Trade Background: China
Importance of U.S.-China Trade Relations
According to the U.S. State Department, China has been one of the world’s fastest growing economies over the past several years, and its efforts to reform and modernize have helped transform China into a large trading economy. China’s total trade was close over $3.6 trillion in 2013, making it the second largest trading nation and the country with the second largest economy in the world. This translates into enormous opportunities for U.S./California exporters.
U.S.-China trade has risen rapidly over the past several decades. Total trade between the two nations has increased from $4.8 billion in 1980 to slightly over $562.4 billion in 2013. U.S. exports to China in 2013 were approximately $122 billion, a steady increase from previous years.
Hong Kong gross domestic product (GDP) per capita is comparable to other developed countries. The United States has substantial economic ties with Hong Kong. A report done by the U.S. State Department in August 2013 indicates that there are some 1,400 U.S. firms in Hong Kong. According to a 2014 report by the Hong Kong Economic and Trade Office in San Francisco, 65,000 U.S. residents currently, work, study or do business in Hong Kong. Another 1.2 million people visited Hong Kong last year from the U.S. The latest available figures on U.S. direct investment in Hong Kong show investment at about $47.8 billion, making the United States one of Hong Kong’s largest investors.
Trade between the United States and Hong Kong has been multiplying in the last few years, with a growth in U.S. exports from $26.6 billion in 2010 to $43.5 billion in 2013, a 60 percent increase. Total trade between the United States and Hong Kong totaled $8.1 billion in 2013, according to the U.S. Department of Commerce.California exports to Mainland China were $16.4 billion in 2013, making it the state’s third largest export destination.
California exports to Hong Kong last year were almost $7.8 billion. California exports to Taiwan increased to nearly $7.5 billion.California and China have a long and intertwined history. Both have an entrepreneurial spirit. There is a large overseas Chinese population which binds the two together.
Many trade analysts argue that China could prove to be a significantly larger market for U.S. exports in the future. China has been one of the world’s fastest growing economies over the past several years, and its efforts to reform and modernize its economy have helped transform China into a large trading economy. China is by far the world’s largest marketplace with nearly 1.4 billion people. Roughly one in five potential customers on the entire planet is Chinese. In years to come, the prosperity of the United States will be even more closely tied to the country’s leadership in international trade and the Asia Pacific region.
The United States/California and China have a complex relationship involving a variety of different issues. Several key subjects still under discussion relating to China’s membership in the WTO include: Intellectual Property Rights (IPR) enforcement and protection, regulatory transparency, government procurement, subsidies, antitrust policy, investment and overall market access for products. Discussion on these issues must continue both bilaterally between China and the United States, as well as on the multilateral level.
In its 2005 annual report to Congress, the U.S.-China Economic and Security Review Commission noted that the United States and China have a growing number of economic and security issues that “need work” to reach solutions and pragmatic answers. The report recommends a number of “course connections” in U.S. policy to prevent or reduce problems, including: addressing China’s currency manipulations; challenging China’s intellectual property rights violations; and developing a national strategy for technology competitiveness.
Permanent Normal Trade Relations and China’s Accession to the World Trade Organization
Under the rules of the World Trade Organization (WTO), a country can enter the organization on terms agreed between it and the WTO. China negotiated with a “working party” of WTO members and bilaterally with many of its major trading partners to define the conditions of its membership. China reached WTO agreements with Japan, Australia, Canada, Europe, the United States and other countries before its accession to the trading organization.
In Beijing on November 15, 1999 U.S. Trade Representative Charlene Barshefsky and National Economic Council Director Gene Sperling announced the successful completion of bilateral talks related to China’s accession to the World Trade Organization.
Ambassador Barshefsky and Sperling issued a joint statement that said, “We are glad that after 13 years of negotiation, China and the United States have agreed upon a strong, commercially viable WTO agreement for China. This historic agreement is a win for American export-related jobs, for Chinese economic reform, for our global trading system and for the long-term U.S.-China relationship.”
This agreement provided significant access for U.S. agriculture, industrial products and services. China would reduce both tariff and non-tariff barriers to industrial goods and farm products. The agreement contained strong provisions to address import surges and unfair trade practices. China has agreed to take specific actions to ensure fair treatment for businesses operating in China. These included limits on technology transfer requirements, offsets and export performance requirements.
During the negotiations, President Clinton hailed separate deals for eliminating significant Chinese barriers to U.S. agriculture products, including beef, pork, poultry, citrus and wheat grown in the Pacific Northwest. Other signed agreements included doubling the number of passenger and cargo flights between the two countries. The U.S. administration also got a commitment from China to crack down on piracy of computer programs.
