US-China Economic Relations | PIIE
The economic and trade relationship with Mexico is of interest to Mexico ranks third as a source of U.S. imports, after China and Canada, and. This paper reviews US-China economic relations and reaches a number of major Just imagine a Mexican-style crisis in China, or a crisis and capital flight from. countries reconsider the importance of China in global trade and investment, in order. to really assess the impact of China on the US-Mexico relationship.
Therefore, the main obstacles to integration are not only caused by outside factors, such as the emergence of China in the N A F TA aspects related to the differences between the member countries.
Chinese investment in the Latin American countries has concentrated on natural resources such as energy, which is manipulated by the large state-owned enterprises. Chinese imports from Latin America are also mainly primary raw materials, while its exports are manu - factured goods. This pattern of trade is, to some extent, a strategic measure made by China in the Latin-American countries, which have historically been highly de - pendent on US manufacturing exports.
Additionally, as the second largest economy of Latin-America, Mexico is geographically located in North America and close to the Caribbean, while its culture belongs to Latin America.
As a result, Mexico has a great inFuence on the whole Latin American region. It is possible that the intention of China to be close to Mexico could be related to political considerations. The close political and economic relationship between the USA and Mexico could be affected by the improvement of the relationship between China and Mexico.
The rapid development of Chinese trade has made China an important variable in the present international economy. Thirdly, the development of China is mainly conceived of as a domestic objective for increasing the living standard of the Chinese people, without a strategic aim. In fact, there are more opportunities than challenges. The law was originally passed to encourage the Soviet Union to permit the emigration of Soviet Jews.
President Clinton exacerbated this tendency, first by criticizing then-President Bush during the campaign, and then in by tying renewal of MFN explicitly to immediate improvements in human rights in China.
The Executive Order signed by President Clinton in to extend MFN untilincluded a laundry list of human rights objectives as conditions for future renewal. Relations between the two countries continued to be rocky in 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. 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, Although the renewal of MFN in was correct substantively, the apparent climbdown from the earlier statements of explicit conditionality made the President appear unsteady.
Soon after the MFN renewal, the US designated China as a priority foreign country under the Special intellectual property rights protection provision. 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 passed with little fanfare, but as tension on the trade, human rights, IPR and proliferation fronts increased, the debate over renewal in 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 MFN debate with human rights, the IPR issue, and proliferation concerns.
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.
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 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. The main transshipment points are the high wage locations of Hong Kong, Taiwan, Macau, and Singapore.
In other words, the Treasury figure implies that nearly 25 percent were transshipped. A bilateral agreement on this issue was signed in January Government sources indicate that the problem appears to be getting worse, however. 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 percent growth rate in apparel imports from China, and a percent growth in exports to the US. Other countries, including Belize, the Czech Republic, Ecuador, and Qatar, exhibit similar triple-digit growth rates. 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 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. 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" where s denotes share, q production quantity, and c "competitiveness"; lower case letters indicate reporting country values, upper case world values.
Thus, in Equation 2changes 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.Mexico US Relations NAFTA, TPP, Economy and Mexico politics YouTube
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 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. At the sectoral level the data were disaggregated to product categories at the 4 digit SIC level and three geographical markets-the US, China, and the rest of the world-were distinguished. 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.
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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.
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Richardson 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. In other words, US exports to China for would have been something like twice their actual volume had it not been for export disincentives. 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 Throughout the s, 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.
It pledged to treat computer software as literary works: 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 it took on additional responsibilities under the Geneva Phonogram Convention.
In Februaryafter 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. For its part, Beijing has pointed out that in the last year it closed 7 CD plants that violated copyright laws and confiscated hundreds of thousands of bootleg CDs. It has also installed new government inspectors at CD factories.
The trade associations that make up the IIPA use different methodologies to estimate losses to piracy in their respective markets.
Most share a common defect however in that they assume that the number of units sold in China would be the same regardless of price; in other words they assume that the price elasticity of demand is zero, as illustrated in the top panel of Figure 3.
In this case industry losses are given by the rectangle EFGH, which the industry claims is A more conventional set of assumptions is shown in the lower panel of Figure 3. Here, demand has some negative price elasticity so that it is downward sloping. Supply is upward sloping rather than infinite as the IIPA assumes. In the initial case, the producer surplus the area above the supply curve below the price line is triangle IJK.
If the price is increased because of royalty payments, the supply curve shifts back along the demand curve to the new high price and low quantity combination P2, Q2. Producer surplus is the triangle LMN. The industry might argue that in this case, the supply does not really shift, rather protection of intellectual property rights in the form of royalties is like a tax, with the revenues going to the producing firms.
