IB91121: China-U.S. Trade Issues

Wayne M. Morrison

Foreign Affairs, Defense, and Trade Division

April 13, 2001

CONTENTS

• SUMMARY
• MOST RECENT DEVELOPMENTS
• BACKGROUND AND ANALYSIS
• U.S. Trade with China
• U.S. Exports to China
• Major Imports from China
• China's Economy
• Major U.S.-China Trade Issues
• Violations of U.S. Intellectual Property Rights
• Major Chinese Trade Barriers
• Prison Labor Exports
• China and the World Trade Organization
• Progress in U.S.-China WTO Talks
• The U.S.-China WTO Agreement
• The Relationship Between China's NTR Status and WTO Accession
• Outlook for U.S.-China Trade Relations

SUMMARY

U.S.-China commercial ties have expanded substantially over the past several years. Total U.S.-China trade rose from $17.8 billion in 1989 to $ 116.4 billion in 2000. Yet, U.S.-China economic ties have been strained by a number of issues. For example, U.S. policymakers have expressed concern over the surging U.S. trade deficit with China, which rose from $6 billion in 1989 to nearly $84 billion in 2000. Many analysts blame the burgeoning trade deficit on China's restrictive trade and investment practices.

The United States has pressed China to reduce trade barriers and improve protection of U.S. intellectual property rights (IPR). Under the threat of U.S. trade sanctions, China agreed to reduce trade barriers and improve IPR protection. Despite some reforms, market access and IPR piracy remain serious problems for U.S. firms in China.

China has made its accession to the WTO a top priority; it has conducted bilateral negotiations with the United States and 36 other WTO members over the terms of that accession. Until recently, U.S.-China WTO made relatively little progress. However, on November 15, 1999, U.S. and Chinese officials announced they had reached a bilateral trade agreement on China's WTO accession. China agreed to cut tariffs and remove non-tariff barriers on trade in agriculture and industrial products and services, eliminate various restrictions on foreign investment in China, and accept U.S. use of safeguard measures to temporarily guard against possible import surges which might harm certain U.S. industries. China must still reach bilateral negotiations with Mexico and complete its talks with the WTO Working Party before a vote can be taken in the WTO to admit China.

In order for the WTO agreements to fully apply between the United States and China, the United States must grant permanent normal trade relations (PNTR) status to China (currently, that status is renewed on an annual basis). Legislation (H.R. 4444) granting PNTR status to China passed the House on May 24, 2000, and in the Senate on September 19^th. The bill was signed into law on October 10, 2000 (P.L. 106-286). The Act would grant PNTR status to China upon its accession to the WTO as long as the President certified that the terms of China's accession were at least equivalent to the November 1999 U.S.-China WTO agreement. In addition, the Act establishes a special Congressional-Executive commission to monitor, and report on, various aspects of China's on human rights policies; requires the U.S. Trade Representative (USTR) to annually issue a report assessing China's compliance with its WTO trade obligations; authorizes funding for programs to monitor and seek enforcement of China's compliance with its WTO trade commitments; sets up a special government task force to halt U.S. imports from China of products suspected of using prison labor; and authorizes funding for programs to promote the development of the rule of law in China.

The 107^th Congress will likely press the Bush Administration to closely monitor China's compliance with its WTO commitments once it becomes a member. The required annual report by the USTR on China's WTO implementation will likely become the focal point of potential congressional concerns over China's compliance.

MOST RECENT DEVELOPMENTS

On January 10-17, 2001, the WTO Working Party handling China's WTO application reconvened and made additional progress on China's accession bid. However, several outstanding issues remained, including China's use of agricultural subsidies in the WTO.

On October 10, 2000, President Clinton signed into law H.R. 4444 (P.L. 106-286), a bill that would grant PNTR status to China upon its accession to the WTO, establish a Congressional-Executive commission to monitor China's human rights practices, codify the anti-import surge provisions of the November 1999 U.S.-China WTO agreement, establish mechanisms to monitor and promote China's compliance with its WTO commitments, and set up a special government task force to improve U.S. efforts to halt imports of goods from China that use prison labor. The bill passed in the House on May 24, 2000 and in the Senate on September 19, 2000.

BACKGROUND AND ANALYSIS

U.S. Trade with China

U.S.-China trade rose rapidly after the two nations established diplomatic relations (January 1979), signed a bilateral trade agreement (July 1979), and provided mutual MFN treatment beginning in 1980. Total trade (exports plus imports) between the two nations rose from $4.8 billion in 1980 to $116.4 billion in 2000 -- making China the 4th largest U.S. trading partner (see Table 1). The U.S. trade deficit with China has grown significantly in recent years due largely to a surge in U.S. imports of Chinese goods relative to U.S. exports to China. That deficit has risen from $3.5 billion in 1988 to $83.8. billion in 2000. China surpassed Japan in 2000 as the largest deficit trading partner of the United States.