Some specific examples from the November 15, 1999 agreement included:
- China would cut duties from an overall average of 22.1 percent to 17 percent.
- China would make even greater reductions on agricultural items of particular interest to the United States.
- China would establish large and increasing tariff-rate quotas for wheat, corn, rice and cotton, with a substantial share reserved for private trade.
- State trading for soy oil would be phased out.
- China would eliminate export subsidies.
- U.S. companies could provide auto financing. China would cut tariffs on automobiles by 25 percent by 2006, from the current 80 percent/100 percent.
- There would be new access for U.S. companies, including banks, insurance companies and telecommunications businesses.
- Foreign banks would be able to conduct local currency business with Chinese enterprises two years after China’s WTO entry, and retail business five years after.
- Insurance companies would be able to offer property and casualty insurance coverage to Chinese entities and individuals.
- Telecommunications and Internet service companies would be able to purchase up to 49 percent of Chinese businesses in these sectors, increasing to 50 percent after two years.
- Distribution rights would be provided for U.S. exporters.
- There would be improved access for computer services, business consulting, accounting, advertising and financial information services.
- Imports for foreign films were increased, on a revenue-sharing basis, to at least 20 films per year.
- In textiles, the United States and China agreed on appropriate measures to avoid market disruptions during and after the phase-out of current quotas.
WTO rules require that its members extend unconditional most favored nation (what the United States refers to as Normal Trade Relations-NTR) status to each other. U.S. law, which required an annual review of China’s NTR status, would have to be changed. The U.S. House of Representatives voted 237-197 on May 24, 2000 to extend permanent normal trade relations (PNTR) status to China. The U.S. Senate floor vote voted 83-15 on September 19, 2000 to extend PNTR status to China. The President signed this legislation on October 10, 2000.
PNTR status was critical to opening opportunities to conduct trade with China. If the United States had not granted PNTR, China and the United States would have treated each other as if they were not members of the WTO. China still could have become a WTO member and the benefits of the agreement then would have gone to the United States’ other major trading partners. PNTR and the U.S.-China Trade Agreement concluded in November 1999 were a win-win for everyone. China already had access to U.S. markets; supporting PNTR opened the door to China’s consumer marketplace – the world’s largest with a population of 1.3 billion.
The final decision on a country’s “accession” into the WTO lies with the current WTO members. WTO rules require that any accession agreement be approved by a two-thirds majority of the Ministerial. China also completed its own domestic procedures for accession.
On Saturday, November 10, 2001, concluding nearly 15 years of negotiations, the 142 members of the World Trade Organization – meeting in Doha, Qatar, unanimously approved China’s application for membership. China’s own Parliament immediately ratified the accession terms outlined in the nearly 1,000 page text. China waited 30 days and officially became a member of the WTO on Tuesday, December 11, 2001.
As a result of the negotiations, China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules.
Among some of the commitments undertaken by China are as follows:
- China will provide non-discriminatory treatment to all WTO members. All foreign individuals and enterprises, including those not invested or registered in China, will be accorded treatment no less favorable than that accorded to enterprises in China with respect to the right to trade.
- China will eliminate dual pricing practices as well as differences in treatment accorded to goods produced for sale in China in comparison to those produced for export.
- Price controls will not be used for purposes of affording protection to domestic industries or services providers.
- The WTO agreement will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation fully in compliance with the WTO agreement.
- Within three years of accession, all enterprises will have the right to import and export all goods and trade them throughout the customs territory with limited exceptions.
- China will not maintain or introduce, but limit any export subsidies on agricultural products.
Taiwan also was approved for WTO accession at the WTO ministerial meeting on November 11, 2001. Admission of Taiwan was prearranged to follow China’s admission, with terms being completed 18 months prior. China originally objected to Taiwan’s independent admission, but it was agreed that the two are separate, functioning as different customs territories and imposing different regulations on the importation of goods. Taiwan will be known as Chinese Taipei in the WTO.
In April 1986, the United Kingdom declared that Hong Kong, being a separate customs territory, possessed full autonomy in the conduct of its external commercial relations. Hong Kong continued to to be a WTO member after July 1, 1997, using the name of “Hong Kong, China.”
