INSTITUTE FOR INTERNATIONAL ECONOMICS
Working Paper 96-6
US-CHINA ECONOMIC RELATIONS
Paper prepared for the conference on Domestic Factors in US-China
Relations, Peking University 24-25 June 1996. I would like to thank Chi Zhang and Dan
Magder for research assistance, and Geoff Carliner, Kim Elliott, Jeff Schott, and
participants at the workshop at the Fairbank Center, Harvard University for helpful
Today the US and China are probably the world's two largest economies (Table 1). Relations between these two countries are crucial to the
future development of the world economy. Unfortunately economic relations between the two
countries are troubled. China is large, rapidly growing, and still in the process of
devising and implementing fundamental economic reforms. Despite its size and importance to
the global economy, it is still not a member of the World Trade Organization (WTO), the
primary multilateral institution for managing the world trade system. As a consequence,
trade disputes between China and the US are resolved almost exclusively in public,
acrimonious bilateral negotiations.
This pattern exposes both the strengths and the weaknesses of the US position. By
pressing China bilaterally, and using the leverage of access to its large and lucrative
market, the US can largely set the agenda without concern for third party interests. At
the same time, US trade policymaking is a complainant driven system prone to capture by
special interests. Consequently the US can set the agenda, but the agenda may reflect the
very particularistic demands of narrow groups and detract from the achievement of broader
This paper reviews US-China economic relations and reaches a number of major
- China's large bilateral surplus acts as a political lightning rod in the US and
contributes to trade tensions, regardless of the economic merits of these political
- The impact of the rapid growth of bilateral trade on the US economy is positive, though
probably not particularly large: imports from China have largely displaced imports from
third countries, not domestic production, and exports have been higher than expected as
- In the recent dispute over intellectual property rights (IPR) the industry loss claims
appear greatly exaggerated,
- Though self-inflicted export disincentives probably do more to discourage US exports
than Chinese policies do.
Based on this analysis, the paper makes several recommendations for US policy:
- The US needs to get its own house in order, reducing its budget deficit (so as to reduce
the trade deficit), and reform both disincentives to export, and the way in which the
trade policy agenda is set,
- The annual debate over most favored nation (MFN) status is counterproductive and the
Jackson-Vanik amendment should either be repealed or circumvented,
- And given the uncertainty surrounding the future Chinese regime, the US government
should consider cultivating contacts outside the central government.
OVERVIEW OF CHINA'S ECONOMY
Two fundamental points must be kept in mind when analyzing US-China economic relations.
First, China is an incompletely reformed centrally planned economy. Agriculture has been
decollectivized, the management of state-controlled firms has been decentralized, and
property rights reforms have facilitated an explosion of businesses outside central
government control, though most observers would conclude that China still lacks an
effective system of guaranteeing property rights. Goods and factor markets have been
liberalized to a significant extent: most prices are now determined by markets, state
control of labor markets has been reduced, and previously repressed capital markets have
experienced rapid, if uneven, development. China nevertheless retains a significant
state-owned sector, and problems associated with lack of reform in this sector, combined
with the relatively primitive nature of macroeconomic policy instruments, has lead to a
stop-start pattern of growth and problems with inflation. Moreover, a legacy of state
control of the economy is the willingness of the state to intervene in what might be
described as an erratic manner.
A few examples should suffice. With respect to commodity markets, China is the world's
largest importer of sugar and cooking oil, and the number of commodities for which it is
the world largest importer may soon include wheat, corn, barley and cotton as China grows
and incomes rise. In April 1995 China reimposed import quotas on sugar, vegetable oil,
grain, and cotton; China is sufficiently large that actions of this sort can wreak havoc
on global markets. Internally, China has opened commodity futures markets, but the pricing
of futures can be rendered impossible if the government remains willing to undertake
significant price controls.
Examples from the financial markets include the (eventually resolved) dispute over
Citic Shanghai's refusal to pay $40 million in debts owed to fourteen brokers on the
London Metals Exchange, and the same firm's refusal to comply with an unfavorable arbitral
ruling in the Revpower case. On 23 February 1995, on the same day Nick Leeson was blowing
up Barings, Shanghai International lost something on the order of $100-120 million (the
proximate value of the firm) by trading 20 times the regulatory limit in government bond
futures. The government's response was in effect to erase the final 8 minutes of trading.
The second fundamental point is that China is huge. The inevitable bumps along the way
in the reform process that the rest of the world could largely ignore in the case of a
smaller economy cannot be overlooked in the case of China. North Korea has defaulted on
debts and has tried to pay off creditors with fish instead of cash, but North Korea's
total merchandise trade is only around $2 billion and the world can easily absorb erratic
economic policy by a marginal participant in the world economy. China is not North Korea.
China's sheer size means that the rest of the world has to take developments in China very
seriously, if for no other reason than developments in China are the single biggest
potential threat to the stability of the international economy. Just imagine a
Mexican-style crisis in China, or a crisis and capital flight from Hong Kong.
Since the inception of economic reforms in 1979, China's economic performance has been
nothing short of spectacular. Between 1979 and 1995, China's real growth rate has averaged
more than 9.5 percent annually . Yet difficulties in the development of effective tools of
macroeconomic management have lead to a stop-start pattern of growth and problems with
inflation. The time path of Chinese economic growth is subject to considerable
The level of output in China is likewise subject to considerable uncertainty, and
various attempts to measure the purchasing power adjusted level of GDP have generated a
wide range of estimates (Lardy, 1994, Table 1.3).2 Indeed,
the estimate of Chinese GDP per capita reported in the most widely cited source, the Penn
World Tables, changed by 40 percent in successive versions of the Tables. Thus any attempt
to put the size of the Chinese economy into international perspective is subject to
enormous uncertainty. With this caveat, an estimate of the Chinese share of world output
derived from purchasing power adjusted data reported by the United States Central
Intelligence Agency is reported in Table 1.3
As can be seen in the first column of Table 1, China accounted
for just under 9 percent of world output in 1993, making it the world's third largest
economy following the United States and Japan. The remaining columns show China's share
ten years hence under various scenarios.4 The Chinese
growth rate is subject to the greatest uncertainty due to questions about the character of
Chinese economic policy in the post-Deng era. The bottomline is that even under the slow
growth scenario, China clearly emerges as the world's second largest economy in the next
decade. This conclusion is further reinforced if the figures for Hong Kong's share of
output are added to China's.
