Wang Yong
2002 was a year that witnessed continuing rapid growth in trade and
investment between China and the United States. And the pace of
this growth was up on the year before.
According to the latest data from the China's General
Administration of Customs, the overall volume of China-US trade
reached some US$78.4 billion during the first ten months of 2002.
Making up this total, Chinese exports to the United States stood at
US$56.5 billion with imports of US$21.9 billion from the US.
Experts forecast that when the final figures are in for the full
year, China-US trade for 2002 will hit a record high of about US$92
billion, well up on the US$80.5 billion seen in 2001. These
statistics would mean that Chinese exports grew by some 23 percent
last year and are showing a faster growth rate than American
exports to China.
However according to US Department of Commerce figures, China-US
trade volume reached US$118.8 billion in the first ten months of
2002. Whichever data are used, China has retained its place as the
fourth largest trading partner of the United States and it is trade
with China that produces the US's largest bilateral trade
deficit.
In
2002, China attracted the largest amount of foreign direct
investment (FDI) of any country in the world. For the third
consecutive year it was the US that led this foreign investment.
American investment in China has risen in terms of the numbers of
projects funded, total contract value and actual expenditure.
From January to August 2002, American companies invested in 2,066
projects in China, an increase of some 25 percent on the
corresponding period in the previous year. Contracts signed
amounted to US$7.1 billion, up over 30 percent and actual
expenditure at US$3.5 billion was also up over 30 percent.
Over the years, contracts involving direct inward investment from
the United States would add up to as much as US$75.3 billion with
accumulated actual expenditure running at US$38.4 billion.
Several factors contributed to the expansion in China-US economic
and trade relations during 2002. The rapid growth of the Chinese
economy set against a background of WTO entry and the opening up of
domestic markets has done much to strengthen the confidence of
international investors in China.
Over 300 of America's top 500 companies now have investments in
China. A poll of members of the American Chamber of Commerce in
China showed 80 percent of US-funded companies believing that
China's WTO accession will either "positively" or "very positively"
increase their business opportunities in Chinese markets. Some 79
percent of these enterprises plan to expand their total investment
and the number of their business locations in China.
Positive signs of recovery in the US economy were another helpful
factor. The US economy performed better than in 2001 and growth in
consumption fuelled the demand for imports from China.
The value of US dollar remained high. One spin-off from this was
the affordability of good quality imports from China, helping to
mitigate the social and political pressure caused by high US
unemployment rates.
The terrorist attack of September 11 marked a watershed in
political and security relations between the United States and
China. The tragic event was to be followed by significantly
strengthened political and security relations. These were followed
in turn by strengthened commercial links. This analysis is borne
out by the sequence of events. In the aftermath of the tragedy, the
US and China moved into a new phase of increased dialogue and
closer engagement. 2002 was a year marked by Sino-US Head of State
exchange of visits while government offices conducted a series of
senior level consultations.
All this high-level interaction was to bring confidence to the
business communities of the two countries. On the eve of Chinese
president Jiang Zemin's visit to Texas in October 2002, Chinese and
American companies signed procurement contracts, mergers,
acquisitions and joint stock ventures valued as high as US$4.7
billion.
US
Secretary of Commerce Don Evans visited China in April to co-host
the 14th meeting of the Sino-US Commerce and Trade Commission. The
end of June saw a visit to Beijing by US Secretary of Agriculture
Ann Veneman.
The year also saw some new trends coming to the surface in US-China
economic and trade relations. Mutual market penetration and
commercial cooperation accelerated significantly within the
manufacturing and service industries of the two nations. A good
example of this was in the new levels of cooperation to be found in
the automobile industry.
China's Shanghai Automobile Company and General Motors (GM) of the
United States are collaborating to develop both light and heavy
automobile models. Together they aim to be the giants of the
Chinese market. Their cooperation also served to further promote
the internationalization of China's automobile industry.
With GM assistance, the Shanghai Automobile Company now holds 10
percent of the stock of the GM Daewoo Automobile Technology Company
based in South Korea. And what's more, the Shanghai Automobile-GM
joint venture has plans to export high performance engines to
Canada as early as the end of 2003.