Background-Normal Trade Relations
For decades, Republicans and Democrats have joined together to ensure the expansion of U.S.-China trade. China, previously not being a member of the World Trade Organization, was ineligible for the low tariffs Normal Trade Relations (NTR) status (formerly called “Most Favored Nation” trade status) granted to most of America’s other trading partners. On June 3 of each year the President issued a determination in which he extended the waiver of the Jackson-Vanik freedom of emigration requirements for China for another 12-month period, from July 4 through July 3 of the following year. This determination extended NTR status for another 12 months, unless disapproved by Congress within 60 days of the July 3 date. Congressional disapproval, should it occur, would take the form of a joint resolution disapproving the President’s determination.
California would have been especially hard-hit by the lapse of NTR and a corresponding move by the People’s Republic of China to cut back on U.S. products and services. Without the annual renewal of NTR, tariffs would rise to rates established under the Smoot-Hawley Tariff Law more than 50 years ago. U.S. consumers would find products from China prohibitively expensive if China lost NTR status. Tariff rates for U.S. imports of Chinese goods would have increased 2 to 10 times, leading to major price increases for such products as clothing, footwear, toys and electrical appliances.
In addition to trade, termination of NTR would have affected California exporters and importers, retailers, transportation and other service industries, together with many California investments in the People’s Republic of China and Hong Kong. Ending China NTR would have resulted in loss of jobs throughout the United States, with Japan and European nations filling the trade void. Most significantly, denial of NTR status would have most likely resulted in retaliation against U.S. exports to China.
In our new century, the prosperity of the United States will be even more closely tied to the country’s leadership in international trade and the Asia-Pacific region. China is the world’s largest emerging market and at the center of the Asia-Pacific regional economy.
U.S. trade with China helps to promote values Americans cherish. Ending NTR would have harmed the very Chinese entrepreneurs and workers whose prosperity and jobs depend on trade and access to the outside world. China’s private enterprises and joint ventures are beachheads of free enterprise, which have driven the sweeping economic and political reforms of the last decade. The United States should support, not isolate, the segments of Chinese society that offer the best hope for further progress toward greater freedom and the rule of law for all of China.
The California Chamber of Commerce, in keeping with long-standing policy, enthusiastically supports free trade worldwide, expansion of trade and investment, fair and equitable market access for California products abroad and elimination of disincentives that impede the international competitiveness of California business and, further, while the Chamber deplores human right abuses in China and elsewhere around the world, has supported extension of Permanent Normal Trade Relations trade status and accession to the World Trade Organization for the People’s Republic of China as an important step toward greater respect for human rights and political freedom for the Chinese people, since U.S. trade and investment provide crucial support for the entrepreneurial forces in Chinese society that advocate further economic and political reform.
NTR was the cornerstone of stable U.S.-China commercial relations and maintains U.S. exports and jobs. NTR was the foundation for continued dialogue and cooperation between the United States and China over such vital concerns as security and human rights.
China was one of the 23 original signatories of the General Agreement on Tariffs and Trade (GATT) – now the WTO – in 1948. After China’s revolution in 1949, the government in Taiwan announced that China would leave the GATT system. Although the government in Beijing never recognized this withdrawal decision, nearly 40 years later in 1986, China notified the GATT of its wish to resume its status as a GATT Contracting Party. A working party to examine China’s status was established in March 1987 and met for the first time in October 1987.
In early 1965, Taiwan requested and was granted observer status at sessions of the GATT. In 1971, this status was removed, following a decision by the U.N. General Assembly that recognized the People’s Republic as the only legitimate government of China. At its September 1992 meeting, the GATT’s Council of Representatives decided to establish a separate working party to examine the request for accession of the separate customs territory of Taiwan. Due to political reasons, Taiwan’s accession to the WTO was linked to China’s accession.
Other Trade Agreements involving China
Hong Kong and China implemented the Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA) on January 1, 2004. The CEPA strengthens and enhances trade and investment cooperation between Hong Kong and China in 18 service and professional industries and 273 product categories.
In October 2004, the Association of Southeast Asian Nations (ASEAN) and China agreed to eliminate tariffs on all merchandise trade. The 2004 deal is part of a five-year process to create a free trade area between China and the 10 ASEAN nations. Once in place, the agreement will create a free trade area of nearly 2 billion people and a combined gross domestic product of $2 trillion. It would be one of the largest trading markets, eliminating nearly all tariffs on goods, moving to liberalizing trade in services, and opening cross-border investment. This would include Brunei, Indonesia, Malaysia, Singapore, Thailand and the Philippines. The four newer members of Cambodia, Myanmar, Vietnam and Laos would join in 2015 after preparing their economies for the increased competition.