China's participation in international trade also has grown rapidly during the period
of reform, and its share of world trade has risen from 0.6 percent in 1977 to 4.9 percent
in 1994, making it the world's 8th-largest trading nation. Chinese economic reforms not
only spurred an enormous growth in trade, but the reforms have transformed the commodity
composition as well, aligning China's pattern of trade more closely with its true pattern
of comparative advantage (Table 2). Between 1980 and 1994, the share
of exports accounted for by the light manufactures of SITC 8 rose from 16 percent to 47
percent. Similarly, imports of capital equipment (SITC 7) rose from 25 percent to 42
percent during this period.
In addition to its rapid emergence in goods markets, China has also become a major
player in international capital markets. China is now the leading developing country
destination for foreign direct investment. The stock of inward foreign direct investment
now exceeds $100 billion, though some of this is due to "roundtripping" as
Chinese investment is routed through Hong Kong to take advantage of the more favorable
treatment of foreign investors. Firms with foreign equity participation accounted for
two-thirds of the increase in Chinese exports in 1992 and 1993.
With regard to portfolio investment, external debt does not appear to be a problem:
World Bank figures estimate annual repayments on the order of $12-14 billion, well within
China's service capacity, though some private analysts claim the burden is higher. Much of
Chinese finance is intermediated through Hong Kong, however, and a crisis of confidence
surrounding the transfer of sovereignty or Chinese policy and administration in its
aftermath could greatly complicate the situation for China and the region as a whole.
China is a major recipient of multilateral and bilateral official lending. The US has
recently questioned whether China should continue to receive concessional finance through
the International Development Agency (IDA), the World Bank soft loan window. IDA funds
have accounted for about a quarter of China's $22 billion in World Bank loans since 1980,
and China has been receiving approximately $1 billion annually from IDA for the last
several years. The US appears to be isolated on this issue, though Japanese attitudes may
be changing in light of its dispute with China over nuclear testing.
Environmental issues are likely to play an increasingly prominent role in China's
economic relations. Already the US Exim Bank has refused to grant export finance to
participate in the Three Gorges Dam project because of environmental concerns. China is
also predicted to emerge as a major source of hydrocarbon emissions in the 21st century
due to its rapid growth and reliance on dirty coal for energy. If there were to be an
international tax on hydrocarbon emissions, it would presumably fall heavily on China. It
is not difficult to imagine China insisting on enhanced multilateral and bilateral
concessional financing or increased access to developed country markets as quid pro quos
for adherence to a strict anti-emissions regime.
US-CHINA ECONOMIC RELATIONS
The rapid integration of China into the global economy has posed particular problems
for high income countries, including United States. China has a rapidly growing aggregate
bilateral trade surplus with the US, even according to Chinese data, and even when the
miscounting of re-exports through Hong Kong are taken into account (Table
3). Nor can this growing Chinese surplus be explained away as a function of the
relocation of production from Hong Kong and Taiwan to China as was conceivable a few years
ago (Table 4).5 Differences in
political values, the growing bilateral imbalance, and the concentration of imports in
light manufactures all act as political lightning rods in the US.
As shown in Table 5, at the one digit SITC level US exports to
China in 1994 were concentrated in the machinery and transportation group ($5.1 billion),
followed by chemicals ($1.5 billion), and mining products ($1.2 billion). In terms of more
narrowly defined three digit SITC categories, exports were the greatest in aircraft ($1.9
billion), fertilizers ($944 million), cotton textile fibers ($648 million), and
telecommunications equipment ($563 million).
US imports from China were overwhelmingly concentrated in the broad miscellaneous
manufactures category (SITC 8 which includes footwear and apparel as well as a variety of
other light manufactures$24.2 billion), followed by machinery and transportation
equipment ($9.0 billion), and manufactured goods classified chiefly by material ($3.3
billion) which includes textiles, wood products, pottery etc. Chinese exports to the US
exceeded one billion dollars in ten more narrowly defined three digit SITC categories:
toys, games, and sporting goods ($5.5 billion), footwear ($5.3 billion), women and girls
coats ($2.0 billion), articles of apparel not elsewhere classified ($1.7 billion),
telecommunications equipment ($1.6 billion), luggage ($1.6 billion), radios ($1.4
billion), headgear ($1.2 billion), plastic products not classified elsewhere ($1.2
billion), and the three digit SITC miscellaneous manufactures category which includes
things like umbrellas, baskets, and brooms ($1.1 billion). These imports are almost wholly
labor-intensive manufactures, and economic theory suggests that this exerts downward
pressure on the wages of import-competing domestic low-skilled labor, if production in
such activities is actually carried out domestically.6
Table 6 lists the US industrial sectors of greatest dependence on
China in 1994, the most recent year for which comparable production and trade data were
available, using a different data set based on a different (Standard Industrial
Classification) scheme. With respect to exports, as shown in the top panel, the industrial
sector with the greatest dependence on exports to China was agricultural pesticides which
exported 40 percent of domestic production to China. It was followed in turn by phosphatic
fertilizers (33 percent), structural metal parts (16 percent), welding apparatus (14
percent), noncellulosic man-made fibers (12 percent), and vitreous plumbing fixtures (10
percent). The sectors listed in the upper panel of Table 4 might be
described as mostly chemicals and capital goods.
The import figures in the bottom panel of Table 6 are both
larger, and in a sense, more systematic. Sectors in which imports from China account for
more than half of domestic consumption include dolls (75 percent), rubber and plastic
footwear (66 percent), narrowly defined miscellaneous manufactures (which includes a
laundry list of items such as cigarette lighters, umbrellas, and wigs55 percent),
leather wearing apparel (53 percent), and leather gloves (51 percent), all of which are
simple light manufactures.