Table 1. U.S. Merchandise Trade with China: 1988-2000
($ Billions)

Source: U.S. Department of Commerce.

U.S. Exports to China

U.S. exports to China in 2000 totaled $16.3 billion, accounting for 2.1% of total U.S. exports to the world, and making China the 11th largest market for U.S. exports (see Table 2). The top five U.S. exports to China in 2000 were electrical machinery, transport equipment (mainly aircraft and parts), office machines (e.g., computers), oilseeds, and general industrial machinery and equipment. Together, these five commodities accounted for about 42% of total U.S. exports to China in 2000. U.S. exports to China in 2000 were nearly 24% higher than 1999 levels. Much of that increase was accounted for by a surge in U.S. exports of oilseeds and computers.

Table 2. Top 5 U.S. Exports to China: 1996-2000
($ in millions)

Commodities sorted by top 5 exports in 2000.

Source: U.S. Department of Commerce.

Many trade analysts argue that China could prove to be a significant market for U.S. exports in the future. China is one of the world's fastest growing economies, and rapid economic growth is likely to continue in the near future, provided that economic reforms are continued. China's goal of modernizing its infrastructure and upgrading its industries is predicted to generate substantial demand for foreign goods and services. Chinese officials predict that such needs will generate $1.5 trillion in increased imports from 1999-2005. According to a U.S. Department of Commerce report: "China's unmet infrastructural needs are staggering. Foreign capital, expertise, and equipment will have to be brought in if China is to build all the ports, roads, bridges, airports, power plants, telecommunications networks and rail lines that it needs." Finally, economic growth has substantially improved the purchasing power of Chinese citizens, especially those living in urban areas along the east coast of China. It is projected that by the year 2005, China will have more than 230 million middle-income consumers (i.e., those earning $1,000 or more annually), whose combined retail spending will exceed $900 billion. If achieved, this would likely make China the world's largest market for consumer goods and services and a major market for luxury goods.

Major Imports from China

China is a relatively large source of many U.S. imports, especially labor-intensive products. In 2000, imports from China totaled $100.1 billion, accounting for 8.0% of total U.S. imports, and making China the 4th largest supplier of U.S. imports. U.S. imports from China in 2000 rose by 22.3% over 1999 levels. The top five U.S. imports from China in 2000 were miscellaneous manufactured articles (such as toys, games, etc.); office machines;

telecommunications equipment, sound recording, and reproducing equipment (such as telephone answering machines, radios, tape recorders and players, televisions, VCRs, etc.);

footwear; and electrical machinery (see Table 3). Together, imports of these five commodities accounted for nearly 59% of total U.S. imports from China in 2000.

Table 3. Top 5 U.S. Imports From China: 1996-2000
($ in millions)

Commodities sorted by top 5 imports in 2000.

Source: U.S. Department of Commerce.

China's Economy

China's economic reforms and open investment policies (which were begun in 1978) have contributed to a surge in economic growth. From 1979 to 2000, China's real GDP grew at an average annual rate of 9.5%, making it one of the world's fastest growing economies; real GDP grew by 8.0% in 2000. Many economists predict that, if China continues to implement economic reforms, its annual real GDP growth will likely average at least 7% over the next two decades, enabling China to double the size of its economy every 10 years (see CRS Issue Brief IB98014, China's Economic Conditions).

China has quickly become a major recipient of foreign direct investment (FDI), a key factor in its rapid economic growth. Much of that investment has gone into export-oriented production facilities. Annual utilized FDI in China grew from $636 million in 1983 to $40.5 billion in 1999. Cumulative foreign investment in China at the end of 1999 totaled $309.1 billion. A significant share of FDI in China has come from overseas Chinese, especially Hong Kong and Taiwan. The United States is the third largest investor in China. Major U.S. corporate investors in China include Motorola, Atlantic Richfield, Coca Cola, Amoco, Ford Motor, United Technologies, Pepsi Cola, Lucent Technologies, General Electric, and General Motors.

China has quickly become a major world trading power. Total Chinese trade (exports plus imports) rose from $21 billion in 1978 to $474.3 billion in 2000. Chinese exports in 1999 were $249.2 billion, while imports were $225.1 billion, producing a $22.1 billion trade surplus. The influx of foreign investment and the high growth of its exports have enabled China to accumulate a significant level of foreign exchange reserves -- currently at about $166 billion.

