuable.
Again, the most likely outcome is a highly detailed set of provisions specifying which forms of telecommunications are open to foreign participation. In the insurance negotiation, the Chinese proposal is excessively vague.
This has led some foreign observers to wonder if the timidity exhibited by the Chinese negotiators is not evidence of the great deal of uncertainty surrounding policy in the post-Deng era, and the unwillingness of the Chinese negotiators to "stick their necks out" until some of this uncertainty is clarified. For these reasons most observers do not foresee a rapid resolution of the China WTO issue. The major achievements of APEC thus far has been the holding of the first pan-Asian meeting of heads of government ironically held in the US in November and the declaration a year later of a commitment by the leaders to free trade and investment in the Asia Pacific region.
Concrete progress toward this goal has been less evident, however, and observers looked to the Osaka meeting to see if APEC would develop into more than a talking shop. Were the APEC countries to actually implement free trade and investment in the region, the results could be quite impressive. One recent study concluded that the static income gains to China of such an agreement would be 2.
Interestingly China is shown to experience an income gain even if it were excluded from any such arrangement-the impact on the other Asian economies would be sufficiently large that China itself would gain through the spillover from the others' income boost.
Countries brought to the table "downpayments" or "deliverables" intended to establish the credibility of the liberalization process to the Osaka meeting.
US-China Economic Relations
While some countries, notably Japan, agreed to accelerate their scheduled Uruguay Round tariff cuts, other countries, including the US, brought little to the table. China tabled a package of tariff reductions, though given the questions of trading rights noted above its significance was questionable. The proposal included a commitment to cut tariffs on 4, products and eliminate quotas and licensing requirements on others. Shanghai and other cities would be designated "pilot bases" for joint ventures oriented towards foreign trade.
On April 1st China cut the average import tariff from Tariff cuts were the greatest on raw materials and high-tech items that China needs to import in order to sustain its economic growth. Tariff reductions on consumer goods and processed manufactured goods were much smaller. For example, tariffs on cars, which China protests is still an infant industry in need of protection, were only reduced from percent to percent.
Conclusions Integrating large, rapidly emerging countries into the international order is always problematic. In the case of China, this is made more difficult by differences in political values, and its large bilateral surplus with the US which acts as a political lightning rod. As a consequence, one must expect that China will be involved in intermittent trade conflict with the US and others for the foreseeable future.
Moreover, due to China's size, the inevitable mishaps that may accompany the process of reform could well have international ramifications. From this perspective it becomes highly important that China be brought into international bodies such as the WTO to try to contain and intermediate these prospective frictions. At the same time, China must assume the obligations that come with membership-otherwise China's entry may eviscerate these groups. These issues require hard bargaining, and given the uncertainty surrounding the future political leadership in Beijing both Chinese and foreign negotiators may have a tendency to be cautious.
This suggests that a prolonged period of transition may be in the offing before China is firmly integrated into international economic institutions on a more permanent and stable basis. Four actions could be taken in the US to facilitate this process. First, the US needs to recognize that China is not the source of its economic problems-although Chinese economic policy leaves much to be desired, trade with China is not an important source of job displacement in the US.
If the US is worried about the trade deficit, it should first reduce its own government budget deficit to close the saving-investment gap. With respect to trade at the industry level, Chinese imports largely displace third country imports in light manufacturing industries, not domestic production. When the compensation premium on export-related employment is considered, total worker compensation is higher because of trade with China than it would have been in its absence.
Indeed, self-imposed US export disincentives probably have a bigger impact on US exports to China than Chinese policies have. Second, the US needs to find some way of extricating itself from the annual Jackson-Vanik certification process which has become increasingly unproductive. One possibility is to scrap Jackson-Vanik altogether, though this is unlikely. A more feasible approach might be to certify China as a market economy at the time of its entry into the WTO.
This would then obviate the need for annual recertification. A third possibility would be to certify that China does not restrict emigration, again obviating the underlying legal requirement for Jackson-Vanik certification. Third, the US needs to be more careful defining national interests and resisting political capture by special interests. The USTR, the negotiating arm of US trade policy, does not have the analytical capability to ascertain the true impact of various foreign practices.