The Department of Commerce's 1993 survey of foreign direct investment provides a
considerable amount of detail on US investment in China. According to the survey, in 1993
US firms had 88 Chinese affiliates (65 of which were majority owned), with nearly $4
billion in assets which generated almost $3 billion in sales on which the affiliates
earned $120 million.7 These affiliates paid over $250
million in compensation to more than 37 thousand employees. Most of this activity was in
the petroleum sector, wholesale trade, machinery and chemicals sectors.
Unfortunately most of the data on intra-firm trade and the destination of sales is not
reported to avoid disclosure of data for individual firms. As a consequence it is
impossible to tell how much of affiliate output is exported back to the US, or conversely
what share of US exports to China are from parents to Chinese affiliates. What the data
that is reported indicates is that for majority owned affiliates, 20 percent of output is
sold to related parties, which is slightly lower than the average for US majority owned
affiliates worldwide (75 percent). In other words, intra-firm trade is probably somewhat
less important in the case of US trade with China than with other countries. Production by
majority owned affiliates is exported to third countries at a noticeably lower rate (16
percent) than the worldwide average (23 percent). The overall picture that emerges is for
a pattern of investment which is probably a bit more geared to serving the needs of the
host market, China, than is the case with other US direct investments around the world. A
corollary is that intra-firm trade is probably not a big contributor to the bilateral
US POLICY TOWARD CHINA
The outside world has limited abilities to affect the development of the Chinese
economythe outcomes of the major economic policy issues that China faces will
largely be determined internally. To give but one example: If the political leadership in
China began to fear that centrifugal forces were pulling the country apart, there might
well be a retrenchment of economic reform, and the Chinese government would become less
responsive to the interests of foreigners and to fulfilling international obligations. In
such circumstances there would probably not be a whole lot that foreigners could do to
reverse such a tendency.
Contrary to recent calls to "contain" China, the overarching goals of US
economic policy toward China are to promote political and economic liberalization within
China (which the Clinton Administration explicitly views as linked), integrate China into
global institutions, and pursue US commercial interests (which the Administration largely
identifies as exporters' interests). The US also has strategic and political goals (which
may at times conflict with economic interests) though there appears to be a lack of
consensus in the domestic foreign policy establishment about prioritizing among these
possibly conflicting goals as well as the effectiveness of alternative strategies and
tactics to achieve them in the post-Cold War world. Policy is also influenced by the
demands of a variety of domestic special interests (import competing sectors, exporters,
human rights activists etc.) with their own particular agendas. As a consequence, US
policy toward China is probably best regarded as a manifestation of competing interests in
which no single goal predominates, and special interest groups may hold sway on particular
issues. This sometimes gives the impression of an inconsistent policy, but to a certain
extent this is probably inherent in the structure of the US political system and the lack
of domestic consensus over goals, strategies and tactics in the post-Cold War world.
In the economic sphere, relations with China are played out in bilateral, regional, and
global fora, and involve both trade and financial issues. There is obviously
interrelationships between these different modalities, but for expository reasons, it is
probably simplest to consider them separately in turn.
The US government interacts with China bilaterally in two basic ways. The first is
proactively through US policies to encourage economic reform in China, and China's
responsible integration into the international economy. The Administration regards
technical assistance as the primary channel through which it can influence economic reform
in China (and by extension encourage political liberalization). Among the avenues of
technical assistance which have recently been created (or revitalized) has been the
US-China Joint Economic Committee led by the Treasury Department, with working groups on
financial reform and the foreign exchange system. The Securities and Exchange Commission
has a group that works on securities regulation, and the Treasury and the Federal Reserve
Board have a group to provide assistance on banking regulation and the implementation of
monetary policy. Private nongovernmental organizations (such as the American Bar
Association) also engage in institution building. The primary channel of economic
cooperation is private business trade and investment, though.
Similarly, bilateral intergovernmental relations are dominated by a second track of
reactive trade conflict, largely a function of China's rapid growth, partially reformed
economic system, and the complainant driven US trade policy making system.8
Noland (1996) presents evidence that indicates that bilateral trade conflict is most
closely associated with the magnitude of bilateral imbalances and the extent of
intra-industry trade.9 In light of China's large and
rapidly growing bilateral surplus with the US and the relative predominance of
interindustry trade over intraindustry trade in bilateral exchange, the
"fundamentals" are in place for highly contentious relations.
However, the potential for Sino-American economic conflict is likely to worsen. Table 7 reports the shares of US trade accounted for by different trade
partners, and projections of how these shares might change obtained by plugging the Table 1 figures, estimates of per capita income, measures of distance
and other factors into a gravity model of bilateral trade.10
As indicated in Table 7, China's share of US trade is likely to grow
significantly, and China may become the United States' fifth largest trade partner after
Canada, Mexico, Japan, and the European Union.
Most Favored Nation Status
Under the Jackson-Vanik Amendment to the Trade Act of 1974, most favored nation (MFN)
status can be extended to nonmarket economies only if the President grants a waiver
certifying that the country does not impede emigration. (The law was originally passed to
encourage the Soviet Union to permit the emigration of Soviet Jews.) China first gained
MFN status in the US market in 1980, and its annual renewal under Jackson-Vanik was
routine until the Tianamen Square incident of 1989.11
Since then the annual renewal has been a point of contention with a bipartisan
Congressional coalition of anticommunists, human rights proponents, and protectionists,
attempting to use the threat of non-renewal as leverage to encourage human rights,
discourage nuclear proliferation, promote open markets, and reduce the bilateral trade
imbalance. President Clinton exacerbated this tendency, first by criticizing
then-President Bush during the 1992 campaign, and then in 1993 by tying renewal of MFN
explicitly to immediate improvements in human rights in China. The Executive Order signed
by President Clinton in 1993 to extend MFN until 1994, included a laundry list of human
rights objectives as conditions for future renewal.
