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China-U.S. Economic and Trade Relations: A Win-Win Partnership

CIIS Time: Aug 21, 2009 Writer: Zhen Bingxi Editor: Zhen Bingxi

Over the past three decades, China-U.S. economic and trade relations have been growing rapidly along with vigorous economic development of China in the course of its reform and opening-up. Economic exchanges and trade between the two countries virtually started from scratch, but now China and the United States have become two of the world¡¯s largest economies and trading partners. The two economies are more interdependent than ever before, each being the other¡¯s major partner: China is America¡¯s second largest trading partner, third largest export market, second largest source of import and largest holder of its treasury bonds; the United States is China¡¯s largest trading partner, largest export market and third largest outlet for foreign direct investment (FDI).

I. China¡¯s Reform and Opening-up Proceeding Side by Side with Growing China-U.S. Economic Exchanges and Trade

China-U.S. bilateral trade had increased by 305 times from US$0.99 billion in 1978, the year when China launched reform and opening-up, to US$302.08 billion in 2007; the total amount of U.S. direct investment in China had grown from US$210 million in 1978-82 up to US$58.44 billion by the end of July 2008, about 277 times as much; at present, China is one of the largest creditors of the United States, holding over US$1 trillion of U.S. securities, of which more than US$600 billion are treasury bonds. The development of Sino-American economic ties and trade along with China¡¯s reform and opening-up has undergone three phases.

The first phase is from 1978 through 1991. During this period of time, as reform and opening-up were set off and gradually gained steam, Sino-American economic exchanges and trade quickly embarked on a path of rapid growth.

A fundamental policy decision for undertaking reform and opening-up was made at the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China in late 1978. Soon afterward, the Party Central Committee decided to establish four special economic zones at Shenzhen and other coastal areas, introduce the family-based contracting system with remunerations linked to output in rural areas, open designated littoral cities or regions, begin negotiations on China¡¯s membership in the World Trade Organization, reform the ownership of state-owned enterprises, etc. The implementation of all these important policy decisions not only paved the way for sustainable, vigorous economic growth in China, but charted a course of rapid increase of economic and trade ties between China and the United States. According to statistics released by China¡¯s General Administration of Customs, bilateral trade between the two countries had increased from US$0.99 billion in 1978 to US$14.2 billion in 1991 at an average annual growth rate of 22.7%. In those years, China had an annual deficit in trade with the United States, and its import from America exceeded its export to it. Items exported to the United States from China were expanded to cover foodstuffs, light industrial goods, medical instruments and medicine, chemicals, machine building equipment, etc.; items imported from the United States increased to include aircraft, chemical fertilizer, timber, paper and paper pulp, etc. Meanwhile, U.S. investment in China also expanded gradually: For each year the number of projects with U.S. investment approved by Chinese authorities increased from just a few with a realized value of several million U.S. dollars in the late 1970s up to 694 with US$320 million in 1991. Projects with U.S. investment expanded ranged from petroleum industry and tourism to manufacturing industries. However, there were only a very small number of big firms investing in China at that time, and even less had long-term investment plans. In fact, the majority of such firms came to invest in China just for ¡°testing the waters¡±.

The second phase is from 1992 through 2001. As China reinforced efforts for reform and opening-up in the decade, China-U.S. economic ties and trade went through structural changes and continued to grow rapidly.

Based on Deng Xiaoping¡¯s remarks concerning reform and opening-up during his inspection tour in South China in 1992, the Party leadership articulated a new general guideline for building a socialist market economy in China and decided to intensify and deepen reform and opening-up by allowing the interior provinces, and particularly western provinces, to gradually adopt the same opening-up measures as the special economic zones and coastal cities did and the same preferential treatment as given to the latter. This helped facilitate continued steady and rapid growth of Sino-American economic ties and trade. As a result, Sino-American trade had gone up from US$17.49 billion in 1992 to US$80.49 billion in 2001 at an annual growth rate of about 18.5%; the total amount of direct investment of U.S. businesses in China had increased from US$511 million to US$4.358 billion at an annual growth rate of about 31%, apparently higher than in the first phase. In addition, there were the following structural changes in the second phase: First, from 1993 onward, deficit in China¡¯s trade with the United States (US$310 million in 1992) was replaced by a surplus (US$6.27 billion in 1993), which increased year by year subsequently. Second, China was becoming an ever-larger trading partner of the United States, and vice versa. China, America¡¯s sixth largest partner in 1994, became the fifth and fourth largest in 1995 and 2000 respectively; in 1996 and beyond, the United States has been China¡¯s second largest trading partner. Third, China was exporting more varieties of technology-intensive goods with a reduced proportion of minerals and other raw materials and a higher proportion of technology-intensive items in the manufactured goods.

According to statistics released by China, of China¡¯s total export to the United States, the share of minerals and industrial chemicals had decreased from 20% in 1989 to 4.5% in 1999; that of textiles and textile materials had decreased from 28.5% in 1989 to 9.2% in 2000 whereas that of metals, mechanical and electrical products, electronics, means of transport, apparatuses and instruments had increased from 5.5% in 1989 to 43% in 2000. In 2000, China¡¯s high-tech export to the United States amounted to US$8.5 billion, accounting for 16.3% of China¡¯s all export to the United States, as against practically nil 11 years before. And fourth, there was an increased number of large U.S. corporations investing in China and of businesses with exclusive U.S. investment. By 2000, of the top 500 U.S. firms listed in the Fortune magazine, 300 had invested in China. Beginning from 1999, the United States had been the largest investor of all countries in China for three consecutive years.

The third phase is from 2002 onward. As China¡¯s economy is integrating with the world economy at a faster pace, China-U.S. economic exchanges and trade have been growing still more rapidly and in greater depth in all areas.

