US-China Economic Relations | PIIE
China's breathtaking economic growth and massive imbalances with the United States have given rise to some myths about the nature of the two powers'. The U.S.-China trading relationship will be central to the global economy for years to come, and it is important for that relationship to be a. The PRC and the US resumed trade relations in and Direct investment by the US in mainland China covers a.
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. 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 inChina's economic performance has been nothing short of spectacular.
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Between andChina's real growth rate has averaged more than 9. 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.
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.
The remaining columns show China's share ten years hence under various scenarios. 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.
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 andthe 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.
Firms with foreign equity participation accounted for two-thirds of the increase in Chinese exports in and With regard to portfolio investment, external debt does not appear to be a problem: 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 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.
Understanding the US-China Trade Relationship | US China Business Council
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. 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.
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 percentstructural metal parts 16 percentwelding apparatus 14 percentnoncellulosic man-made fibers 12 percentand 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 percentrubber and plastic footwear 66 percentnarrowly defined miscellaneous manufactures which includes a laundry list of items such as cigarette lighters, umbrellas, and wigs percentleather wearing apparel 53 percentand leather gloves 51 percentall of which are simple light manufactures.
The Department of Commerce's survey of foreign direct investment provides a considerable amount of detail on US investment in China. 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 linkedintegrate 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.
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.
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This sometimes gives the impression of an inconsistent policy, but to a certain extent this is probably inherent in the structure of the US political system and the lack of domestic consensus over goals, strategies and tactics in the post-Cold War world.
In the economic sphere, relations with China are played out in bilateral, regional, and global fora, and involve both trade and financial issues. There is obviously interrelationships between these different modalities, but for expository reasons, it is probably simplest to consider them separately in turn.
The 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. 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.
Most Favored Nation Status Under the Jackson-Vanik Amendment to the Trade Act ofmost 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.
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.
Taking up the challenge in US–China economic relations
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.
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.
There are legitimate concerns in Washington over the extent to which China has unfairly taken advantage of its convergence into the global trading system and globalisation itself.
Trump's 'America First' agenda is in stark contrast with the globalisation and regulatory integration popular among the Davos crowd. Moreover, its ambitious state-sponsored Made in China plan reportedly aims to challenge US supremacy in sophisticated technologies arenas such as AI and biotech. There is truth on both sides.
However, the United States cannot slash its trade deficit with the rest of the world unless Americans have enough savings in their bank accounts.
Although Trump supporters disparage cheap imports from China, Americans dependent on credit cards rely on those low prices. This is disruptive and dangerous, for two reasons. Geopolitically, a divorce forces other countries — mainly longstanding US allies in the region — to pick sides. The China challenge is both economic and strategic.
China is using its growing economic weight to alter trade and investment rules in its favour and to generate regional outcomes often contrary to US interests. China is also using its economic clout to punish countries that act against its interests.
The China challenge is difficult to address because the trade and investment practices that concern the United States are products of the Chinese political system. The United States so far has pursued only limited trade action against China in the form of steel and aluminium tariffs pursuant to Section of the Trade Expansion Act of But relying on tariffs alone is insufficient. Moreover, relying on Section meant that the administration had to develop a national security justification for them.
Such a claim is not particularly credible.