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Working Paper 96-6

US-China Economic Relations

by Marcus Noland, Peterson Institute for International Economics

© Institute for International Economics

Introduction

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 aims.

This paper reviews US-China economic relations and reaches a number of major conclusions:

  • 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 concerns,
  • 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 well,
  • 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 (Figure 1). 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 uncertainty.1

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 (Figure 2). 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 wigs—55 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 trade imbalance.

 

US Policy Toward China

The outside world has limited abilities to affect the development of the Chinese economy—the 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.

 

Bilateral Issues

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

Import-Competing Sectors

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 transshipped.

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 bigger.)

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 person—an 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 metal furniture.18

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"

equation

where s denotes share, q production quantity, and c "competitiveness"; lower case letters indicate reporting country values, upper case world values.19 Rearranging and differentiating with respect to time, Equation (1) yields

equation

equation (2)

where dotted variables indicate time derivatives. Thus, in Equation (2), changes in the reporter country's production are decomposed into two terms—the 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 Equations (1) and (2) in terms of commodity- and geographic-specific markets

equation(3) (4)

where i and j indicate product and partner respectively. The first term on the rhs of Equation (4) is the CMS rate of consumption growth—the rate of production growth which would have occurred if the country simply maintained its market share in domestic consumption in each commodity market. The second term gives the change in production for domestic consumption due to changes in share—that is, changes in competitiveness. The remainder of the terms in Equation (4) can be defined analogously.20

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 markets—the US, China, and the rest of the world—were 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 billion—was 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 thousand jobs.

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 been minor.

Export Controls

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 Property.

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, as illustrated in the top panel of Figure 3.25 This is ludicrous for luxury items in China such as computer software, videos, and CDs. In this case industry losses are given by the rectangle EFGH, which the industry claims is 42.3 billion. 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. 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 policy—in 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.

 

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.

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 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 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.

APEC

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 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.) 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.

 

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.

 

Notes

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 in Figure 1.

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 nontraded prices.

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 scenarios—the 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 ranked 15th.

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 with competitiveness.

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 exports.

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 balance—they 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 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.

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 low—implying 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 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.

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 Trefler (1993).

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 these explanations.

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 protection—that 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 Subramanian (1995).

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

1993 2003


LOW MEDIUM HIGH



NORTH AMERICA 26.3 22.8 24.0 25.5
    United States
21.9 18.2 19.2 20.6
    Canada
2.1 1.9 2.0 2.0
    Mexico
2.3 2.7 2.8 2.9
ASIA-PACIFIC 26.1 28.1 31.0 33.6
    Japan
8.8 7.6 8.1 8.8
    China
8.8 10.8 13.0 15.5
    Rest of Asia Pacific
8.5 8.4 9.9 10.8
      Korea
1.5 1.4 1.9 2.1
      Taiwan
1.0 1.0 1.2 1.3
      Hong Kong
0.6 0.5 0.7 0.8
      Singapore
0.3 0.4 0.4 0.5
      Malaysia
0.4 0.5 0.6 0.7
      Thailand
0.8 0.9 1.2 1.4
      Philippines
0.4 0.4 0.5 0.5
      Indonesia
0.9 1.0 1.3 1.4
      Australia
2.2 1.9 2.0 2.1
      New Zealand
0.3 0.3 0.3 0.3
WESTERN EUROPE 22.5 18.3 19.1 19.9
LATIN AMERICA 6.0 5.6 5.9 6.1
REST OF THE WORLD 19.1 19.2 20.0 21.9

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


Exports Imports


1980 1994 1980 1994




Food and live animals 0.15 0.07 0.15 0.02
Beverages and tobacco 0.00 0.01 0.00 0.01
Crude materials, inedible, except fuels 0.09 0.03 0.18 0.06
Mineral fuels, lubricants and related materials 0.21 0.03 0.01 0.03
Animal and vegetable oils, fats and waxes 0.00 0.00 0.01 0.00
Chemicals and related products 0.06 0.04 0.10 0.11
Manufactured goods 0.20 0.16 0.25 0.27
Machinery and transport equipment 0.03 0.19 0.25 0.42
Miscelleneous manufactured articles
(includes textile and apparel)
0.16 0.47 0.03 0.06
Others 0.09 0.00 0.01 0.02
TOTAL 1.00 1.00 1.00 1.00

Source: Statistics Canada, World Trade Database 1980-1994.