China became the WTO¡¯s 143rd member at the end of 2001, which indicates that China¡¯s economy is further integrating with the international economic system. The Party Central Committee led by General Secretary Hu Jintao, by adhering to the Deng Xiaoping Theory and the important thought of ¡°Three-Represents¡± as the guideline, adapts to the changing domestic and international circumstances. Taking the Scientific Outlook on Development and making innovative endeavors, China is redoubling its efforts in building a harmonious society and proceeding in the course of reform and opening-up. After acceding to the WTO, China is now opening to all countries and regions rather than being more peripherally-oriented in the initial phase; China¡¯s foreign trade has expanded from traditional merchandise to the service sectors; it is easier to enter the Chinese market, which is becoming more transparent and normative as the government has promulgated and updated large numbers of laws and regulations.

As China¡¯s economy is integrating with the world economy at a full spectrum and in greater depth, China-U.S. economic exchanges and trade have gradually expanded to cover services, investment, economic and technological cooperation and other areas, not just confined to merchandise trade. Statistics released by China¡¯s Ministry of Commerce show that trade between China and the United States had increased from US$80.49 billion in 2001 to US$302.08 billion in 2007 at an annual average growth rate of 24.7%, higher than in the first and second phases; according to U.S. statistics, U.S.-China trade in the same period of time had grown from US$121.51 billion up to US$330.48 billion at an annual average growth rate of 18.2%; in the same period of time, U.S. export to China had grown five times as much as U.S. export to the rest of the world, so that China has become the third largest export market of the United States as compared to its ninth largest in 2001. In the first nine months of 2008, trade between the two countries reached US$250 billion despite the U.S. economic slowdown. Moreover, the product mix of China¡¯s export to the United States has been optimized: Mechanical and electrical products have gradually replaced primary products and other labor-intensive products as the lion¡¯s share. As a result, export of machinery, electrical equipment and parts, auto vehicles and parts, optical instruments and medical instruments in 2007 reached as much as US$152.42 billion, accounting for 47.4% of China¡¯s total export to the United States as against merely 28.2% for garments, toys, furniture and shoes. China-U.S. services trade has also grown significantly in recent years. As U.S. statistics show, such trade had increased from US$8.5 billion in 2000 to US$23 billion in 2007 at a growth rate of 170%, with a 180% increase of the U.S. surplus from US$1.9 billion to US$5.4 billion. In addition, of the top 500 U.S. firms, 400 and more have invested in China. By October 2008, there had been an accumulated total of 56,335 projects in China with a realized value of US$58.8 billion. U.S. investment goes into a broadening range of areas, covering not only manufacturing industries such as machinery, transport vehicles, electrical products, power generation, petroleum, chemicals, textiles and apparels, foodstuffs, and medicines, but real estate, finance, insurance, foreign trade, and accounting and other service sectors. China¡¯s holding of U.S. treasury bonds has increased from US$60.3 billion in 2000 up to more than US$600 billion at present. China has thus become America¡¯s largest creditor in terms of treasury bonds. Meanwhile, there is an increasing number of Chinese trading and non-trading companies doing business in the United States. By the end of 2006, China¡¯s direct investment in the United States had reached US$1.238 billion in a broad range of industries, science and technology, tourism, finance, insurance, transport and contracting.

II. Interconnection between China-U.S. Political Relationship and Bilateral Economic/Trade Ties

Normalization of China-U.S. relations has proceeded almost simultaneously with China¡¯s course of reform and opening-up. Diplomatic relationship between the two countries was established in January 1979. In July that year, the two sides signed the Agreement on Sino-American Trade Relations and agreed to mutually grant most-favored-nation treatment as of February 1, 1980, marking the beginning of trade normalization between the two countries. Despite ups and downs in China-U.S. relations and on-and-off disputes over various economic and trade issues in the past three decades, bilateral relations between the two countries have by and large been moving forward, and political relationship and economic exchanges and trade have been closely interconnected.

To begin with, normal development of political relations serves to create a sound political environment for promoting economic exchanges and trade. By the same token, if bilateral political relationship is tense, it is bound to have a negative impact on bilateral economic exchanges and trade.

The three decades following the establishment of diplomatic relations have witnessed both smooth development of bilateral economic ties and trade when China-U.S. relations were normal and slowdown or even stalemate in such ties when relations were abnormal. In 1981-83, the setbacks in China-U.S. relations led to a decrease of bilateral trade from US$5.89 billion in 1981 down to US$5.34 billion in 1982 and US$4.03 billion in 1983. In the next few years, China-U.S. relations were relatively stable with a significant increase of bilateral trade and U.S. investment in China. However, after the summer of 1989 the sanctions and the discriminatory export control measures taken by the United States against China seriously hampered bilateral cooperation in economic exchanges and trade, greatly constraining U.S. export to China. As a result, bilateral trade decreased from US$12.25 billion in 1989 to US$11.77 billion in 1990. Moreover, such sanctions and measures had a negative impact on U.S. investment in high-tech projects in China. Because of the U.S. sanctions and annual review of the MFN treatment for China in U.S. Congress, U.S big businesses failed to receive large numbers of orders from China. The Jiang-Clinton summit in Seattle in 1993 when the two presidents were attending the APEC leaders¡¯ informal meeting marks a major milestone for improvement of China-U.S. relations. After that, bilateral economic exchanges and trade were soon back on track for rapid growth. China-U.S. trade had increased from US$17.5 billion in 1992 to US$74.5 billion in 2000 at an average annual growth rate of nearly 20%; and in the corresponding period of time, U.S. direct investment in China had increased from US$510 million up to US$4.39 billion, showing an average annual growth rate of 31 % as high. In the context of improved political relations between the two countries, the two sides reached agreement on China¡¯s membership in the WTO in November 1999, thus concluding the marathon negotiations on China¡¯s accession to the WTO that had lasted as long as 14 years. In 2000, U.S. Congress passed the Normal Trade Relations (NTR) Act for China. By the end of the following year, President Bush announced that the United States would grant the Permanent NTR status for China, thus removing a major obstacle in China-U.S economic and trade relations. Since G.W. Bush assumed office, and especially during his second term, China-U.S. economic exchanges and trade have been broadening in scope and proceeding in across-the-board development in the context of stable development of bilateral political relations: In addition to traditional merchandise trade and direct investment in manufacturing industries, bilateral economic cooperation and trade have extended to services trade, technological R&D, investment in securities, financial exchanges, energy and environmental cooperation, macro-economic policy coordination, exchange of views on structural issues in domestic economy as well as coordination in handling multilateral economic, trade and financial issues in broad areas.