Relations between the two countries continued to be rocky in 1994: the Chinese
government cracked down on dissidents following a visit by Assistant Secretary of State
for Human Rights John Shattuck, and Secretary of State Warren Christopher was snubbed
during his Spring 1994 trip to China. Despite this, economists and business leaders
successfully argued that revoking China's MFN and the ensuing retaliation would only hurt
American exports while doing little or nothing for human rights. The Chinese, for their
part, made a number of superficial concessions on human rights while cultivating the
support US business. Despite an outcry from many Congressmen, human rights activists and
the press, the Administration decided to announce that China had met the minimum
requirements necessary for renewal.12 It also declared
that in the future it would delink MFN and non-trade issues. The Administration's adopted
the new line that encouraging China's economic liberalization and integration into the
world economy would be the best way to pursue US foreign policy objectives of
democratization, development and economic reforms in China (Economic Report of the
President, 1996). Although the renewal of MFN in 1994 was correct substantively, the
apparent climbdown from the earlier statements of explicit conditionality made the
President appear unsteady.
Relations subsequently worsened. Soon after the 1994 MFN renewal, the US designated
China as a priority foreign country under the Special 301 intellectual property rights
protection provision. In May 1995, the US Congress voted overwhelmingly to support the
admittance into the US of Taiwan's President Lee Teng-hui to receive an honorary degree at
his alma mater, Cornell University.13 The vote to admit
Lee was a reflection of both fundamental American values and the fact that while the US
public regards China as important, this is not translated into warm feelings.14
Over the next year relations between the two countries plunged to their lowest level in
recent memory. Several reports were released criticizing China's human rights policy; the
American public was particularly outraged when China imprisoned (but later released) human
rights activist Harry Wu, a US citizen. China also conducted large-scale military
exercises off the coast of Taiwan in an effort to intimidate voters before the island's
first democratic elections in which Lee Teng-hui scored a resounding victory. Evidence was
uncovered that Chinese firms had sold Pakistan magnetic rings that could be used to enrich
nuclear fuel which could be then used in the production of nuclear weapons, and were
involved in smuggling illegal weaponry into the US. And just as the intellectual property
rights (IPR) dispute was reemerging as a hot political issue, it was time to renew China's
MFN status for another year.
MFN renewal in 1995 passed with little fanfare, but as tension on the trade, human
rights, IPR and proliferation fronts increased, the debate over renewal in 1996 has become
yet another forum for addressing American concerns. As could be expected, the President
announced that he would certify China's MFN status for another year, and the
Administration has strenuously resisted Congressional efforts to link the 1996 MFN debate
with human rights, the IPR issue, and proliferation concerns. The USTR has made it clear
that it will deal with the IPR issue independently of the MFN renewal. And while failed
Republican Presidential candidate Pat Buchanan railed against the Chinese, Republican
Presidential nominee apparent Senator Bob Dole closed ranks with the President,
reaffirming his support for renewal of China's MFN status.15
Similarly others have long argued that China's MFN status should only be dependent on
substantive progress in meeting criteria of trade liberalization, transparency, and other
preconditions in China's effort to join the WTO. Even South Carolina Senator Ernest
Hollings, a long-time opponent of China's MFN status, announced that he would switch his
vote and support MFN extension on the grounds that the yearly Washington debate serves
only to increase tension and harm US-China relations without accomplishing anything
positive. Indeed, what is truly striking about the trade politics in the US is how MFN
policy has been driven by exporters and investors, not import-competing interests.16
Nevertheless, even if the issue of MFN did not exist, the US and China would continue
to have trade disputes. Historically, the focal point of trade tensions has been
protectionist demands by US light manufacturers. To cite one example, China's share of the
US bicycle market increased from 14.6 percent in 1993 to 23.7 percent in 1994, and in
April 1995 three American manufacturers filed an antidumping suit against China.17 The most important action has come in textiles and
apparel, however, where the historic inability of the US government to resist
protectionist demands, import surges from China, and Chinese evasion of legal textile and
apparel trade restrictions have combined to make this a major point of contention.
China circumvents its bilateral textile and apparel quotas, mainly by transshipping
products through third countries which are also covered by bilateral quotas. In other
words, the Chinese substitute their products for the unfulfilled quotas of third
countries. A US Customs Service study put the value of these transshipments at $2 billion.
The main transshipment points are the high wage locations of Hong Kong, Taiwan, Macau, and
Singapore. Textile and apparel imports from these four countries were $8.5 billion in
1993. In other words, the Treasury figure implies that nearly 25 percent were
A bilateral agreement on this issue was signed in January 1994. Government sources
indicate that the problem appears to be getting worse, however. According to the Customs
Service, there appears to be roughly $10 billion in Chinese textiles and apparel floating
around the world not properly accounted for. For example, Chinese customs officials
reported $13 billion in exports to 120 countries in 1992. But just eighty-one of these
countries alone reported $23.7 billion of imports from China in the same year. (MOFTEC
reports $7.7 billion in textile and apparel exports in 1992, making the discrepancy even
China reports $6.4 billion of textile and apparel exports to Hong Kong in 1992. Hong
Kong reports $8.6 billion in consumption imports (more than $1,000 per personan
enormous figure), and $9.7 billion in re-exports. Even allowing for high re-export
markups, these discrepancies are huge.
The US Customs Service found that half of the 36 fastest growing apparel suppliers to
the US market had no significant domestic production for export, but report a significant
increase in imports from China. Kenya, for example has recently experienced a 790 percent
growth rate in apparel imports from China, and a 212 percent growth in exports to the US.
Other countries, including Belize, the Czech Republic, Ecuador, and Qatar, exhibit similar
triple-digit growth rates. All in all, the Customs Service estimates that at least $200
million of illegally transshipped apparels is coming into the US through these countries.