It would be desirable to establish a formal interagency group including officials from the Council of Economic Advisers, the Office of Management and Budget, and the Treasury which tend to have far stronger analytical capabilities than USTR, to scrutinize industry claims and develop some sense of priorities in setting the trade policy agenda.
Lastly, the US needs to do a better job of cultivating relationships with sub-central government officials. In cases such as the IPR dispute, the central government signs agreements that it is either unwilling or unable to carry out. The US needs to do a better job of identifying key local officials who can get the job done. A reorientation of engagement to the local level could also prove quite useful if political power devolves in a less centralized way in the future.
One consequence of these difficulties is that growth may be overstated. Inflation was officially The basket of goods and their weights in the price index are not reported and apparently subject to change, and the sampling techniques used to assemble the underlying data is poor.
The industrial and producer price deflators diverge significantly afterand an unofficial recalculation puts real GDP growth at 9. Purchasing power adjusted income figures take into account differences in national price levels, especially for non-traded goods.
These figures are superior to those based on converting different national incomes to a common currency using market exchange rates which do not capture the large international differences in nontraded prices.
LardyTable 1. Note that the subtotals for the high and low shares are calculated on the assumption that the particular unit experiences high low growth while the rest of the world experiences low high growth. Thus Table 1 is not based on three scenarios, but rather 41 scenarios-the medium scenario, and one for each entry into the high and low columns.
See Noland for further details on the underlying scenarios and the derivation of the projections. Ironically, the current intellectual property rights disputes with between the US and China can at least in part be attributed to Taiwanese entrepreneurs moving their pirating factories to mainland China.
There is considerable academic debate in the United States as to whether this indeed has been occurring. See Lawrence and Slaughter and Leamer for opposing views. The term foreign affiliate refers to any Chinese firm in which a US parent company or individual owned more than 10 percent of the voting securities or the equivalent.
A majority-owned affiliate is a Chinese firm in which US individuals or parent companies collectively owned more than 50 percent of voting securities or the equivalent. In the case of China, majority-owned affiliates account for most of assets, sales, earnings, employment, and compensation.
The US-China Economic Relationship
Some argue that corruption, at least partly a function of the incomplete nature of China's reforms, affects both the path of future reforms and makes conflicts that arise more difficult to resolve. China was ranked 50th out of 54 countries in the corruption perception index published by Transparency International.
The US ranked 15th. The one notable exception to the pattern of trade conflict driven by the particularistic demands of US special interests is the US Treasury's condemnation of Chinese exchange rate practices. Beginning in May and four times since, the US Treasury has cited China for manipulating its currency "to prevent balance of payments adjustment and gain unfair advantage" under section of the Trade Act.
A positive interpretation of this would be action on the exchange rate could forestall more politically damaging sectoral trade disputes which could arise from exchange rate misalignment. Again, see Noland for details of this estimation. Deng Xiaoping graciously offered to permit 10 million Chinese to emigrate to the United States, in order to prove there was no restriction on emigration.
As a point of reference, the Immigration and Naturalization Service only allows 20, immigrants from any given country each year, although family members, political refugees, and some others may be exempted from this restriction. The vote in the House of Representatives was to 0, and the tally in the Senate was 97 to 1.
The sole Senator voting against the resolution had previously announced that he would not stand for reelection, and reportedly has two sons doing business in Shanghai. A recent public opinion survey found that both elites and the general public believe by substantial majorities that the US has vital national interests at stake in China Rielly, However, China's ranking was in the lowest quartile of countries, below the EU, Japan, and Russia, and just above the Cedras dictatorship in power in Haiti at the time of the poll.
In a widely publicized speech in May Dole argued that "denying MFN would not free a single dissident, halt a single missile sale, prevent a single threat to Taiwan or save a single innocent Chinese life. Admittedly the Uruguay Round deal was completed under the assumption that Chinese textile and apparel exports to the US would remain constrained under the bilateral quota system. This sort of problem is not limited to the US.
In April the EU announced that it was deducting 9. This discussion follows Richardson Two problems arise though, in the application of this method. The first is an index number problem. In the discrete time application of Equation 4the values of the share weights sij may change over time.