There are plenty other examples of bilateral industrial
cooperation. Sinopec and Exxon Mobil moved into a strategic
alliance to develop the market for petroleum products in China.
Tsingtao Brewery signed a strategic investment cooperation
agreement with the world's largest brewer Anheuser-Busch. China's
Shanghai Soap Group acquired the bankrupt Moltech, which produces
rechargeable batteries in the United States. Industrial cooperation
also saw momentum in other fields, such as household electrical
goods, aviation, hi-tech developments and so on. A multi-layered
interdependence has been developing between the industries of the
two countries.
Increased trade has brought increased risk of trade disputes and
causes of friction. However there are also new opportunities for
dispute resolution. New multilateral measures are now available in
addition to the already well established bilateral mechanisms.
The options available to China for settling trade disputes
increased with WTO entry. In March 2002, the Bush administration
announced Section 201 safeguard measures on steel imports. China
was cited along with the EU nations and Japan as one of the
countries whose exports were harming American steel
manufacturers.
In
order to counter this example of US trade protectionism, China and
the EU coordinated their policies within the WTO framework. They
joined hands to exert fair pressure on the US. In May 2002, China's
Ministry of Foreign Trade and Economic Cooperation (MOFTEC) released its own
"retaliation list" of American imports valued at some US$94
million.
The US has now dropped some steel products originating in the EU,
Japan and Australia from the protectionist tariff. China has set
out its demands that it should also be freed from the tariff
constraints but is still awaiting US confirmation. China has
confirmed its intention to maintain negotiation with the US on this
matter.
Agriculture has been particularly contentious. Since 1972 when
trade relations were normalized, agriculture has occupied an
important position in bilateral trade. But with the success of
China's agricultural reform came greatly increased domestic
production of grain and reductions in food imports from the United
States. In the final stages of China's WTO negotiations, trade in
farm goods became a heated issue between the two countries. The two
most controversial issues were market access and agricultural
subsidies.
It
has been widely predicted that Chinese agriculture will be
particularly hard hit by WTO accession. This is especially
significant in a country where the majority of the population
resides in rural areas. However the opening up of the Chinese
agricultural market is both necessary and irreversible.
China's government agencies needed to offer some transitional
protection to domestic farmers and so secure food supplies. It was
against this background that China's government agencies turned to
regulations requiring safety reviews of imported genetically
modified soybean.
The United States is the world's largest soybean exporter, with a
34 percent share of the global market. China has become the biggest
customer for US soybean with imports running at levels equivalent
to the total production of soybean in China.
China argued that a safety review would be justified, rational and
in conformity with international agreements. Various soybean
interests in the US together with the US Department of Agriculture
however have contended that implementing the regulations would
increase the risk of market unpredictability for American
exporters.
The two countries eventually reached a consensus on the soybean
issue through consultation. China postponed implementation of the
safety review process and will also streamline the administration
procedures involved in applications and approval.
But now China's agricultural exports (mainly onions) to the US and
their impact have caught the attention of the American public. Even
though actual volumes of farm trade in 2002 were lower than
forecast, it is expected that there are still more disputes to
come.
With China's WTO entry, there has been unprecedented progress in
its economic and trade relations with the US. The momentum is
already so great as to seem unstoppable. However the two countries
will have to take good care when dealing with the more sensitive
issues. If not handled properly they could soon be new obstacles to
the smooth expansion of bilateral economic cooperation. There is
still potential for further trade disagreements between the two
countries on issues connected with China's implementation of WTO
obligations.
China made a great effort to meet its WTO obligations during 2002,
its first full year of membership. This has evoked a positive
response from the WTO itself and also from most individual WTO
members.
In
December 2002, the Office of US Trade Representative released its
annual report as required by Congress. This recognized China's
"significant progress" in living up to its WTO obligations. But the
report did emphasize three areas deserving continued attention.
These are agricultural trade, protection of intellectual property
rights and access to service industry markets.