Major U.S.-China Trade Issues

While China's economic reforms and rapid economic growth have expanded U.S.-China commercial relations in recent years, disputes have arisen over a wide variety of issues, including, China's failure to provide adequate protection of U.S. intellectual property rights (IPR), the widespread and pervasive use by China of trade and investment barriers, allegations that China has attempted to illegally obtain U.S. high technology, textile transshipments to the United States, the use of prison labor in the production of various exported products to the United States, and the conditions for China becoming a member of the World Trade Organization (WTO).

Violations of U.S. Intellectual Property Rights

Section 182 of the Trade Act of 1974 as amended (also known as "Special 301"), requires the USTR to identify "priority foreign countries" that fail to provide adequate and effective protection of U.S. intellectual property rights (IPR), such as patents, copyrights, trademarks, and trade secrets, or deny fair and equitable market access to U.S. firms that rely on IPR protection. The USTR is directed to seek negotiations with the priority foreign countries to end such violations and, if necessary, to impose trade sanctions if such negotiations fail to produce an agreement.

In April 1991, China (along with India and Thailand) was named as a "priority foreign country" under Special 301. The USTR began a Section 301 investigation in May 1991, claiming China's laws failed to provide adequate protection of patents, copyrights, and trade secrets. In November 1991, the USTR threatened to impose $1.5 billion in trade sanctions if an IPR agreement was not reached by January 1992. Last-minute negotiations yielded an agreement on January 16, 1992. China promised to strengthen its patent, copyright, and trade secret laws, and to improve protection of U.S. intellectual property, especially computer software, sound recordings, chemicals, and pharmaceuticals.

In June 1994, the USTR again designated China as a Special 301 "priority foreign country," because it had failed to enforce recently enacted IPR laws. In particular, the USTR cited the establishment of several factories in China producing pirated compact and laser disks, as an example of China's "egregious" violation of U.S. IPR. In addition, the USTR stated that trade barriers had restricted access to China's market for U.S. movies, videos, and sound recordings, and that such restrictions encouraged piracy of such products in China. On February 4, 1995, the USTR announced that insufficient progress had been made in talks with Chinese officials and issued a list of Chinese products, with an estimated value of $1.1 billion, which would be subject to 100% import tariffs. However, a preliminary agreement was reached on February 26, 1995, and a formal agreement was signed on March 11, 1995. The new agreement pledged China to substantially beef up its IPR enforcement regime and to remove various import and investment barriers to IPR-related products. Specifically, China agreed to:

Take immediate steps to stem IPR piracy in China over the course of the next 3 months by taking action against large-scale producers and distributors of pirated materials, and prohibiting the export of pirated products.

Establish mechanisms to ensure long-term enforcement of IPR laws, such as banning the use of pirated materials by the Chinese government, establishing a coordinated IPR enforcement policy among each level of government, beefing up IPR enforcement agencies, creating an effective customs enforcement system, establishing a title verification system in China to ensure that U.S. audio visual works are protected against unauthorized use, reforming China's judicial system to ensure that U.S. firms can obtain access to effective judicial relief, establishing a system of maintaining statistics concerning China's enforcement efforts and meeting with U.S. officials on a regular basis to discuss those efforts, improving transparency in Chinese laws concerning IPR, and strictly enforcing IPR laws.

Provide greater market access to U.S. products by removing import quotas on U.S. audio visual products, allowing U.S. record companies to market their entire works in China (subject to Chinese censorship concerns), and allowing U.S. intellectual property-related industries to enter into joint production arrangements with Chinese firms in certain cities.

Several U.S. firms charged that IPR piracy in China worsened in 1995, despite the 1995 IPR agreement, and pressed the USTR to take tougher action against China. The International Intellectual Property Alliance (IIPA), an association of major U.S. copyright-based industries, estimated that IPR piracy by Chinese firms cost U.S. firms $2.3 billion in lost trade during 1995.