Table 3: US-China Bilateral Trade Balances ($ Billions)


US Data Chinese Data Adjusted
US Data
Adjusted
Chinese Data




1989 -6.2 3.5 -4.9 -3.7
1990 -10.4 1.4 -9.1 -7.8
1991 -12.7 1.8 -11.0 -9.9
1992 -18.3 0.3 -15.4 -15.4
1993 -22.8 -6.3 -19.5 -24.9
1994 -29.5 -7.5 -25.8 -29.1
1995 -33.8 -8.6 -28.9 -31.2

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: Bilateral US-Chinese Economic Area Trade Balances ($ Billions)


Chinese Economic
Area
PRC Hong Kong Taiwan




1987 -25.9 -2.8 -5.9 -17.2
1988 -20.6 -3.5 -4.6 -12.6
1989 -22.6 -6.2 -3.4 -13.0
1990 -24.4 -10.4 -2.8 -11.2
1991 -23.7 -12.7 -1.1 -9.8
1992 -28.4 -18.3 -0.7 -9.3
1993 -31.4 -22.8 0.3 -8.9
1994 -37.4 -29.5 1.7 -9.6
1995 -39.6 -33.8 3.9 -9.7

Note: customs valuation.

Source: Department of Commerce.



Table 5: Commodity Composition of Trade, 1994 ($ thousands)


  SITC Code

Industry Sector

US Exports to China

U.S. Import from China

Trade Balance

0

Food and Live Animals Chiefly for Food

276,845

528,433

-251,588

1

Beverages and tobacco

6,401

12,331

-5,930

2

-263

Crude Materials, Inedibles, Except Fuels

-Cotton Textile Fibers

1,152,257

648,128

251,414

900,843

3

Mineral Fuels, Lubricants and Related Materials

61,146

362,691

-301,545

4

Animals and Vegetable Oils, Fats and Waxes

134,812

3,279

131,533

5

- 562

Chemicals and Related Products, N.E.S.

- Fertilizers (except crude)

1,507,859

944,121

722,823

785,036

6

Manufactured Goods Classified Chiefly by Materials

407,734

3,344,552

-2,936,818

7

-792

 

- 764

 

- 762

Machinery and Transport Equipment

- Aircraft & associated equipment; spcecrft veh & pts

 

- Telecommunications equipment

 

- Radiobroadcast receivers

5,118,675

1,910,641

 

563,437

 

9,056,750

 

 

1,641,813

 

1,367,653

-3,938,075

 

 

-1,077,376

8

- 894

- 851

- 842

- 845

 

- 831

 

- 848

 

- 893

 

- 899

Miscellaneous Manufactured Articles

- Baby Carriages, Toys, games and sporting goods

- Footwear

 

- Women/girls coats, capes etc. tex fabric, non knit

 

- Articles of apparel of textile fabrics n.e.s.

 

- Trunks, suitcases, Vanity Cases, briefcases

 

- Headgear

 

- Plastics

 

- Miscellaneous Manufactured

508,463

24,175,559

5,536,493

 

5,259,130

 

2,037,599

 

1,660,921

 

1,560,660

 

1,225,162

 

1,217,666

 

1,096,224

-23,667,096

9

Commodities and trans. Not Classified Elsewhere

112,569

323,312

-210,743

Total

 