Transshipping is currently subject to criminal prosecution, and Customs and the Justice
Department have launched a major campaign to prosecute transshippers. There was recently a
major conviction involving a Chinese state-owned firm. In May 1995 the US cut China's
cotton underwear quota by 35 percent and also reduced some other quotas because firms were
illegally transhipping textiles though Hong Kong, mislabeling them as video rewinders and
The obvious question arises as to whether imports from China primarily displace
domestic production (thereby exerting significant downward pressure on the wages of
low-skilled workers employed in these industries) or whether these imports simply replace
imports from elsewhere. To investigate this question a constant market share (CMS)
analysis was undertaken.
The CMS approach is based on the idea that a particular country's share of world
production is a function of its "competitiveness".
. Thus, changes in the reporter country's production are decomposed into two
termsthe first indicating what the country's production would have been if it simply
maintained its share of world production, and a second indicating gains or losses due to
changes in share (competitiveness).
Production, in turn, is also a function of the pattern of domestic consumption,
exports, and imports, and changes in production will be affected by the commodity and
geographical market (partner) composition of trade. So for example, countries specializing
in exports to rapidly growing product markets or partner countries would experience faster
export growth than competitors concentrated in slowly growing markets for a given level of
relative competitiveness. Their shares in those markets, however, would be constant as
long as the underlying competitiveness factors remained unchanged. Thus a more
sophisticated model can be constructed by decomposing production into consumption,
exports, and imports, and redefining the relationships in terms of commodity- and
This approach has been applied to data on US production, exports, and imports for the
years 1988 through 1994. At the sectoral level the data were disaggregated to 460 product
categories at the 4 digit SIC level and three geographical marketsthe US, China, and
the rest of the worldwere distinguished.
The results indicated that in 1994 the Chinese share in US consumption was
approximately $10.9 billion higher than would be expected if China had simply maintained
its competitiveness in the US market since 1988.21
However, the vast majority of this gain$10 billionwas at the expense of third
country imports, so larger than expected Chinese imports only displaced around $900
million of US production bound for domestic consumption.
US exports to China were also approximately $700 million higher than expected, so at
the end of the day, Chinese trade with the US reduced US industrial production by about
$200 million over what would have been expected if the US and China had maintained their
relative competitiveness. Applying the Department of Commerce figure for average labor
productivity across the industrial sector, this would amount to a loss of less than one
This is not the end of the story, however. Export jobs pay on average 13 percent more
than non-export jobs. Applying the export-related wage premium to the jobs figures one
finds that the higher pay of the export jobs more than compensated for the slight
reduction in total employment, and total compensation in the industrial sector was higher
than expected, even with the Chinese competitiveness gains.
Whatever the Chinese gains in competitiveness, these gains have come almost exclusively
at the expense of third country exporters, and the direct impact on the US economy has
US policy discourages exports to China. This discouragement takes the form of both
generic export disincentives such as unfavorable tax treatment, and specific disincentives
such as restrictions on the export of militarily sensitive products or the refusal of the
Exim Bank to support participation of US firms in the Three Gorges Dam project. Richardson
(1993) uses a gravity model (similar to the one used to generate the bilateral trade
volume estimates of Table 7) to estimate the impact of export
disincentives. His estimates for 1989 for all merchandise trade for 1989 range between
$5.1 billion and $10.7 billion, on a base of $5.7 billion in US exports to China. In other
words, US exports to China for 1989 would have been something like twice their actual
volume had it not been for export disincentives. For the more narrowly defined categories
of chemicals and machinery the export shortfall ranges between $2.8 billion and $6.2
billion. Using a somewhat different data set Richardson obtained estimates of the export
shortfall of $6.1 billion to $13.4 billion for 1991.
These estimates are subject to considerable uncertainty, the US export control regime
has loosened with respect to China since Richardson's sample period, and the Chinese
economy has grown by approximately one-half. Nonetheless, even if they are remotely
accurate, they suggest that self-inflicted US export disincentives dwarf the impact of
Chinese policies on US trade.
Intellectual Property Rights
Bilateral trade disputes between the US and China have not only involved merchandise
trade. An important, possibly preeminent, source of conflict has been over the lack of
intellectual property rights (IPR) protection in China. Early in its reforms, China
proclaimed its commitment to protecting copyrights, patents, and trade secrets by signing
the US-China Bilateral Trade Agreement of 1979. Throughout the 1980s, the two countries
used the Joint Commission on Commerce and Trade as a forum to discuss issues of
compliance, and China even joined the Paris Convention for the Protection of Intellectual
Frictions resurfaced in 1991, when the US government instigated a Special 301
investigation of Chinese IPR violations.22 After a series
of negotiations aimed at heading off retaliatory tariffs, the two countries signed a
memorandum of understanding in 1992 under which China agreed to strengthen its IPR laws.
It pledged to treat computer software as literary works: subject to copyright protection
for 50 years. It also promised to expand the definition of and increase the protection for
pharmaceutical patents, an issue that had proved to be a major sticking point in the
negotiations. Later that year China joined the Berne Copyright Convention and the
Universal Copyright Convention, and in 1993 it took on additional responsibilities under
the Geneva Phonogram Convention.23
Although China carried out most of the institutional and legal changes required by the
memorandum, the incidence of piracy continued to skyrocket. Concern over lax enforcement
prompted the USTR to launch another Special 301 investigation in 1994. US Trade
Representative Mickey Kantor threatened a 100 percent tariff on $1.08 billion worth of
Chinese imports. In February 1995, after a flurry of consultations, negotiators reached an
agreement on the day before the tariffs were to be imposed. China agreed on specific
enforcement measures to crack down on IPR infringement, to conduct frequent bilateral
consultations, and to establish task forces to raid illegal manufacturers and improve
border control. China also promised to increase market access for US products by banning
quotas on several goods and allowing US companies to set up new joint ventures. This last
move was seen as important to counteract the implicit trade barrier to US goods caused by
China's domestic sales of pirated goods.