Secondly, continued expansion of China-U.S. exchanges and trade forms an important basis that facilitates stable development of bilateral political relationship. In China-U.S. relations, economic ties and trade are a set of relationship in which the two sides have more common interest and greater potential than in any other area. With increasing economic interdependence, bilateral economic exchanges and trade are becoming a more and more important foundation and stabilizer of the overall bilateral relationship. Deng Xiaoping, chief architect of China¡¯s reform and opening-up, pointed out that economic cooperation should be a foundation stone of Sino-American relations and that despite the differences and disputes the economies of the two countries were complementary, and economic cooperation was in the interest of both sides; the late U.S. president Richard Nixon once said to the effect that at a time when the United States and China had no common enemy, economic and trade relationship would be pivotal in U.S.-China relations.

Growing economic interdependence between China and the United States would mitigate the impact of differences over security and political issues on bilateral relations. Frictions on international security issues and conflict over values might impair bilateral relations, but interdependence in economic ties and trade would raise economic cost if political confrontation disrupts bilateral relations. Neither U.S. politicians nor American businessmen should or would neglect the fact that China is now the fastest growing emerging economy and the largest emerging market in the world. China-U.S. economic exchanges and trade would be all the more important when political relations are at low ebb. This is because neither side, especially the business communities in the two countries, wishes to see any downgrading in overall bilateral relations. In pursuit of their immediate and long-term interests in China, the U.S. business community, and especially big businesses that have invested in China, has been consistently in favor of better U.S.-China relations. For example, in the first half of the 1990s when the annual review of the MFN for China was in a hubbub and was highlighted by political tension in bilateral relations, the U.S. government still decided to grant the MFN status for China and eventually had to decouple it from the human rights issue. This was largely because these big businesses had exerted stronger pressures on the U.S. government for fear of loosing their immense business opportunities in China if the latter insisted on linking economic ties and trade with ideological differences. In recent years, it is out of political consideration that the U.S. side has provoked frictions over economic and trade issues from time to time, for fear, in particular, that China¡¯s rise would pose a threat to the United States in future. However, the U.S. leaders and business community who realize the importance of China¡¯s economic growth and Sino-American economic exchanges and trade to the United States have worked hard for a ¡°soft landing¡± of such frictions. In his article carried in a recent issue of the bi-monthly Foreign Affairs titled ¡°A Strategic Economic Engagement: Strengthening China-U.S. Ties¡±, Henry Paulson, U.S. Secretary of Treasury, wrote, ¡°The prosperity of the United States and China depends on helping China further integrate into the global economic system¡± ¡­ and U.S. Chinese Strategic Economic Engagement is ¡°the only path to success.¡± As a matter of fact, the significance of the status of China-U.S. economic ties and trade for U.S. interests is far greater than that of business opportunities per si. Just as Professor Ezra Vogel, a well-known American scholar, noted, if U.S.-China business relations are downgrading, China would have less interest in cooperation with the United States on non-economic issues of U.S. concern.

While bilateral economic and political relations are closely interrelated, they sometimes are somewhat uneven. It should not be taken for granted that their mutual impact is that powerful. Increased economic ties and trade may not automatically reduce political divergences between the two countries, nor would they suffer a big fall resulting from political contingencies or frictions over some security issues. There were cases in the past, and particularly in the post-Cold War years, in which while China-U.S. economic exchanges and trade were increasing at a rapid pace, bilateral political relations were often on a ¡°roller-coaster¡±. For instance, during the 1990s, Sino-American political relations suffered setbacks on a number of occasions including U.S. F-16 fighters sale to Taiwan, the Milkyway shipping interdiction, Lee Teng-hui¡¯s U.S. visit, the U.S. dispatch of naval ships to the Taiwan Strait in response to China¡¯s military exercises, linking the human rights issue with the MFN treatment for China, supporting anti-China resolutions in the UN Human Rights Commission, bombing of the Chinese Embassy chancery in former Yugoslavia, and the more recent EP-3 case, etc. But bilateral economic exchanges and trade in this period of time had by and large not been too much affected by political tensions in bilateral relations. It is reasonable for some scholars to liken the two sets of relationship in the economic and trade area and in the political and security area to ¡°two vehicles on parallel roads¡±, as seeking economic benefits and containing China¡¯s rise from political motives are dual goals of the U.S. long-term national strategy. Moreover, as China¡¯s economy and overseas interest continue to grow while Americans have been negatively affected by economic globalization in recent years, economic and trade disputes have become more prominent in China-U.S. relations. As a consequence, some people have begun to question the validity of economic and trade ties being a stabilizer for bilateral relations between the two countries.