In this case producer surplus would be the trapezoid LMRK. Unfortunately, the determination of the Clinton Administration to pursue its IPR agenda, and the apparent unwillingness of the Chinese government to shut down pirate production as distinct from signing agreements to respect IPR means that the likelihood of actual punitive sanctions being imposed appears to be higher than in past disputes.
Past history suggests that Chinese negotiators will engage in brinkmanship, waiting until the final possible moment before reaching any agreement. Yet the emphasis on enforcement, as distinct from reaching new agreements, increases the likelihood that sanctions may be imposed.
Even then, though China often agrees to US conditions, its track record of effective enforcement belies its procedure of superficial compliance. Its enforcement mechanisms are also less than required under the WTO both with respect to border measures and general procedures and remedies Subramanian, It would also move resolution of disputes from bilateral negotiations to an arguably less politicized multilateral setting.
Multilateral Issues While the US government has little direct influence on China's internal reforms, it has substantial ability to influence the terms on which China is integrated into global economic institutions, most notably the World Trade Organization WTO. The US and other countries are understandably cautious on this issue because of China's enormous size and the likely precedential effect that the terms of China's accession will have on the protocols of approximately 20 other economies in transition which wish to join the WTO.
In the case of China, foreigners have encountered significant difficulties in a lack of transparency in the application of trade restrictions, as well as non-uniform application of trade policy in different parts of China. In these negotiations the US has tended to put more emphasis on obtaining access to the Chinese market this would be consistent with the US domestic political emphasis on exportswhile the EU has put more emphasis on securing liberal safeguard provisions to protect against imports from China.
Ironically, the US insistence on market access which is, after all, trade expanding and welfare-enhancing has been criticized in China, while the EU's demands for safeguards which restrict trade and reduce welfare has received less opprobrium.
Beyond these fundamental issues, the main points of contention regarding China's application to join the WTO have been whether China will enter as a developed or developing country and thereby the length of the transitional period granted for bringing domestic practices into compliance with WTO obligations as well as the issue of trading rights and state trading monopolies and the subsidization of state-owned firms.
China has argued that it should be allowed to enter the WTO as a developing country, and China is a developing country on any measure of per capita income. The United States has argued, however, that significant parts of China are sufficiently developed that it would be folly to permit China the additional leeway granted developing countries.
China's case is complicated by the fact that Taiwan has indicated that it is prepared to join the WTO as a developed country. The likely outcome will be to classify China as a developing country for some WTO obligations and a developed country for others. China maintains state trading monopolies, and unless foreigners are freely allowed to import and export, concessions on tariffs and other impediments to trade would be meaningless.
US firms also argue that the "trade balancing requirement" of the current foreign exchange allocation system is in effect a nontariff barrier and a clear violation of the TRIMs agreement. With regard to market access, the United States has asked China to join the "zero for zero" group which eliminated tariffs on construction equipment, medical equipment, steel, beer, distilled spirits, pharmaceuticals, paper, toys, and furniture, and which greatly reduced tariffs on chemicals and electronics.
The European Union has requested that China bind industrial product tariffs at percent. Although neither demand is likely to be satisfied, China will undoubtedly increase market access as part of its WTO accession, and has signalled some willingness to do so as noted below. With regard to investment, foreign investors have to go through a protracted administrative approvals process, which is subject to corruption, and the US has requested a streamlining of this process.
The US has also insisted that China accept international standards on expropriation and compensation, and avail investors to international binding arbitration for settlement of disputes with the state Cheng, The situation in services is more complicated. China has resisted opening up its telecommunications services market to foreign providers on national security grounds.
However, without a modern telecommunications system, concessions in other areas, such as banking, are less valuable. Again, the most likely outcome is a highly detailed set of provisions specifying which forms of telecommunications are open to foreign participation. In the insurance negotiation, the Chinese proposal is excessively vague. This has led some foreign observers to wonder if the timidity exhibited by the Chinese negotiators is not evidence of the great deal of uncertainty surrounding policy in the post-Deng era, and the unwillingness of the Chinese negotiators to "stick their necks out" until some of this uncertainty is clarified.
For these reasons most observers do not foresee a rapid resolution of the China WTO issue. The major achievements of APEC thus far has been the holding of the first pan-Asian meeting of heads of government ironically held in the US in November and the declaration a year later of a commitment by the leaders to free trade and investment in the Asia Pacific region. Concrete progress toward this goal has been less evident, however, and observers looked to the Osaka meeting to see if APEC would develop into more than a talking shop.