On April 30, 1996, the USTR again designated China as a Special 301 "priority foreign country" for not fully complying with the February 1995 IPR agreement. According to the USTR, while China had cracked down on piracy at the retail level (launching raids and destroying millions of pirated CDs and hundreds of thousands of pirated books, sound recordings, and computer software), it had failed to take effective action against an estimated 30 or so factories in China that were mass-producing and exporting pirated products. U.S. officials called on the Chinese government to close such factories, prosecute violators, and destroy equipment used in the production of pirated products. Further, the USTR stated that China failed to establish an effective border enforcement mechanism within its customs service to prevent the export of pirated products. Finally, The USTR indicated that China failed to provide sufficient market access to U.S. firms, due to high tariffs, quotas, and regulatory restrictions. Shortly after, the USTR indicated it would impose U.S. sanctions on $2 billion worth of Chinese products by June 17, 1996, unless China took more effective action to fully implement the IPR agreement. On June 17, 1996, USTR Charlene Barshefsky announced that the United States was satisfied that China was taking steps to fulfill the 1995 IPR agreement. Barshefsky cited the Chinese government's recent closing of 15 plants producing illegal CDs and China's pledge to extend a period of focused enforcement of anti-piracy regulations against regions of particularly rampant piracy, such as Guangdong Province. The Chinese government also promised to improve border enforcement to halt exports of pirated products as well as illegal imports of presses used to manufacture CDs. Further, the Chinese government reaffirmed its pledge to open up its market to imports of IPR-related products. Finally, Chinese officials promised to improve monitoring and verification efforts to ensure that products made by Chinese CD plants and publishing houses are properly licensed.

The USTR has stated that China has made great strides in improving its IPR protection regime, noting that it has passed several new IPR-related laws, closed or fined 74 assembly operations for illegal production lines, seized millions of illegal audio-visual products, curtailed exports of pirated products, expanded training of judges and law enforcement officials on IPR protection, and has expanded legitimate licensing of film and music production in China. In April 1999, the USTR announced that the Chinese government had issued a new high-level directive to all Chinese government entities directing that they use only legitimate computer software, a move described by the USTR as a "milestone in China's efforts to increase intellectual property protection."

The USTR notes, however, that IPR piracy remains a serious problem in China, especially illegal reproduction of software, retail piracy, and trademark counterfeiting. Chinese enforcement agencies and judicial system often lack the resources needed to vigorously enforce IPR laws; convicted IPR offenders generally face minor penalties. In addition, while market access for IPR-related products has improved, high tariffs, quotas, and other barriers continue to hamper U.S. exports; such trade barriers are believed to be partly responsible for illegal IPR-related smuggling and counterfeiting in China. The IIPA estimated that IPR piracy in China cost U.S. firms $1.7 billion in lost sales in 1999-an improvement over 1998 losses which were estimated at $2.6 billion.

Major Chinese Trade Barriers

For many U.S. firms, China remains a difficult market to penetrate, due largely to Chinese government policies, which attempt to protect and promote domestic industries. Chinese trade policies generally attempt to encourage imports of products which are deemed beneficial to China's economic development and growth (and which are generally are not produced in China), such as high technology, as well as machinery and raw materials used in the manufacture of products for export. In many cases, preferential trade policies are used to encourage these priority imports. Goods and services not considered to be high priority, or which compete directly with domestic Chinese firms, often face an extensive array of tariff and non-tariff barriers. Such policies make it difficult to export products directly to China. As a result, many U.S. firms have established production facilities in China to gain access to the China market. However, foreign-invested firms in China face a wide variety of barriers as well. U.S. government officials maintain that China's restrictive trade and investment policies are a leading cause of the surging U.S.-China trade imbalance. Major Chinese barriers of concern include:

• High tariffs. The average Chinese tariff rate is currently 17% (down from an average rate of 42% in 1996), but tariffs on selected items, such as autos and various agricultural products, can rise to 100% or more.

• Pervasive non-tariff barriers are arbitrarily used to control the level of certain imports into China, including quotas, import licenses, registration and certification requirements, and restrictive technical and sanitary standards (especially in respect to agricultural products).

• Non-transparent trade rules and regulations. China's trade laws and regulations are often secretly formulated, unpublished, unevenly enforced, and may vary across provinces, making it difficult for exporters to determine what rules and regulations apply to their products. In addition, foreign firms find it difficult to gain access to government trade rule-making agencies to appeal new trade rules and regulations.

• Trading rights. China restricts the number and types of entities in China that are allowed to import products into China, which limits the ability of both Chinese and foreign firms in China to obtain imported products. Foreign companies are not permitted to directly engage in trad in China. In addition, trading rights for many agricultural products are given exclusively to Chinese state trading companies, which are directed to import only if there is a domestic shortfall of certain products.

• Distribution rights. Most foreign companies are prohibited from selling their products directly to Chinese consumers.

• Investment restrictions. Chinese officials pressure foreign investors to agree to contract provisions which stipulate technology transfers, exporting a certain share of production, and commitments on local content. Other problems faced by foreign firms in China include the denial of national treatment (i.e., foreign firms are treated less favorably than domestic firms), foreign exchange controls, distribution and marketing restrictions, and the lack of rule of law.