III. Frictions and Cooperation in Bilateral Economic Exchanges and Trade

In the course of fast growing China-U.S. economic exchanges and trade, China has been under enormous pressures from frequent frictions created by the U.S. side. Sometimes, the disputes between the two sides had turned white-hot. However, the bilateral economic and trade regulatory mechanisms established over the decades have helped to relieve the tensions, reduce frictions and prevent worst-case scenarios.

1. Economic and trade frictions have become more frequent, breaking out from time to time.

The first trade friction took place shortly after the establishment of diplomatic relations between the two countries when the U.S. side launched anti-dumping investigations on China¡¯s sale of menthol in the United States on July 2, 1980. Throughout the 1980s, most of China-U.S. economic and trade frictions were of an economic nature, mainly concerning the textile import quotas for China and anti-dumping of industrial products imported from China. Following 1989, U.S. economic and trade frictions with China tended to be politicized. The U.S. side used a dual tactic: Politically, it resorted to economic sanctions, discriminatory export control regulations, embargo and annual review of the MFN treatment as policy instruments with which to heighten pressure on China; economically, it was trying to press China to make concessions on the U.S. terms on a broad range of economic and trade disputes over anti-dumping and countervailing duties (CVD), the textiles quota, bilateral trade imbalance, RMB/USD exchange rate, IPR protection, etc. After China¡¯s accession to the WTO at the end of 2001, China-U.S. economic and trade frictions seemed to be ¡°regularized¡±.

(1) The issue of anti-dumping and countervailing duties

Between 1980 and 2007, the U.S. side had launched a total of 129 cases of anti-dumping investigations against China. Thus, the number of such cases exceeds that of similar cases with any other U.S. trading partner. A major reason is that in disregard of China¡¯s tremendous accomplishments in its market-oriented economic reform over the past three decades, the United States insists that China be a non-market economy and follows the practice of discriminatory ¡°alternate state¡± accordingly. In addition, the U.S. side argued that as China¡¯s economic expansion in recent years displayed some features different from a non-market economy, subsidies were calculable and imports from China should therefore be subject to the U.S. anti-subsidy act. Between early 2007 and August 2008, the U.S. side launched 13 cases of combined anti-dumping/CVD investigations on items imported from China, including laminated woven sacks and tires for non-highway use. The U.S. double standards for protecting its domestic industries constitute double discrimination against Chinese commodities.

(2) The textiles issue

After the bilateral agreement on textiles trade expired in 2005, the dispute over textiles trade has become a prominent issue in China-U.S. trade. In the last analysis, it was because the U.S. textile industry was not well prepared for the consequences arising from expiration of the agreement. In order to protect the interests of U.S. textiles firms, the U.S. side had time and again used the Special Safeguard 242 Provision to restrict textiles import from China. After several rounds of consultation, the two sides finally reached agreement on the textiles issue on November 8, 2005 and signed the Memorandum of Understanding on Textiles and Garments Trade between the Government of the People¡¯s Republic of China and the Government of the United States of America. Under the accord, there is quantitative regulation over China¡¯s export of 21 specifications of cotton pants to the United States during the time the MOU is in effect (i.e. from January 1, 2006 through December 31, 2008). However, the U.S. textile industry was already trying hard in preparations to press the U.S. government to adopt new protectionist measures.

(3) The issue of trade imbalance

China-U.S. trade has never been in balance since 1993. China¡¯s surplus in trade with the United States has continued to increase rapidly in recent years. Of all trading partners of the United States, China has the largest surplus. In fact, China-U.S. trade imbalance is by no means abnormal, resulting from structural differences, division of labor, and different statistical methods between the two countries as well as impact of economic globalization. But the U.S. side has used the trade imbalance as a pretext to accuse the Chinese side, blaming China for unfair trading and forcing China to further appreciate the RMB and allow the United States to get more access to the Chinese market.

(4) The issue of the RMB/USD exchange rate

By pressing for the RMB appreciation, the U.S. side intends to prevent a significant increase of China¡¯s export to the United States so as to reduce the U.S. deficit in trade with China. On July 21, 2005, the Chinese government announced that it had decided to decouple the RMB from the U.S. dollar and reform the mechanisms of RMB exchange rates. Given that the RMB has significantly appreciated, the U.S. side blamed the Chinese government for being still too stringent on the exchange rate control and therefore urged the Chinese side to do more for RMB¡¯s further appreciation. As a matter of fact, China-U.S. trade imbalance has little to do with the RMB exchange rate and the RMB appreciation plays a marginal role in cutting the U.S. trade deficit, as Chinese statistics show that in the past three years and more the RMB has appreciated more than 20% against the U.S. dollar while the U.S. deficit in trade with China (according to U.S. statistics) had increased by 26% from US$199.7 billion in 2005 to US$251.2 billion in 2007.

(5) The issue of protecting intellectual property rights (IPR)

The United States had consistently taken a tough stand toward China on the issue of intellectual property rights, frequently accusing China of lax protection. During the 1990s the U.S. side had for several times listed China as a ¡°a priority targeted country¡± in implementation of the Special 301 provisions of U.S. trade law under the pretext that the Chinese government was unable to prevent cases of violation, and therefore unilaterally released a list of items for reprisal against China. Bilateral negotiations on IPR were held and agreement was reached in 1991, 1994 and 1996 respectively. At the beginning of the new century, the dispute over IPR began to stand out again. In July 2004, U.S. Under Secretary of Commerce accused Chinese enterprises of across-the-board violations of IPR; and in early 2005, the U.S. Chamber of Commerce asked the U.S. government for the first time to subject the issue of counterfeits by China to the WTO for dispute settlement. Furthermore, using ¡°China¡¯s lax IPR protection¡± as an excuse, the U.S. side conducted investigations under Section 337 of the Tariff Act of 1930 (amended) on Chinese products (according to which the U.S. side may intervene in cases of foreign products encroaching on U.S. IPR pursuant to relevant domestic laws). By the end of 2007, the U.S. side had launched a total of 78 cases of ¡°Article 337¡± investigations against China, of which 63 were launched after 2002. The Chinese government had made a great deal of efforts in IPR protection and made significant progress in national legislation and law enforcement as well as international exchange and cooperation for IPR protection. But the U.S. side still holds that China has not done enough in IPR protection without taking adequate and strong law enforcement measures to punish pirate copying.