Were the APEC countries to actually implement free trade and investment in the region, the results could be quite impressive. One recent study concluded that the static income gains to China of such an agreement would be 2.
Interestingly China is shown to experience an income gain even if it were excluded from any such arrangement-the impact on the other Asian economies would be sufficiently large that China itself would gain through the spillover from the others' income boost.
- US-China Economic Relations
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, products and eliminate quotas and licensing requirements on others. Shanghai and other cities would be designated "pilot bases" for joint ventures oriented towards foreign trade.
On April 1st China cut the average import tariff from Tariff cuts were the greatest on raw materials and high-tech items that China needs to import in order to sustain its economic growth. Tariff reductions on consumer goods and processed manufactured goods were much smaller. For example, tariffs on cars, which China protests is still an infant industry in need of protection, were only reduced from percent to percent. Conclusions Integrating large, rapidly emerging countries into the international order is always problematic.
In the case of China, this is made more difficult by differences in political values, and its large bilateral surplus with the US which acts as a political lightning rod. As a consequence, one must expect that China will be involved in intermittent trade conflict with the US and others for the foreseeable future. Moreover, due to China's size, the inevitable mishaps that may accompany the process of reform could well have international ramifications.
From this perspective it becomes highly important that China be brought into international bodies such as the WTO to try to contain and intermediate these prospective frictions. At the same time, China must assume the obligations that come with membership-otherwise China's entry may eviscerate these groups. These issues require hard bargaining, and given the uncertainty surrounding the future political leadership in Beijing both Chinese and foreign negotiators may have a tendency to be cautious.
This suggests that a prolonged period of transition may be in the offing before China is firmly integrated into international economic institutions on a more permanent and stable basis. Four actions could be taken in the US to facilitate this process.
First, the US needs to recognize that China is not the source of its economic problems-although Chinese economic policy leaves much to be desired, trade with China is not an important source of job displacement in the US.
If the US is worried about the trade deficit, it should first reduce its own government budget deficit to close the saving-investment gap. With respect to trade at the industry level, Chinese imports largely displace third country imports in light manufacturing industries, not domestic production.
When the compensation premium on export-related employment is considered, total worker compensation is higher because of trade with China than it would have been in its absence. Indeed, self-imposed US export disincentives probably have a bigger impact on US exports to China than Chinese policies have. Second, the US needs to find some way of extricating itself from the annual Jackson-Vanik certification process which has become increasingly unproductive.
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One possibility is to scrap Jackson-Vanik altogether, though this is unlikely. A more feasible approach might be to certify China as a market economy at the time of its entry into the WTO. This would then obviate the need for annual recertification. A third possibility would be to certify that China does not restrict emigration, again obviating the underlying legal requirement for Jackson-Vanik certification.
Third, the US needs to be more careful defining national interests and resisting political capture by special interests. The USTR, the negotiating arm of US trade policy, does not have the analytical capability to ascertain the true impact of various foreign practices. It would be desirable to establish a formal interagency group including officials from the Council of Economic Advisers, the Office of Management and Budget, and the Treasury which tend to have far stronger analytical capabilities than USTR, to scrutinize industry claims and develop some sense of priorities in setting the trade policy agenda.
Lastly, the US needs to do a better job of cultivating relationships with sub-central government officials. In cases such as the IPR dispute, the central government signs agreements that it is either unwilling or unable to carry out.
The US needs to do a better job of identifying key local officials who can get the job done. A reorientation of engagement to the local level could also prove quite useful if political power devolves in a less centralized way in the future. One consequence of these difficulties is that growth may be overstated. Inflation was officially The basket of goods and their weights in the price index are not reported and apparently subject to change, and the sampling techniques used to assemble the underlying data is poor.
The industrial and producer price deflators diverge significantly afterand an unofficial recalculation puts real GDP growth at 9. Purchasing power adjusted income figures take into account differences in national price levels, especially for non-traded goods. These figures are superior to those based on converting different national incomes to a common currency using market exchange rates which do not capture the large international differences in nontraded prices.
LardyTable 1. Note that the subtotals for the high and low shares are calculated on the assumption that the particular unit experiences high low growth while the rest of the world experiences low high growth. Thus Table 1 is not based on three scenarios, but rather 41 scenarios-the medium scenario, and one for each entry into the high and low columns. See Noland for further details on the underlying scenarios and the derivation of the projections.