9,286,761

38,781,144

-29,494,383


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


SIC
CODE
NAME EXPORT SHARE



2879 AGRICULTURAL PESTICIDES & OTH AGR CHEMICALS, NSPF 0.40
2874 PHOSPHATIC FERTILIZERS 0.33
3449 STRUCTURAL METAL PARTS, NSPF 0.16
3548 WELDING APPARATUS, AND PARTS, NSPF 0.14
2824 MANMADE FIBERS, NONCELLULOSIC 0.11
3261 VITREOUS PLUMBING FIXTURES 0.10
3535 CONVEYORS AND CONVEYING EQUIPMENT AND PARTS 0.08
3728 AIRCRAFT EQUIPMENT, NSPF 0.08
2076 VEG OILS & BYPROD EXC CORN, COTTONSEED & SOY BEANS 0.08
3542 MACHINE TOOLS METAL-FORMING, AND PARTS, NSPF 0.08
3543 MOLDERS' PATTERNS FOR THE MANUFACTURING OF CASTINGS 0.08
3792 TRAVEL TRAILERS AND CAMPERS, AND PARTS, NSPF 0.07
3553 WOODWORKING MACH, PARTS & ATTACHMENTS 0.07
3533 OIL AND GAS FIELD EQUIPMENT, AND PARTS, NSPF 0.07
2075 SOYBEAN OIL AND BYPRODUCTS 0.07
3536 HOISTS, OVRHD TRVLNG CRANES & MONORLS PTS ATT NSPF 0.06
2812 ALKALIES AND CHLORINE 0.06
3671 ELECTRON TUBES 0.05
3564 FANS & BLOWERS EX HSHLD; DUST COLLECTION, ETC. 0.05
3568 MECH POWER TRANSMISSION EQUIP NSPF & PTS, NSPF 0.05

SIC
CODE
NAME IMPORT SHARE



3942 DOLLS AND STUFFED TOY ANIMALS 0.75
3021 RUBBER AND PLASTICS FOOTWEAR 0.66
3999 MANUFACTURED ARTICLES, NSPF 0.55
2386 LEATHER WEARING APPAREL, NSPF 0.53
3151 LEATHER GLOVES AND MITTENS 0.50
3171 WOMEN'S HANDBAGS AND PURSES 0.47
3142 HOUSE SLIPPERS 0.47
3944 GAMES, TOYS, AND CHILDREN'S VEHICLES, EXCEPT DOLLS 0.45
3272 CONCRETE PRODUCTS, NSPF 0.42
3634 ELECTRO-MECH HSHLD APPL NSPF ELECTRO-THERMIC, ETC 0.40
2391 CURTAINS AND DRAPERIES 0.40
3172 PERSONAL GOODS, OF LEATHER, EX HANDBAGS & PURSES 0.38
3648 LIGHTING EQUIPMENT, NSPF (INCLUDING COMMERCIAL) 0.37
2675 DIE-CUT PAPER AND PAPERBOARD; CARDS AND CARDBOARD 0.36
3149 FOOTWEAR, NSPF 0.36
2591 VENETIAN BLINDS & PTS, IR/STL OR ALUMINUM, ETC. 0.35
2392 HOUSE FURNISHINGS, NSPF 0.35
2394 TARPAULINS TENTS AWNGS SAILS & OTH MDE-UP CNV GDS 0.34
3161 LUGGAGE 0.34
3143 MEN'S FOOTWEAR, NSPF; WORK FOOTWEAR, NSPF 0.30

Source: Department of Commerce. Note: The abbreviation NSPF stands for Not Specifically Provided For.



Table 7: U.S. Trade Shares


Share of U.S. Trade

1993 2003


LOW MEDIUM HIGH



NORTH AMERICA 28.3 27.5 30.3 31.5
    Canada
20.5 16.5 18.2 19.2
    Mexico
7.8 10.8 12.1 12.5
ASIA-PACIFIC 35.2 34.7 37.6 41.1
    Japan
14.7 12.2 13.2 15.0
    China
3.8 4.2 5.3 6.7
    Rest of Asia Pacific
16.6 16.4 19.1 21.6
      Korea
3.0 2.5 3.4 4.1
      Taiwan
3.9 3.7 4.5 5.3
      Hong Kong
1.9 1.6 2.1 2.6
      Singapore
2.3 2.3 2.6 3.0
      Malaysia
1.6 1.8 2.1 2.4
      Thailand
1.2 1.2 1.5 1.9
      Philippines
0.8 0.8 0.9 1.0
      Indonesia
0.8 0.8 1.0 1.1
      Australia
1.1 0.9 1.0 1.1
      New Zealand
0.2 0.2 0.2 0.2
WESTERN EUROPE 22.2 17.4 18.5 20.2
LATIN AMERICA 6.8 5.9 6.3 7.0
REST OF THE WORLD 7.5 6.9 7.3 8.1

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.



figure1



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figure3

References

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 International Economics.

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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, mimeo.

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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.


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