China's efforts focused on curbing sales of pirated goods at the retail level. 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.24
Industry trade associations argue that the losses associated with piracy of computer
software, CDs, films, and trademarks cost American companies $2.3 billion in 1995 alone
(IIPA, 1996). 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.25
This is ludicrous for luxury items in China such as computer software, videos, and CDs.
Either way, the true loss of producer surplus associated with piracy is far lower
than the $2.3 billion asserted by the industry.26 The IPR
issue appears to be a quintessential case of domestic special interest groups successfully
capturing government policyin both countries.27 In
the US, the intellectual property producers appear to have an influence of policy
completely out of proportion with the actual impact on the US economy.28
Likewise, despite Chinese promises, the suspicion remains that China is unlikely to act
forcefully to shut down their own politically well-connected pirates.
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. The
Administration has stated its determination to impose a 100 percent tariff on $2 billion
worth of Chinese goods unless China clearly demonstrates it has lived up to its 1995
commitment, and has published a proposed retaliation hit list for public comment.29 The Chinese have reacted sharply to the attack,
threatening to retaliate with a package of tariffs of even greater value.
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.30
Ultimately, the Chinese IPR regime will be strongly shaped by its entry into the WTO
and the pressures of international enforcement. As it now stands, China provides far less
statutory IPR protection than required under the TRIPs provisions of the WTO single
undertaking. Its enforcement mechanisms are also less than required under the WTO both
with respect to border measures and general procedures and remedies (Subramanian, 1995).31 Entry into the WTO would require China to strengthen both
legal protections and their enforcement. It would also move resolution of disputes from
bilateral negotiations to an arguably less politicized multilateral setting.
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.
To join the WTO a signatory must agree to uphold the basic requirements of membership:
transparency of the trade regime; uniform, non-discriminatory application of trade rules;
and national treatment for goods and, to a more limited extent, service providers. 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.
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
exports), while the EU has put more emphasis on securing liberal safeguard provisions to
protect against imports from China.32 (Japan has tended
to align itself more closely with the US position.) 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.33 The current negotiations center on the
dismantling of these monopolies, and foreign monitoring of the operations of state-owned
firms to insure that they do not run afoul of the WTO's anti-subsidy provisions. 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
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 20-25 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, 1995).
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.
China is also a participant in the Asia Pacific Economic Cooperation (APEC). 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 1993) 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 1995 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 2.2 percent of real GDP, while the
dynamic gains would be even larger (Lewis, Robinson, and Wang, 1995). (Interestingly China
is shown to experience an income gain even if it were excluded from any such
arrangementthe impact on the other Asian economies would be sufficiently large that
China itself would gain through the spillover from the others' income boost.) Another
study, undertaken by the Australian government, put the gains to China of an APEC free
trade agreement at 4.2-5.5 percent of GDP depending on model and specification (Office of
National Assessment, 1994).
Countries brought to the table "downpayments" or "deliverables"
intended to establish the credibility of the liberalization process to the Osaka meeting.
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
4,000 products and eliminate quotas and licensing requirements on 170 others. Shanghai and
other cities would be designated "pilot bases" for joint ventures oriented
towards foreign trade.
On April 1st 1996 China cut the average import tariff from 35.9 percent to 23 percent
and scrapped one third of its import quotas. 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 110 percent to 100 percent.34
This latest round of tariff cuts is less an indication of serious liberalization and
more a signal intended to influence China's prospects for WTO accession while further
shaping the economy according to Beijing's design.
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
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
membershipotherwise 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 problemsalthough 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
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.
1. One consequence of these difficulties is that growth may be
overstated. Inflation was officially 24.2 percent in 1994, but many observers believe the
true figure is higher. 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 after 1992, and an unofficial recalculation puts real GDP growth at 9.0 in
1993 and 7.8 in 1994, significantly below the official values reported.
2. 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
3. Lardy (1994, Table 1.3) cites estimates of purchasing power adjusted
per capita income for 1990 that range from $1,000 to nearly $2,600. The estimate of $1,910
used in the construction of Tables 1 and 7
is well within this range.
4. 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 scenariosthe medium scenario, and one for
each entry into the high and low columns. See Noland (1994) for further details on the
underlying scenarios and the derivation of the projections.
5. 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.
6. There is considerable academic debate in the United States as to
whether this indeed has been occurring. See Lawrence and Slaughter (1993) and Leamer
(1995) for opposing views.
7. 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.
8. 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 1996 corruption perception index published by Transparency International. The US
9. 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 1992 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 3004 of the 1988 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.
10. Again, see Noland (1994) for details of this estimation.
11. 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 20,000
immigrants from any given country each year, although family members, political refugees,
and some others may be exempted from this restriction.)
12. President Clinton did impose one minor sanction, a ban on $200
million worth of Chinese weapons and ammunition, a cursory nod capable of pleasing
everyone from the gun industry to opponents of trading with the military enterprises who
produce the weapons.
13. The vote in the House of Representatives was 396 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.
14. 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, 1995). 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.
15. In a widely publicized speech in May 1996 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."
16. 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.
17. This suit follows the imposition of antidumping duties on Chinese
bicycles in Canada, Mexico, and the EU (Financial Times 7 April 1995).
18. This sort of problem is not limited to the US. In April 1995 the
EU announced that it was deducting 9.3 million garments (less than 1 percent of the
Chinese quota) for three years because of illegal transshipping through Hong Kong, Dubai,
Morocco, Bangladesh and Kenya (Financial Times, 19 April 1995).
19. This discussion follows Richardson (1971).
20. Two problems arise though, in the application of this method. The
first is an index number problem. In the discrete time application of Equation (4), the
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
In this application US production data was obtained from the Annual Survey of
Manufacturers, and deflated to December 1984 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 1985 dollars using import and export indices also from the Bureau
of Labor Statistics. US consumption was then calculated as production plus imports minus
CMS weights were calculated by taking the geometric means of initial and terminal year
weights, approximating the Divisia index.