The US congress passed special laws to require the administration
to keep a close eye on the implementation of China's WTO
obligations and the opening up of Chinese markets to international
exports and investment. To facilitate this the US government has
established multi-level monitoring mechanisms with facilities
located in Washington DC, Beijing and Geneva.
We
can say that in the first year of WTO accession, the measures put
in place to open up the markets have had only limited impact on
China's domestic industries. But with phasing out of the permitted
transitional protectionist measures, China's domestic industries
will have to face even greater challenges. It is being predicted
that full implementation of WTO obligations will undoubtedly
trigger further trade disputes between China and the United
States.
Trade imbalance has grown more quickly than expected and it is
unlikely there will be a correction in the near term. Both Chinese
and US administrations will wish to tread carefully in case of a
possible backlash in American domestic politics.
According to its own statistics, the United States suffered a
deficit of some US$83 billion in its trade with China in 2001. This
exceeded even its trade deficit with Japan, which stood at US$69
billion for the year. And the previous year's figure was overtaken
in just the first ten months of 2002 when the US ran up a trade
deficit with China of US$83.1 billion. The whole year prediction
has been put at US$93 billion.
Many different factors contribute to the huge trade imbalance. The
most important of these are linked to the flow of foreign direct
investment into China. When major investors move their assembly
lines from the US to China, they are also redistributing the
balance of trade.
China replaced Japan as the largest single source of trade deficit
for the United States several years ago. Throughout the 1990s,
various domestic special interest groups in America, including
conservative groups, labor and human rights organizations, have
united in their efforts to lobby for restrictive conditions to be
imposed on China's access to "normal trade relations" or "most
favored nation" status. These groups can be expected to keep up
their pressure to politicize and undermine economic and trade
relations with China.
In
late 2001 on the eve of China's WTO accession, the US announced its
granting of permanent normal trade relations to China. However the
problems of the politicization of what are essentially commercial
issues is not yet fully settled. The worsening trade imbalance may
well prove to be the catalyst for further adverse political
consequences back in the US.
Both governments need to work hard to let the public know about the
real facts behind the current trade imbalance. As a matter of fact,
many American experts have recognized that new imports from China
mostly just replace market share previously held by imports from
elsewhere. Consequently the overall effect on US domestic industry
has actually been fairly neutral.
Besides, well priced but good quality goods from China can have a
positive role to play in countering inflationary pressures and
helping to ease the financial burden on US consumers, particularly
those on middle income levels and below.
Political and diplomatic factors do seem likely to have a role to
play in the continuing development of bilateral economic and trade
relations. How American foreign policy should react to the new
advances in China can be a heated topic of debate. A clear line of
demarcation can be drawn between the "containment hawks" and
"engagement doves."
The terrorist attack of September 11 was followed by a toning down
of the "hawkish" side of the Bush administration's policy on China.
Nevertheless those of a conservative viewpoint continue to urge
vigilance in the face of any potential negative impact of China's
rapid development on US security interests.
Among the "hawks", the US-China Security Review Commission of the
US Congress has been most skeptical about China's future
intentions. Last July, it published its first annual report. This
pays particular attention to the so-called "magnetic effect" of the
Chinese economy in attracting foreign direct investment. It advises
the US government to be vigilant in respect of a drift towards
dependence upon Chinese hi-tech exports. And then the report goes
on to recommend that the US should adopt a policy of containment
towards China's newfound competitiveness. It holds this should be
pursued in coordination with other affected countries in a bid to
counter the negative impact of the "magnetic effects".
To
sum up, 2002 was a year that witnessed China-US economic and trade
relations grow closer in a quite unprecedented manner as a result
of China's increasingly open markets coupled with rapid economic
growth. Trade and investment have been driving forward China-US
economic relations. With the phasing-in of China's full WTO
obligations, Chinese markets are set to become more and more open
and China-US economic and trade relations will move up a gear. The
closer trade and investment links will open a new chapter of
stability and promise in the history of China-US relations.
The author is an associate professor at the School of
International Studies at Peking University. He
is also executive director of the Peking University Center for
International Political Economic Research.
(China.org.cn February 11, 2002)