In October 1991, the Bush Administration initiated a Section 301 case against four significant unfair trading practices affecting U.S. exports to China: tariff and non-tariff barriers to certain products, restrictive import license requirements, technical barriers to trade (such as discriminatory standards for agricultural products), and non-transparency in Chinese trade laws. The Section 301 case was the most sweeping market access investigation in the USTR's history; it was essentially aimed at reforming China's entire trade regime.

On August 21, 1992, the USTR determined that negotiations had failed to resolve the trade dispute and threatened to impose $3.9 billion in U.S. trade sanctions unless an agreement was reached by October 10, 1992. The proposed sanctions were (at that time) the highest level ever issued by the USTR under a Section 301 case. On October 10, 1992, the United States and China reached an agreement settling the Section 301 case. China pledged to reduce or eliminate a wide variety of trade barriers over the next five years (according to specific timetables), including tariffs, quotas, import controls, import licenses, and import substitution laws. In addition, China agreed to make its trade regime more transparent by publishing trade laws and regulations. Finally, China agreed to eliminate scientific standards and testing barriers to agricultural imports.

The market access agreement was supposed to have been fully implemented by the end of 1997. USTR officials have noted that China has made significant reforms to its trade regime as specified under the trade agreement. However, in some cases, China eliminated certain trade barriers, only to impose new barriers (such as certification requirements for certain products). In addition, China failed to fully eliminate discriminatory sanitary regulations on several imported food products. Finally, while China has published many of its trade laws and regulations, transparency remains a problem for many foreign firms. For example, China has not published many of its quota levels.

U.S. officials have raised concerns that China over the past year has imposed several new trade barriers (such as quotas, registration requirements, and restrictions on foreign investment) on a variety of sectors, including agriculture, telecommunications equipment and services, power generating equipment, and insurance. In addition, new financial controls on trade (imposed in July 1998 in order to crack down on illegal foreign exchange transfers) have negatively affected the ability of foreign firms in China to obtain foreign currency to repatriate profits and to purchase imported materials used in production.

Prison Labor Exports

Some analysts charge that the use of forced labor is widespread and a long-standing practice in China, and that such labor is used to produce exports, a large portion of which may be targeted to the United States. The importation from any country of commodities produced through the use of forced labor is prohibited by U.S. law, although obtaining proof of actual violations for specific imported products is often extremely difficult.

On August 7, 1992, the United States and China signed a Memorandum of Understanding (MOU) to ensure that prison labor products were not exported to the United States. However, U.S. disputes with China over its implementation of the MOU led to the signing of a "statement of cooperation" (SOC) on March 14, 1994, which included provisions which clarify procedures for U.S. officials to gain access to Chinese production facilities suspected of exporting prison labor products. President Clinton's May 1994 report to Congress on renewing China's MFN status stated that China had generally abided by the agreements on prison labor. However, the U.S. Department of State's China Country Report on Human Rights Practices for 1998 states that: "Although the signing of the SOC initially helped foster a more productive relationship between the U.S. Customs and Chinese authorities, cooperation overall has been inadequate." According to the 1999 State Department Human Rights report, during 1999 U.S. Customs unsuccessfully pursued several standing requests to visit eight sites suspected of exporting prison labor products (one of which dated back to 1992, and several dating back to 1994), and renewed requests (several dating back to 1994) for the Chinese Ministry of Justice to investigate seven factories and three penal facilities for evidence of prison labor exports. The Justice Ministry did not respond to any of these requests.

China and the World Trade Organization

Negotiations for China's accession to the General Agreement on Tariffs and Trade (GATT), and now WTO (the successor organization to the GATT), have gone on for 15 years. Chinese leaders have stated that gaining entry into the World Trade Organization (WTO) is a major Chinese priority. They believe that WTO membership would enable China to gain full nondiscriminatory treatment in its trade relations with WTO members (especially the United States) and provide it access to the multilateral trade dispute resolution process. Supporters of China's WTO membership argue that it would bring China's trade regime in line with other WTO members and would result in a significant reduction of Chinese trade barriers. Negotiations on China's WTO membership are being held on two fronts: multilateral negotiations in a Working Party composed of all interested WTO members and bilateral negotiations between China and individual WTO members. Currently at issue are the specific steps China would be required to take to gain accession to the WTO.