21. These figures should not be compared to the trade
balancethey are measuring something conceptually different. Specifically, the CMS
analysis does not indicate that Chinese imports were only predicted to rise by $10.9
billion. It indicates that Chinese imports were $10.9 billion higher than expected based
on the maintenance of constant market shares.
22. The Omnibus Trade and Competitiveness Act of 1988 gives the US the
ability to conduct Special 301 investigations and to unilaterally impose tariffs on
countries found to be violating intellectual property.
23. 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 producersnot 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.
24. According to the Brussels-based International Federation of the
Phonographic Industry (IFPI), China has increased CD production capacity to around 150
million units, though the domestic market can only absorb around 5 million units annually.
The International Intellectual Property Alliance (IIPA), a Washington based industry
lobby, estimates that China has more than 29 factories with a combined annual production
capability of around 100 million CDs yet domestic consumption is only 5-7 million CDs a
year. In both cases, the estimated domestic demand of CDs appears quite lowimplying
an annual demand of 1 CD for roughly every 250 people. A higher estimate of domestic
demand would push down the estimates of pirated exports.
25. US government officials privately indicated that the IIPA's
estimate was not the basis of the $2 billion retaliation figure arrived at by the US
government, but could provide no information on how this figure was determined.
26. To get a sense of how the numbers might change, figures released
by the IFPI suggest that the piracy rate in China is 88 percent and that the losses are
approximately $4 per disk. If these parameters are applied to the IIPA's estimate of 150
million units produced, one gets an industry methodology loss estimate of $528 million.
However, if one assumes that the payment of royalties would increase the price of a CD at
the retail level from $8 to $12, and that the price elasticity of demand is -1 and the
price elasticity of supply is 1, the producer surplus loss would be $160 million, or
around 30 percent of the industries estimate. If the price elasticity of demand is -2,
producer surplus falls to $44 million, or less than a tenth of the industry's estimate.
Moreover, it should be noted that this loss calculation is for all foriegn
producersestimates 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.
27. 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. See
28. 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. Shortly after the last IPR agreement with China
was concluded, Hollywood mogul Steven Spielberg hosted for President Clinton the highest
revenue per person ($50,000 per couple) fundraiser in US political history. 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
29. 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 protectionthat is where possible they have
tried to avoid import-sensitive products.
30. The predominance of textiles and apparel on the list may set an
unfortunate precedent for the opportunistic use of 301 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.
31. 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.
Since the McKinley tariff of 1890, the US has prohibited imports of goods produced using
prison labor (a practiced explicitly authorized in the GATT/WTO agreement). In the late
1980s evidence surfaced that Chinese exports to the US were produced in prison-run
factories. The two countries signed a memorandum of understanding in 1992, under 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. However, a Human Rights Watch/Asia report published in 1994
reported on the continued use of political prisoners in export industries. Furthermore,
following the deterioration of US-China relations in 1995, China suspended inspections and
did not allow a Customs official visit for a full year.
32. For example China has not signed the Rome Convention (the
International Convention for the Protection of Performers, Producers of Phonograms, and
Broadcasting Organizations) nor is a signatory to UPOV (the Convention for the protection
of New Varieties of Plants) which are incorporated into the WTO TRIPs agreement. It also
does not have in place a number of enforcement mechanisms required under TRIPs. See
33. 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.
34. Under current practices, foreign-funded enterprises can only
export goods produced by themselves, and import equipment and raw materials needed for
their own production. China, which only grants trading rights to a limited number of
domestic firms, fears that if trading rights were generally available, the resultant
competition would cause a deterioration in China's terms of trade, and a spate of dumping
suits in foreign markets.
35. China also did away with preferential tariff rates for foreign
investors importing capital equipment and raw materials. The impact of these changes on
foreign companies is mixed. They will find it cheaper to import components into China, but
more expensive to build materials for factories.
TABLE 1 - WORLD INCOME SHARES
||WORLD INCOME SHARES
|REST OF THE WORLD
Note: Shares are calculated from purchasing power adjusted national
income figures. See text for explanation of derivation of "high" and
"low" shares; they do not sum to 100.0.
Source: Marcus Noland, "Implications of Asian Economic Growth," Asia
Pacific Economic Cooperation Working Paper Series Number 94-5, Washington: Institute
for International Economics.
TABLE 2 - CHANGES IN CHINESE EXPORT AND IMPORT SHARES
|Food and live animals
|Beverages and tobacco
|Crude materials, inedible, except fuels
|Mineral fuels, lubricants and related materials
|Animal and vegetable oils, fats and waxes
|Chemicals and related products
|Machinery and transport equipment
|Miscelleneous manufactured articles
(includes textile and apparel)
Source: Statistics Canada, World Trade Database 1980-1994.
TABLE 3 - US-CHINA BILATERAL TRADE BALANCES ($ Billions)
Source: K. C. Fung and Lawrence J. Lau, "The China-U.S.
Bilateral Trade Balance: How Big Is It Really?" Department of Economics, Stanford
University, Stanford California. April 1996.
The adjustments correct for the mistreatment of Hong Kong's entrepot trade services in
the accounts of both China and the United States.
TABLE 4 - BILATERAL US-CHINESE ECONOMIC
AREA TRADE BALANCES ($ BILLIONS)
Note: customs valuation.
Source: Department of Commerce.
TABLE 5: COMMODITY COMPOSITION OF TRADE, 1994 ($
| SITC Code
US Exports to China
U.S. Import from China
|Food and Live Animals Chiefly for Food
||Beverages and tobacco
|Crude Materials, Inedibles, Except Fuels
||Mineral Fuels, Lubricants and Related Materials
||Animals and Vegetable Oils, Fats and Waxes
|Chemicals and Related Products, N.E.S.
Fertilizers (except crude)
||Manufactured Goods Classified Chiefly by Materials
|Machinery and Transport Equipment
Aircraft & associated equipment; spcecrft veh & pts
- Telecommunications equipment
- Radiobroadcast receivers
|Miscellaneous Manufactured Articles
Baby Carriages, Toys, games and sporting goods
- Women/girls coats, capes etc. tex fabric, non knit
- Articles of apparel of textile fabrics n.e.s.