2. Institutionalization of bilateral consultation and coordination at higher levels.

Despite frequent frictions in bilateral economic exchanges and trade on a more regular basis, better cooperation in this area is important for the vital interests of both sides and the overall bilateral relationship, and therefore both sides have been doing everything possible to prevent such frictions from evolving into a trade war and promote further expansion of economic ties and trade amidst on-and-off frictions. This is the mainstream of bilateral economic relations and trade. To this end, both sides have frequently engaged in policy consultation and coordination ever since the establishment of diplomatic relations. Regular meetings have been held over the decades in China-U.S. Joint Economic Commission (JEC), China-U.S. Commission on Commerce and Trade (JCCT), and China-U.S. Strategic Economic Dialogue (SED).

(1) China-U.S. Joint Economic Commission

The JEC was established as agreed upon by Vice Premier Deng Xiaoping and President Carter during Deng¡¯s U.S. visit in 1979. Meeting alternately in the capitals of the two countries, the Commission is co-chaired by Minister of Finance on the Chinese side and Secretary of the Treasury on the U.S. side with participation of officials from departments in charge of macro-economic regulation and financial matters in the two countries. The first round was held in Washington D.C. in September 1980, inaugurating coordination over economic and trade matters between the two sides. JEC sessions were suspended because of the political unrest in 1989 and resumed in 1994. Since then, the JEC has met annually, alternately in Beijing and Washington D.C. By the end of 2007, there had been a total of 19 rounds. The subject matters taken up at JEC sessions include, inter alia, financial issues, taxation, investment and other macro-economic issues as well as a broad range of specific issues in law enforcement (such as interdicting financial assets of terrorists and terrorist organizations, countering money laundering, import/export of products made with forced labor, etc.), market access, international financial and economic cooperation, consular affairs, implementation of bilateral civil aviation and shipping agreements, etc. The JEC is a useful forum for the two sides to exchange views on financial and economic issues of mutual concern. It has helped the U.S. side to better understand China¡¯s economic system, policies, and measures as well as views on the establishment of a fair international economic order. It also plays an important role in promoting China¡¯s cause of reform and opening-up and ensuring for sound and stable development of China-U.S. economic relations.

(2) China-U.S. Joint Commission on Commerce and Trade (JCCT)

The JCCT was set up in 1983 and its first round was held in May that year. It was elevated to a higher level at the end of 2003. The Co-Chair on the Chinese side was Vice Premier Wu Yi and her counterparts on the U.S. side were U.S. Secretary of Commerce and U.S. Trade Representative. The JCCT held its 19th session in 2008. Major subjects taken up at JCCT sessions extensively cover goods and services trade, market access, investment protection, technological cooperation in industry, protection of intellectual property rights, farm products, textiles, communications and electronics, aviation, medical instruments, energy, transport, chemicals, post and telecommunications, environmental protection, patents, statistics, standardization, commodity inspection, certification (and verification), Import/Export Bank loans, etc. The JCCT enables the two sides to handle and seek to resolve existing and emerging problems in a timely fashion, helps alleviate disputes in bilateral economic exchanges and trade and prevent the outbreak of a trade war with disastrous consequences, so as to ensure for normal and stable development in this area.

(3) China-U.S. Strategic Economic Dialogue (SED)

At their meeting in September 2006, President Hu Jingtao and President Bush agreed to formally launch another dialogue forum proposed by the U.S. side, referred to as SED. The participants mainly discuss overall, long-term and strategic economic issues concerning the common interest of both sides. The SED is convened semi-annually and has met five times so far. The first round was titled ¡°China¡¯s development path and economic development strategy¡±, focusing on five topics divided into 11 sub-topics about: a) ¡°Toward balanced urban and rural development in China¡±; b) ¡°Sustained economic expansion¡±; c) ¡°Promoting trade and investment¡±; d) ¡°Energy and environment¡±; and e) ¡°sustainable development¡±. The second- round of discussions revolved on two major themes of ¡°Innovation and Education¡± and ¡°Growing China-U.S. Economic Ties and Trade¡±, covering a broad range of issues about service sectors, investment and transparency, energy and environment, balanced growth, innovation, etc. The theme of the third round was ¡°Grasping opportunities and meeting challenges in the course of economic globalization¡±. Five topics for discussion were: ¡°Building trust in trade¡±, ¡°Balanced economic growth¡±, ¡°Energy¡±, ¡°Environment¡± and ¡°Two-way investment¡±. The central theme of the fourth round was China-U.S. economic relations in the next decade, focusing on such issues as energy and environmental cooperation, two-way investment protection, fastening the pace of financial reform, and product safety, etc. This round was concluded with the signing of China-U.S. Cooperative Framework on Energy and Environment in the Next Decade and agreement to initiate Bilateral Investment Protection Talks (BIT). The 5th round was held in December 2008 in Washington where the two sides agreed to continue their close communication on systemically significant macro-economic policies, and reaffirmed their commitment to continue maintaining financial market stability, stimulating global growth, rejecting protectionism and promoting open trade and investment.