Use of initial year weights the Laspeyres index will tend to underestimate hypothetical export growth, while the use of terminal year weights the Paasche index will tend to overestimate it. A continuous time Divisia index would be preferable to either. The second problem is that while CMS analysis is typically performed on value share data, it is quantity share that will vary directly with competitiveness. In this application US production data was obtained from the Annual Survey of Manufacturers, and deflated to December dollars using price indices from the Bureau of Labor Statistics.
Chinese and world imports were obtained from the Bureau of the Census, and deflated to dollars using import and export indices also from the Bureau of Labor Statistics. US consumption was then calculated as production plus imports minus exports. CMS weights were calculated by taking the geometric means of initial and terminal year weights, approximating the Divisia index. These figures should not be compared to the trade balance-they are measuring something conceptually different.
The Omnibus Trade and Competitiveness Act of gives the US the ability to conduct Special investigations and to unilaterally impose tariffs on countries found to be violating intellectual property. The presumption in this discussion is that China ought to adhere to the international norms. It should be noted however, that these norms by and large reflect the interests of intellectual property producers-not consumers. There is little consensus in the economics profession as to the optimal regime from a global welfare standpoint, and it is even less evident that the status quo is optimal for all countries.
To make this concrete, it may be in a low income country's interests to permit the copying of pharmeceuticals if this would greatly reduce the cost of medicines to consumers. More generally, it may be in the interests of a low income, net intellectual property consuming country to try to avoid the provision of intellectual property rights while in a catch-up phase.
According to the Brussels-based International Federation of the Phonographic Industry IFPIChina has increased CD production capacity to around million units, though the domestic market can only absorb around 5 million units annually. The International Intellectual Property Alliance IIPAa Washington based industry lobby, estimates that China has more than 29 factories with a combined annual production capability of around million CDs yet domestic consumption is only million CDs a year.
In both cases, the estimated domestic demand of CDs appears quite low-implying an annual demand of 1 CD for roughly every people. A higher estimate of domestic demand would push down the estimates of pirated exports. Moreover, it should be noted that this loss calculation is for all foriegn producers-estimates of losses suffered by US producers would be even smaller.
Lastly, it should be emphasized that this calculation is highly speculative and is presented for heuristic purposes only.U.S.-China Relations: Three Things to Watch
A large academic literature is devoted to examining the characteristics of industries that successfully lobby for import protection or export assistance. On the import side, successful lobbying appears to be strongly associated with high seller concentration which reduces organizing costs and free rider problems and low buyer concentration which conversely inhibits the development of opposing lobbies. Success also appears to be positively correlated with employment of high-skill labor.
One can only speculate as to why the IPR industry would be so successful in pressing its case. One argument is that the Administration felt a need to compensate the entertainment industry for the less than satisfactory outcome from its standpoint in the Uruguay Round. Others point to the importance of the industry in Democratic Party fund-raising activities. Moreover, both the entertainment and computer industries are concentrated in California, a politically critical state for the Democrats.
However, the IPR industries appear to have been as successful in pressing their case in the Bush Administration, casting some doubt on both these explanations. The recently announced retaliation list appears to depart from previous practice of trying to maximize the impact on politically influential groups in the target country while minimizing the impact on US consumers, while trying to avoid conflating market-opening and domestic protection-that is where possible they have tried to avoid import-sensitive products.
The predominance of textiles and apparel on the list may set an unfortunate precedent for the opportunistic use of sanctions in the future. CITA, the interagency group on textiles and apparel protection with a reputation for being completely captured by the domestic industry, was reportedly very involved in the discussions and wanted the retaliation list to include nothing but textiles and apparel. China's record on other issues suggests that there is a gap between what it will agree to under pressure, and its compliance with those commitments.
In the late s evidence surfaced that Chinese exports to the US were produced in prison-run factories. The two countries signed a memorandum of understanding inunder which the Chinese agreed to take steps to halt any exports of goods produced by prison labor.