Progress in U.S.-China WTO Talks. China and the United States reportedly made significant progress towards resolving major differences in their bilateral WTO negotiations during Chinese Premier Zhu Rongji's meeting with President Clinton on April 8, 1999. According to U.S. officials, China offered to cut tariffs significantly and remove non-tariff barriers on U.S. trade in agriculture, industrial goods, and services, and to eliminate various restrictions on foreign investment, trading rights, and distribution for U.S. firms in China. Separately, China agreed to eliminate unjustified sanitary and phytosanitary (SPS) bans on wheat, citrus, and beef immediately.

Although the Clinton Administration stated that China's market access offer would bring China into the WTO at above existing WTO standards on issues and sectors of major concern to the U.S., it concluded that an agreement could not be finalized until certain outstanding issues could be resolved, namely market access in China for banking, securities, and audio visual services, and provisions governing U.S. rules for antidumping, import surges, and textile quotas. However, the United States and China did reach an agreement (the Bilateral Agricultural Cooperation Agreement) under which China agreed to remove technical barriers to trade (such SPS restrictions) on U.S. meat, citrus, and wheat exports to China.

On April 13, 1999, the two sides agreed to intensify negotiations towards reaching a final agreement. However, following the accidental NATO bombing of the Chinese embassy in Belgrade on May 7, 1999, China suspended the WTO talks (as well as its implementation of the bilateral agreements on wheat, citrus, and beef). These talks were officially resumed on September 11, 1999, during a meeting between President Clinton and Chinese President Jiang Zemin in New Zealand.

The U.S.-China WTO Agreement. On November 15, 1999, U.S. and Chinese officials announced that a bilateral agreement relating to China's WTO bid was reached. The Clinton Administration released the full text of the agreement on March 14, 2000. Under the agreement, China promised that after gaining WTO membership it would take the following steps (some on accession and others over specified phase-in periods):

• Provide full trading and distribution rights (including the ability to provide services auxiliary to distribution) for U.S. firms in China.

• Cut average tariffs for U.S. priority agriculture products (beef, grapes, wine, cheese, poultry, and pork) from 31.5% to 14.5% by 2004. Overall industrial tariffs would fall from an average of 24.6% to 9.4% by 2005 (tariffs on U.S. "priority products," such as wood, paper, chemicals, and capital and medical equipment, would fall even further). Tariffs on information technology products, such as computers, semiconductors, and telecommunications equipment, would be cut from an average level of 13.3% to zero by 2005.

• Establish a tariff-rate quota system for imports of agricultural bulk commodities (such as wheat, corn, cotton, barley, and rice), i.e., imports up to a specified quota level would be assessed a low tariff (1-3%), while imports above a certain level would be assessed a much higher tariff rate. Private trade in agricultural products would be permitted for the first time.

• Phase out quotas and other quantitative restrictions (some upon accession, many within two years, and most within five years). Quota levels for many products would expand by 15% each year until the elimination of the quota.

• Eliminate unscientifically based SPS restrictions on agricultural products and end export subsidies.

• Open service sectors (many of which are currently closed to foreign firms), including distribution, value-added telecommunications, insurance, banking, securities, and professional services (including legal, accountancy, taxation, management consultancy, architecture, engineering, urban planning, medical and dental, and computer-related services). China would expand (over various transitional periods) the scope of allowed services and gradually remove geographical restrictions on foreign service providers. The amount of permitted foreign ownership in service industries would vary (and in some cases expand over time) from sector to sector.

• Reduce restrictions on auto trade. Tariffs on autos would fall from 80-100% to 25% (tariffs on auto parts reduced to an average rate of 10%) by 2006. Auto quotas would be eliminated by 2005. U.S. financial firms would be allowed to provide financing for the purchase of cars in China.

• Provide fair treatment for foreign firms operating in China by removing government rules requiring technology transfer, local content, and export performance conditions.

• Provide that Chinese state-owned firms make purchases and sales based on commercial considerations and give U.S. firms the opportunity to compete for sales on a non-discriminatory basis.

• Accept the use by the United States of certain safeguard, countervailing, and antidumping provisions (over transitionary periods) to respond to possible surges in U.S. imports from China of various products, such as textiles, that might cause or threaten to cause market disruption to a U.S. industry.

The conclusion of the U.S.-China bilateral WTO trade agreement was an important step in China's WTO bid, due in part to the important role the United States plays in the WTO, and since Chinese officials in the past complained that the United States' position on China's WTO accession was the main obstacle to China's admission. However, China must still conclude bilateral agreements with Mexico and complete talks with the WTO Working Party over the nature of its trade regime, before a final vote can be taken in the WTO on China's accession.