The SED is a new bilateral regulatory mechanism formed by China and the United States in the economic and trade area for senior officials to discuss a wider spectrum of more integrated issues at a higher level and in greater depth. Building on the other regulatory mechanisms in place, the SED, with strong support from the two Presidents and in their personal involvement, makes up for the institutional deficiencies resulting from different administrative set-ups of the two countries. In addition, it is also necessitated by increased economic interdependence and more divergent and interlocking interests between the two countries in recent years. The SED participants are senior officials from Ministry of Finance, Ministry of Foreign Affairs, State Commission for Reform and Development, Ministry of Science and Technology, Ministry of Labor and Social Security, Ministry of Railway, Ministry of Transport, Ministry of Information Industry, Ministry of Commerce, Ministry of Public Health, Chinese People¡¯s Bank, and State Bureau for Environmental Protection on the Chinese side; and their counterparts from Department of the Treasury, Department of State, Federal Reserve Board, Department of Public Health, Department of Energy, Department of Commerce, Department of Labor, Department of Transport, Presidential Economic Advisory Committee, Office of the U.S. Trade Representative, Environmental Protection Agency and Import/Export Bank on the U.S. side. The SED not only dispenses with the overlapping subjects for discussion and overlapping agency involvement between the JEC and the JCDT, but expands subjects for discussion to address policy streamlining in domestic macro-economic regulation, social development, energy issues and environmental protection.

Both sides are satisfied with the accomplishments of the SED and other bilateral consultation mechanisms. In their meeting before the opening ceremony of the Beijing Olympic Games, President Hu Jintao and President Bush both spoke highly of the SED¡¯s significant role and expressed hope that both sides would make continued efforts to carry on the SED and promote bilateral economic exchanges and trade.

IV. Prospects of China-U.S. Economic Exchanges and Trade and Policy Recommendations

As China¡¯s reform and opening-up proceed in depth and China-U.S. relations continue to stay in a stable course, economic exchanges and trade between the two countries forebode well in future: Bilateral cooperation will expand more extensively; the two economies will be more interdependent; and the two sides will better understand the importance of mutually beneficial bilateral cooperation for both countries. Differences and frictions may emerge from time to time, bilateral ties in the area may continue to be adversely affected by surging trade protectionism, and the pernicious politicization of economic and trade issues in the United States may impede normal development of bilateral exchanges and trade. However, these differences and frictions can be gradually militated or resolved through consultation and coordination.

In handling bilateral economic and trade issues, China and the United States should address economic factors such as matching the advantages and mutual benefits for both sides as well as political and security factors. Looking ahead, there will be numerous favorable factors accompanied with many constraints or uncertainties in economic exchanges and trade between China and the United states.

Favorable Factors

1. The fact that China¡¯s reform and opening-up will proceed in depth provides best assurances for expansion of China-U.S. economic ties and trade. The 17th Congress of the Chinese Communist Party has charted a new course of building a well-off society in China and adopted new measures for deepening reform and opening-up. Such measures include: Transforming the modality of economic operation, perfecting the socialist market economic system, steadfastly adhering to the policy of boosting domestic consumption, stimulating economic expansion through boosting consumption, investment and export in a balanced manner rather than mainly relying on investment and export growth as in the current case; opening up to the world in greater depth and breadth by enhancing the level of economic liberalization, speeding up the pace of transforming the mode of foreign trade expansion with a view to gradually achieving the import-export balance. The implementation of these new measures will ensure continued rapid growth of China¡¯s economy, further market liberalization and reduction of China¡¯s trade surplus, thereby promoting further growth of China-U.S. economic exchanges and trade.

2. Complementarity and interdependence between the Chinese and U.S. economies form a foundation stone for future development of bilateral economic exchanges and trade. The two economies are at different developmental stages with many divergences: First, the U.S. economy is highly market-oriented and its capital market is very mature with great mobility whereas China¡¯s economy is still undergoing market transformation and its capital market is gradually taking shape in the course of opening-up and reform. Secondly, the U.S. economy more relies on service trade whereas China¡¯s economy heavily relies on low-cost, export-oriented products. Thirdly, labor cost in the United States is very high and the traditional sectors are gradually becoming sun-setting industries whereas China has a huge reservoir of low-cost labor and great potential of industrial production capacity. Complementarity emanating from economic divergences between the two countries serves to enhance bilateral cooperation in the economic and trade area and makes the two economies more and more interdependent. The United States is now China¡¯s largest export market while China is an export market for the United States with the fastest-growing market access; the United States is now the country with which China has the largest trade surplus while China has become one of the largest holders of U.S. treasury bonds. Such complementarity and interdependence not only call for continued expansion of bilateral economic exchanges and trade, but highlight the significance of bilateral exchanges for the economic growth of both countries.