In order to ensure proper enforcement, the Chinese further agreed to allow a US Customs official, based in Beijing, to conduct routine inspections of Chinese facilities suspected of using prison labor. Furthermore, following the deterioration of US-China relations inChina suspended inspections and did not allow a Customs official visit for a full year. It also does not have in place a number of enforcement mechanisms required under TRIPs. The US also faces a legal issue on the apparent conflict between US application of the WTO to China and the Jackson-Vanik amendment which inhibits the extension of unconditional MFN treatment to nonmarket economy countries which restrict emigration.
Although USTR maintains that only an explicit change in the law would resolve the issue, many legal observers in the US believe that this conflict can be finessed when the time comes. Under current practices, foreign-funded enterprises can only export goods produced by themselves, and import equipment and raw materials needed for their own production. The ban was renewed a number of times, lasting for over 60 years. Morgan and Andrew Carnegie, sought to provide the American capital and management that would generate a rapid industrialization of China.
It started building the Hankow-Canton Railroad, to link central and southern China. It only managed to finish 30 miles of line.
Americans soon grew disillusioned, and sold out to a rival Belgian syndicate. Standard Oil did succeed in selling kerosene to the China market, but few others made a profit. Boxer Rebellion US troops in China during the Boxer Rebellion in Ina movement of Chinese nationalists calling themselves the Society of Right and Harmonious Fists started a violent revolt in China, referred to by Westerners as the Boxer Rebellionagainst foreign influence in trade, politics, religion, and technology.
The campaigns took place from November to September 7,during the final years of Manchu rule in China under the Qing dynasty. The insurgents attacked foreigners, who were building railroads and violating Feng shuiand Christianswho were held responsible for the foreign domination of China.
Diplomats, foreign civilians, soldiers, and Chinese Christians were besieged during the Siege of the International Legations for 55 days. The multinational forces were initially defeated by a Chinese Muslim army at the Battle of Langfangbut the second attempt in the Gaselee Expedition was successful due to internal rivalries among the Chinese forces.
Marines fight rebellious Boxers outside Beijing Legation Quarter Copy of painting by Sergeant John Clymer. The Chinese government was forced to indemnify the victims and make many additional concessions. Subsequent reforms implemented after the rebellion contributed to the end of the Qing dynasty and the establishment of the modern Chinese Republic.
The United States played a secondary but significant role in suppressing the Boxer Rebellion, largely due to the presence of US ships and troops deployed in the Philippines since the American conquest of the Spanish—American and Philippine—American War. The Chinese paid indemnities to each of the powers. A number of schools were established in China, such as Tsinghua College in Peking. They supported missionaries inmore than inand in By they opened 16 American universities, six medical schools, and four theology schools, together with middle schools and a large number of elementary schools.
The number of converts was not large, but the educational influence was dramatic. Punch Aug 23, by J. Pughe In the s the major world powers FranceBritainGermanyJapanand Russia began carving out spheres of influence for themselves in China, which was then under the Qing dynasty.
The United States demanded this practice to end so that all nations could trade on an equal footing. Secretary of State John Hay sent diplomatic letters to these nations, asking them to guarantee the territorial and administrative integrity of China and to not interfere with the free use of treaty ports within their respective spheres of influence. Hay took this as acceptance of his proposal, which came to be known as the Open Door Policy.
Japan also presented a further challenge to the policy with its Twenty-One Demands in made on the then- Republic of China. Japan also made secret treaties with the Allied Powers promising Japan the German territories in China.
InJapan invaded and occupied Manchuria. The United States along with other countries condemned the action, leading to U. China was reunified by a single governmentled by the Kuomintang KMT in Buckwhose Nobel lecture was titled The Chinese Novel. They discovered the demand for Western education was much stronger, and much more elite, than the demand for Christianity. Programs were set up to fund Chinese students In American colleges. Rooseveltand Winston Churchill at the Cairo Conference in A series of Neutrality Acts had been passed in the US with the support of isolationists who forbade American aid to countries at war.
Because the Second Sino-Japanese War was undeclared, however, Roosevelt denied that a state of war existed in China and proceeded to send aid to Chiang. American public sympathy for the Chinese was aroused by reports from missionaries, novelists such as Pearl S.