The WTO Working Party handling China's WTO accession last met during January 10-17, 2001. Although some progress was made, several issues remained unresolved, particularly China's use of agricultural subsidies after it joins the WTO. China has insisted that it be treated as a developing country with regards to agricultural trade, enabling it to reduce domestic subsidies over a longer period of time, and to maintain higher levels of domestic supports than are required of developed countries. The United States and other WTO members have resisted China's efforts to maintain a high level of agricultural subsidies after WTO accession due to concerns that it could offset the potentially large benefits to agricultural exporters from the concessions on tariff and non-tariff barriers China has committed to in its bilateral WTO agreements with the United States and other WTO members. A recent Inside U.S. Trade article states that China and the United States have reached a preliminary agreement on this issue: China would be allowed to claim developing country status for its agriculture in the WTO, but the level of trade-distorting subsidies allowed would be below that enjoyed by current developing country WTO members. Despite this reported breakthrough, China's accession to the WTO will not likely occur until the end of 2000 or early 2001.

The Relationship Between China's NTR Status and WTO Accession

Under current U.S. law, China's normal trade relations (NTR) status (formally referred to in U.S. law as most-favored-nation, or MFN, status) is renewed on an annual basis, based on the freedom-of-emigration requirements under the so-called Jackson-Vanik amendment, and subject to possible congressional disapproval through passage and enactment of a joint resolution. From 1980 (when NTR status was restored to China after being suspended in 1951) to 1989, the renewal of China's NTR status was relatively noncontroversial and was relatively unopposed by Congress. However, congressional concern over the Tiananmen Square incident in 1989 and subsequent crackdown on human rights led many Members to support legislation terminating the extension of China's NTR status or to condition that status on additional requirements, mainly dealing with human rights. Although none of these measures were enacted, many Members sought to use the annual renewal of China's NTR status as a focal point to express concerns, as well as to pressure the executive branch, over a wide range of Chinese trade (e.g., trade barriers and failure to protect IPR) and non-trade (e.g., human rights, prison labor, Taiwan security, and weapons proliferation) issues. Several members opposed such linkage, arguing that it had little effect on Chinese policies and that the often rancourous congressional debate over China's trade status undermined long-term U.S.-Chinese relations and added uncertainty to the trade relationship.

During its negotiations with China over the terms of its WTO accession, the Clinton Administration pledged that, in return for significant market opening commitments on the part of China, it would press the Congress to enact PNTR legislation. Once a satisfactory bilateral agreement was reached with China in November 1999, the Clinton Administration began to push for PNTR legislation. Many analysts had warned that passage of such legislation, especially during an election year, might prove extremely difficult.

The Clinton Administration and its supporters argued that China would get into the WTO with or without congressional approval of PNTR status for China, and that failure to pass such legislation would prevent the United States and China from having an official trade relationship in the WTO. As a result, it was contended, U.S. firms would be excluded from the trade concessions made by China to gain entry into the WTO, while U.S. competitors in the WTO would be able to take full advantage of new business opportunities in China, and the United States would be unable to use the WTO dispute resolution process to resolve trade disputes with China. The Clinton Administration further maintained that China's accession to the WTO would promote U.S. economic and strategic interests, namely by inducing China to deepen market reforms, promote the rule of law, reduce the government's role in the economy, and further integrate China into the world economy, making it a more reliable and stable partner. Finally, the Administration contended that congressional rejection of PNTR would be viewed by the Chinese as an attempt to isolate China economically; such a move would seriously damage U.S.-China commercial relations and undermine the political position of economic reformers in China.

Despite these arguments and strong lobbying by various U.S. business interests, passage of China PNTR was highly uncertain when Congress began consideration of legislation in May 2000. Many Members raised concerns over the effects China's WTO membership would have on U.S. import sensitive industries, while others expressed reservations over giving up what they perceived as leverage over China's human rights policies. The Clinton Administration and congressional supporters of PNTR legislation sought to craft a compromise that would gain support of undecided members without alienating members who wanted a "clean" PNTR bill.

H.R. 4444, as originally introduced by Representative Bill Archer, would have granted PNTR status to China upon its accession to the WTO as long as the President certified that the terms of its accession were at least equivalent to the November 1999 U.S.-China trade agreement. Several provisions were added by the House to H.R. 4444 in response to various congressional concerns. In addition to the provisions contained in the original version of H.R. 4444, the final bill (which passed in the House on May 24th and in the Senate on September 19th), would:

• establish a special Congressional-Executive commission to monitor, and report on, various aspects of China's policies on human rights, including labor practices and religious freedom;

• require the USTR to issue a report annually assessing China's compliance with its WTO trade obligations;

• codify the anti-surge mechanism established under the November 1999 U.S.-China trade agreement and establishes procedures for obtaining relief from import surges;

• expand funding for various U.S. government agencies to monitor and seek enforcement of China's compliance with its WTO trade commitments;

• set up a special government task force to halt U.S. imports from China of products suspected of using prison labor; and

• provide funding for programs to promote the development of the rule of law in China.