3. The principle of mutual benefit is a driving force for further development of bilateral economic ties and trade between the two countries. Growing China-U.S. economic cooperation and trade are truly conducive to the economies and the larger interests of the people in both countries, and it is also a fundamental reason why bilateral cooperation and trade have been steadily developing independent of the will of certain people. As far as China is concerned, with funds, technologies and equipment from the United States and America¡¯s up-to-date management experience, China will be able to make up for the inadequacy of its own development funds and mitigate the pressure for providing huge job opportunities. More importantly, more Chinese products may have better chances of getting more access to both the U.S. market and the global market, so as to enable China to become a world-class exporter and facilitate its own economic growth. According to Chinese statistics, China¡¯s export to the United States in 2007 totaled US$232.7 billion, accounting for 7.5% of China¡¯s GDP; whereas U.S. statistics show, China¡¯s export to the United States was US$330.5 billion that year, accounting for 10.6% of China¡¯s GDP. In other words, 7.5% of China¡¯s GDP derives from its export to the United States. As far as the United States is concerned, growing economic ties and trade with China not only directly benefit American consumers and businesses, but help boost its macro-economic growth. To be more specific: First, U.S. export (of merchandise and services combined) to China provide hundreds of thousands of jobs annually and also prop up employment in the high-salary, high-productivity sectors in the United States; secondly, purchase of high-quality, low-price products imported from China enables American consumers to save up to US$100 billion per year and also serves to check inflation; thirdly, U.S. businesses that have invested in China receive abundant returns. For instance, in 2007 while profits from domestic investment by U.S. businesses fell by 3%, the profits from U.S. investment in China increased by 17%; fourthly, rapid growth of U.S. export to China helps boost fast U.S. economic expansion. At present, export accounts for 12% of U.S. aggregate GDP, which is a record high. Export contributed more than 40% to U.S. economic expansion in 2007, which was partially attributed to the large increase of U.S. export to China. In the past decade, the U.S. export to China has increased at a rate five times higher than that of U.S. export to the rest of the world; in 2000-07, the export by almost all U.S. states to China had increased at a three-digit rate, and among them, there was an increase of 766%, 564%, 521%, 470% and 413% for Arizona, Wisconsin, Michigan, Texas and Ohio, respectively; and lastly, China has used a significant portion of its foreign exchange reserves to purchase U.S. treasury bonds, which apparently helps stabilize the economic and financial situation in the United States. It should be noted in particular that in the context of the ongoing financial crisis that broke out in the United States in the latter half of 2008, most serious ever since the Great Depression in the 1930s, China increased, not reduced, its holding of U.S. treasury bonds while Japan and a number of other countries dumped their U.S. bonds in holding. In August and September, China¡¯s U.S. treasury bond holding increased by US$43.6 billion to reach a total of US$585 billion, thus replacing Japan as the largest foreign holder of U.S. treasury bonds. Recently, U.S. Secretary of the Treasury Paulson admitted frankly that China¡¯s increased holding of U.S. treasury bonds was the strongest action to ¡°bail out¡± the U.S. financial market.

4. Improved bilateral regulatory mechanisms provide favorable conditions for continued development of China-U.S. economic exchanges and trade. The SED, the JEC and the JCCT form a combined interagency network for maintaining stable China-U.S. relations. While the SED plays a lead role in addressing long-term, fundamental issues rather than being confined to micro-economic issues, the JEC, JCCT and others are focused more on more specific economic and trade disputes. The two sets of regulatory mechanisms are mutually reinforcing as a bridge for enhancing China-U.S. economic ties and trade by way of mitigating frictions, ironing out differences and removing disputes between the two sides.

5. Cooperation in the political, security, energy and environmental fields serves as a lubricant in China-U.S. economic exchanges and trade. Being global political powers with shared interest, it is imperative for China and the United States to strengthen political relationship and bilateral cooperation. The United States finds it necessary to engage China on many regional and global issues such as the DPRK and Iranian nuclear issues, countering terrorism, preventing the proliferation of weapons of mass destruction, the Darfur conflict in the Sudan, energy, environmental protection, reduction of poverty, etc. The United States needs China¡¯s support and cooperation in all these areas. It is all the more important for both sides to better cooperate in handling the above issues and further promote bilateral economic exchanges and trade especially when serious frictions have become major obstacles to bilateral economic exchanges and trade.

Constraints

1. U.S. protectionism is raising its head in trade with China. Recently, economic downturn, financial turbulence and increased unemployment in the United States have given rise to economic nationalism and trade protectionism. It is the domestic factors that are the primary causes of the existing U.S. economic difficulties. But the United States blames and shirks the responsibility to other countries. China and other emerging economies bear the brunt as the ¡°scapegoats¡±. There are a considerable number of draft resolutions under deliberation in the U.S. Congress against China on economic, trade and financial disputes between China and the United States, and more may be forthcoming. If passed, they would impede normal trade and economic ties between the two countries.

2. The U.S. side is not likely to stop politicizing economic and trade frictions with China. Rapid growth of China¡¯s economy makes some U.S. politicians more worried that the rise of China would threaten United States¡¯ dominance and vested interests. For political reasons, the United States will not recognize China as a full-grown market economy, and nor will it easily relax its control of exports and technology transfer to China.

3. There will be more, and not less, competition and friction in China-U.S. economic exchanges and trade. In addition to labor-intensive products, as more and more Chinese technology-intensive products are exported to the United States, an increased proportion of such exports to the United States will compete with similar U.S. products on the U.S. domestic market. Moreover, as more Chinese firms invest overseas and invest more, they will compete with U.S. firms overseas. If such competition cannot be properly taken care of, new frictions will crop up between the two sides. Moreover, China-U.S. trade imbalance is not likely to disappear, because it is related to the global pattern of industrial division and structural differences between the Chinese and U.S. economies. The U.S. side will continue to pressure China under the excuse of the trade imbalance by bringing up RMB/USD exchange rate, intellectual property rights, market access and other issues from time to time.

4. What kind of a policy the new U.S. administration will pursue with regard to U.S.-China economic exchanges and trade is not clear. President Obama might take a different approach from his Republican predecessor. His campaign statements and articles he wrote during the campaign indicate that he deems the RMB/USD exchange rate as a core issue in U.S.-China economic relations and would therefore persuade China to change its established position by all possible diplomatic means. In addition, he might exert even stronger pressures to bear upon China on such issues as U.S.-China trade imbalance, intellectual property rights, product safety and discriminative practices against foreign investment in China¡¯s major sectors. More often than not, what the new president will actually be doing may markedly differ from his policy lines declared during the election campaign. Besides, no incoming president, be it Obama or anyone else, would ignore the importance of growing U.S.-China interdependence and ever-expanding bilateral economic exchanges and trade to the United States and rashly pursue policies that would bring about a drastic retraction of economic ties and trade.