- Trunks, suitcases, Vanity Cases, briefcases
- Miscellaneous Manufactured
|Commodities and trans. Not Classified Elsewhere
Note: SITC stands for Standard International Trade Classification. Large three digit
SITC entries broken out as memoranda items.
Source: U. S. Foreign Trade Highlights, 1994.
TABLE 6: SECTORS OF GREATEST IMPORT AND EXPORT DEPENDENCE
||AGRICULTURAL PESTICIDES & OTH AGR CHEMICALS, NSPF
||STRUCTURAL METAL PARTS, NSPF
||WELDING APPARATUS, AND PARTS, NSPF
||MANMADE FIBERS, NONCELLULOSIC
||VITREOUS PLUMBING FIXTURES
||CONVEYORS AND CONVEYING EQUIPMENT AND PARTS
||AIRCRAFT EQUIPMENT, NSPF
||VEG OILS & BYPROD EXC CORN, COTTONSEED & SOY BEANS
||MACHINE TOOLS METAL-FORMING, AND PARTS, NSPF
||MOLDERS' PATTERNS FOR THE MANUFACTURING OF CASTINGS
||TRAVEL TRAILERS AND CAMPERS, AND PARTS, NSPF
||WOODWORKING MACH, PARTS & ATTACHMENTS
||OIL AND GAS FIELD EQUIPMENT, AND PARTS, NSPF
||SOYBEAN OIL AND BYPRODUCTS
||HOISTS, OVRHD TRVLNG CRANES & MONORLS PTS ATT NSPF
||ALKALIES AND CHLORINE
||FANS & BLOWERS EX HSHLD; DUST COLLECTION, ETC.
||MECH POWER TRANSMISSION EQUIP NSPF & PTS, NSPF
||DOLLS AND STUFFED TOY ANIMALS
||RUBBER AND PLASTICS FOOTWEAR
||MANUFACTURED ARTICLES, NSPF
||LEATHER WEARING APPAREL, NSPF
||LEATHER GLOVES AND MITTENS
||WOMEN'S HANDBAGS AND PURSES
||GAMES, TOYS, AND CHILDREN'S VEHICLES, EXCEPT DOLLS
||CONCRETE PRODUCTS, NSPF
||ELECTRO-MECH HSHLD APPL NSPF ELECTRO-THERMIC, ETC
||CURTAINS AND DRAPERIES
||PERSONAL GOODS, OF LEATHER, EX HANDBAGS & PURSES
||LIGHTING EQUIPMENT, NSPF (INCLUDING COMMERCIAL)
||DIE-CUT PAPER AND PAPERBOARD; CARDS AND CARDBOARD
||VENETIAN BLINDS & PTS, IR/STL OR ALUMINUM, ETC.
||HOUSE FURNISHINGS, NSPF
||TARPAULINS TENTS AWNGS SAILS & OTH MDE-UP CNV GDS
||MEN'S FOOTWEAR, NSPF; WORK FOOTWEAR, NSPF
Source: Department of Commerce. Note: The abbreviation NSPF stands for Not
Specifically Provided For.
TABLE 5 - U.S. TRADE SHARES
||SHARE OF U.S. TRADE
|REST OF THE WORLD
Source: Marcus Noland, "Implications of Asian Economic
Growth," Asia Pacific Economic Cooperation Working Paper Series Number 94-5,
Washington: Institute for International Economics.
See text for explanation of "high" and "low" share estimates. Note:
The abbreviation SIC stands for Standard Industrial Code.
Cheng, Leonard K.H. 1995. "US Attitudes and Policy Towards Investment in
China," paper presented at the International Conference on Sino-US Economic
Relations, Hong Kong, 21-23 June.
Fung, K.C. 1995. "Accounting for Chinese Trade: Some National and Regional
Considerations," paper presented at the Conference on Research in Income and Wealth
Geography and Ownership as Bases for Economic Accounting, Washington, 19-20 May.
Lardy, Nicholas R. 1994. China in the World Economy, Washington: Institute for
Lawrence, Robert Z. and Matthew J. Slaughter. 1993. "International Trade and
American Wages in the 1980s: Giant Sucking Sound or Small Hiccup?," Brookings Papers
on Economic Activity 1993:2 161-226.
Leamer, Edward E. 1995. "A Trial Economist's View of U.S. Wages and
'Globalization'," paper presented at the Brookings Institution Conference on Imports,
Exports, and the American Worker, Washington 2-3 February 1995.
Lewis, Jeffrey D., Sherman Robinson, and Zhi Wang. 1995. "Beyond the Uruguay
Round: The Implications of an Asian Free Trade Area," Washington: World Bank, mimeo.
Noland, Marcus. "Implications of Asian Economic Growth," Working Papers on
Asia Pacific Economic Cooperation 94-5, Washington: Institute for International Economics.
Noland, Marcus. "Chasing Phantoms: The Political Economy of USTR,"
manuscript, Washington: Institute for International Economics.
Office of National Assessments. 1994. "APEC Liberalization Gains," Canberra,
Richardson, J. David. (1971). "Constant-Market-Share Analysis of Export
Growth," Journal of International Economics, pp. 117-133.
Richardson, J. David. (1993). Sizing Up U.S. Export Disincentives, Washington:
Institute for International Economics.
Rielly, John E. 1995. American Public Opinion and U.S. Foreign Policy 1995, Chicago:
Chicago Council on Foreign Relations.
Subramanian, Arvind. "Trade-Related Intellectual Property Rights and Asian
Developing Countries: An Analytical View," paper presented at the Asian Development
Bank, Manila, May.
Trefler, Daniel. 1993. "Trade Liberalization and the Theory of endogenous
Protection: An Econometric Study of U.S. Import Policy," Journal of Political
Economy, 101:1 138-160.
Back to Top