If China does not gain WTO accession by June 2001, President Bush will have to issue a waiver (under the Jackson-Vanik amendment) to extend China's NTR status for an additional year, which could be subject to a congressional vote to disapprove that waiver.

Outlook for U.S.-China Trade Relations

A U.S. extension of PNTR status to China and entry by China into the WTO could have important ramifications for U.S.-China economic relations. First, Congress would no longer vote annually on China's trade status, which could help bring greater stability and predictability to the relationship than has been the case over the past several years. Second, the United States (as well as China) would be able to use WTO dispute resolution process to resolve trade disputes. Many analysts believe China would more likely comply with a ruling from a multilateral institution than from a threat of unilateral U.S. sanctions. Third, subjecting China's trade regime to multilateral rules and agreements would mean that the United States would no longer have to "go it alone" in trying to get China to open its markets; other WTO members would have an equally strong stake in ensuring China's compliance with its WTO commitments. Finally, China's accession to the WTO would likely improve the business climate in China, leading to greater trade and investment opportunities for U.S. firms. A sizable increase in U.S. exports to China would help reduce tensions over trade issues. However, many analysts have raised concern over the ability of the Chinese government to fully implement its WTO commitments once it obtains membership. Corruption and local protectionism are rampant in China, and gaining the cooperation of local officials and government bureaucrats that oversee various affected industries could prove difficult in the short run. In addition, economic reforms required under WTO commitments could lead to significant employment disruptions, especially among farmers and employees of inefficient state-owned enterprises. Some analysts warn that such disruptions might erode the government's determination to fully implement its WTO commitments, especially if it fears social stability is threatened. Such concerns may partially explain why China has not yet been able to complete its WTO accession negotiations.

U.S. officials complain that China has failed to fully live up to the April 1999 U.S.-China Bilateral Agricultural Cooperation Agreement. They charge that, in some cases, China has removed one barrier only to replace it with another, while in other cases, China has failed to remove all the restrictions specified under the agreement. As a result, U.S. officials contend that U.S. agricultural exporters have not gained the level of increased access to Chinese markets envisioned when the agreement was reached. Some officials fear that this experience will be repeated after China joins the WTO.

Congress will likely continue to play an active role in U.S.-China commercial relations. For example, it will likely press the Bush Administration to ensure China's trade compliance with its WTO commitments. The required annual report by the USTR on China's WTO implementation will likely become the focal point of potential Congressional concerns over China's compliance. If U.S. exports fail to increase significantly, and the USTR's report finds serious problems with China's compliance, Congress may press the Administration to file dispute resolution cases against China in the WTO.

Congressional Members concerned with China's human rights conditions will likely focus their attention on the soon-to-be established Congressional-Executive commission on China, which will monitor China's human rights policies and maintain a "victim's list" of citizens suffering from various abuses. The commission will issue annual reports to Congress, including findings and recommendations. The House International Relations Committee will be required to hold hearings on the content of the report. Members may seek to use this process to focus attention on China's human rights abuses, and possibly to develop legislative responses to such abuses. The Chinese government would likely respond negatively to the findings of the commission (and any subsequent action by Congress); it has tended to treat pressure over its human rights policies as interference in its internal affairs.

If China fails to gain WTO accession by June 2001, President Bush will have to issue a waiver to extend China's NTR status for an additional year, which could be subject to a congressional vote to disapprove that waive.

It is not clear whether the April 2001 incident involving the collision of a Chinese jet fighter and a U.S. Navy surveillance plane (and the subsequent detention by China of 24 U.S. crew members) will affect long-term U.S.-China economic relations. Certain incidents in the past have led to short-term disruptions in U.S.-China economic relations, but appear to have had little impact over the long run. For example, following the accidental NATO bombing of the Chinese embassy in Belgrade on May 7, 1999, China suspended negotiations with the United States over its bid to join the World Trade Organization (WTO). U.S.-China WTO negotiations were officially resumed on September 11, 1999 during a meeting between President Clinton and Chinese President Jiang Zemin in New Zealand and a bilateral WTO agreement was reached two months later. However, further escalation of tensions between China and the United States, should they occur, could begin to affect bilateral economic ties in a number of areas, including trade, investment, and negotiations on China's WTO bid.

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