Economic cooperation and trade between China as the world¡¯s largest developing country and the United States as the world¡¯s largest developed country constitute a complex but vitally important set of relationship. The fact that the two countries are most important economic and trade partners is not only in their best interest, but is extremely important for world peace and development. As U.S. Under Secretary of the Treasury Allen Holmer pointed out recently, U.S.-China economic exchanges and trade are a pivotal engine of world economy; the two countries contributed a combined 40% and more to the global economic growth in 2008; and one of the most important economic issues confronting the world in the 21st Century was whether or not the United States and China could ¡°correctly¡± handle their relationship in the economic and trade area. It is, therefore, incumbent upon both countries to make sure that sustained healthy development of their bilateral economic exchanges and trade continue to benefit the people of the two countries and mankind as a whole. To this end:

First, the two sides should continue to promote fair trade and economic cooperation between them in accordance with the five principles proposed by Premier Wen Jiabao on his U.S. visit in December 2003. These principles are: 1) Seeking mutual benefit on major issues of common concern, each side taking into consideration both its own interest and that of the other. 2) Putting economic growth first as a top priority, ironing out differences while expanding economic cooperation and trade. 3) Strengthening the role of all bilateral regulatory mechanisms for better communication, cooperation and consultation and preventing intensification of frictions and disputes. 4) Holding consultations on an equal footing. Both sides should seek common ground on major issues while reserving differences over minor ones, and neither side should impose restrictions or apply sanctions at will on the other. 5) Avoiding politicization of economic and trade issues. Both sides should seek to resolve pressing issues in bilateral economic exchanges and trade from a long-term, strategic perspective. Being based on the WTO frameworks and the basic norms of international trade, these should be long-term guiding principles for correctly understanding and properly handling divergences and frictions in China-U.S. trade in the coming years or decades.

Second, both sides should join hands to facilitate stable and harmonious development of bilateral economic relationship. China¡¯s rising economic power in integration with the international economic system is irresistible and bound to have an immense impact on the existing global economic structure. In view of this trend, it is imperative for China and the United States to do the best they can to forge a cooperative and harmonious relationship in economic exchanges. Firstly, on its part, the United States should treat China as an equal, taking an unbiased view of China¡¯s economic growth and social progress, and seeking solutions to its own problems in the course of its own economic expansion rather than taking China as a scapegoat; and China, on its part, should proceed in the course of reform, opening-up and development to the extent that China¡¯s economy is gradually integrating into an emerging international economic system that is acceptable to the United States and other Western countries. Secondly, each side should take the other side¡¯s vital concerns into due consideration and seek to solve economic and trade issues through economic means. While the U.S. side should recognize China as a full-grown market economy and relax its control on technology transfers to China, the Chinese side should provide favorable conditions for increased U.S. high-tech export to China, including better protection of intellectual property rights. And thirdly, efforts should be made to reach out to the general public in both countries so that everyone understands that economic cooperation and trade between the two countries are truly in his or her own interest. As a significant number of China-specific resolutions on economic and trade issues in the U.S. Congress stem from ¡°grass-root¡± constituencies, efforts should be made to dispense with trade protectionist sentiments against China in such grass-root localities. It is, therefore, necessary for the U.S. government to reach out to the American public and let them know that the United States benefits enormously from economic exchanges and trade with China. Meanwhile, the Chinese side should increase economic exchanges and trade with those states and regions where more job opportunities can be created for local people, so that more people will benefit from China-U.S. economic cooperation and trade.

Third, both sides should gradually work for more balanced China-U.S. economic exchanges and trade. It is true that development in trade, direct investment and capital flow is uneven: China has a big surplus in trade with the United States; the U.S. investment in China far exceeds China¡¯s investment in the United States; and much of China¡¯s foreign exchange reserves has flown into the United States as China has purchased and held a huge amount of U.S. treasury bonds and other financial assets. Such unevenness that largely stems from structural differences between the two economies cannot be easily dispensed with in the near future. An urgent need today is not to do away with it, but to improve the regulatory mechanisms through which to achieve balance step by step. In addition, another form of imbalance in bilateral consultation and coordination over economic and trade issues is the ways the two sides approach to such imbalance: The U.S. side is more proactive and tends to produce a long list of specific cases to be taken up for discussion while the Chinese side is more passive, raising more generic questions without caring of whether or not agreement can be reached or how much can be effectively implemented. Some Chinese scholars are of the view that the JCCT and similar dialogue forums have appeared to be the main venue for the U.S. side to resolve issues of their own concern in the past decades. They argue that the Chinese side should follow the U.S. suit. It seems that during the fourth round of the SED, the Chinese side was less passive and gained more leverage.

Finally, both sides should join hands in seeking more common ground for increased bilateral economic cooperation and trade. As China¡¯s reform and opening-up proceed in depth in the changing international circumstances, there are broad prospects for bilateral relations through cooperation between Chinese and U.S. businesses, especially in such areas as financial exchange services, energy, environmental protection, etc. As Chinese corporations are growing stronger and investing more overseas, opportunities for cooperation between Chinese and U.S. corporations in the United States and around the world will multiply. Meanwhile it is necessary for small and medium-sized companies in China and the United States to further increase their business ties in investment and trade. The more they are engaged for increased trade and investment, the more stable China-U.S. economic relationship will be.