US–China economic relations
US–China economic relations
Abstract and Keywords
This chapter examines three areas of US–China economic relations: international trade in goods and services, foreign direct investment (FDI), and portfolio investment. These three relationships are understood in their institutional and regulatory environments. They also interact with one another: in some cases providing substitute means to achieve objectives; in other cases, one relationship works much better if features of another relationship are also working well, in which case they are complements. They are also affected by non-economic relations. Differences between the countries’ economic and political systems are a significant feature of the bilateral economic relationships and can be contentious.
US–China economic relations encompass three primary areas: international trade in goods and services, foreign direct investment (FDI), and portfolio investment.1 These three relationships are understood in their institutional and regulatory environments. These three spheres also interact with one another: in some cases providing substitute means to achieve objectives; in other cases, one relationship works much better if features of another relationship are also working well, in which case they are complements. They are also affected by non-economic relations. Throughout this entry, we attempt to present views from China and the USA in a balanced way.2
Differences between the countries’ economic and political systems are a significant feature of the bilateral economic relationships, which are sometimes contentious.3 At the same time, the impacts of these differences are easily overstated; contention has emerged in a similar way between the USA and other fast-growing economies with state-led development strategies, such as Japan and South Korea in the 1980s.
17.1 International trade in goods and services
In 1980, shortly after the beginning of reforms,4 China’s exports to the USA stood at $2.43 billion, or 0.61 per cent of GDP in 2005 dollars. For the USA, exports to China were $7.86 billion, or a paltry 0.14 per cent of GDP in comparable 2005 dollars. Over the next three decades, the levels of exports and corresponding imports changed dramatically, with a chronic trade deficit, as seen in Figure 17.1. This observation led to many calls in the USA (p.120) for measures in response to (if not to retaliate for) perceived unfair trade policies and practices on the part of China.
Over time, the composition of exports also changed significantly. Manufactured exports from China to the USA became increasingly sophisticated as measured by technology content and value added. While predominantly attention has been paid to trends in merchandise exports, trends in the services sector are also informative. The USA maintains an increasing trade surplus in the service sector.5
By design, the WTO is the main regulatory mechanism of China–US trade.6 Indeed, as trade relations have been fraught with disagreements, both sides have appealed to the WTO. China brought ten complaints to the WTO in the decade since its accession in 2001 with eight of them being lodged against the USA, while the United States brought thirty-four complaints, of which fifteen were against China.7
Bilateral China–US talks are arguably more important than WTO action. This view grew as it became increasingly clear that the WTO Doha Round of negotiations—initiated just (p.121) after China’s accession—were likely to end in failure. Indeed, this failure to make further progress put the WTO role in question. Government positions revealed sharp differences but also a mutual goal of smooth trading relationships, from which both sides could gain.
The US perspective has focused on the criticism that China effectively subsidizes its exports and maintains an artificially undervalued currency, flouting WTO treaty agreements and unfairly harming US producers.8
A widely accepted argument is that if China’s artificial import barriers are reduced, net imports must increase.9 As noted by Fred Bergsten,10 ‘Surplus China and deficit America . . . appear to recognize that it would be a huge mistake, and indeed again unsustainable, for China to resume its reliance on export-led growth and ever-rising trade surpluses or for the United States to become once again the “global consumer of last resort” and run huge current account deficits. Instead, China must expand domestic (especially consumer) demand and the United States must re-orient toward exports and productive investment.’
In contrast, as argued by Shang-Jin Wei, ‘If import barriers are reduced . . . an export expansion triggered by trade liberalization could more than offset the increase in imports. . . . Because the expanding export sector (e.g. garments) is less capital intensive than the contracting import-competing sector (e.g. semi-conductor products), in order to fully absorb all the capital [savings], the export sector has to expand by an extent greater than the increase in the imports of the capital intensive goods.’11
Further, as noted by the China Daily, ‘Traditional measures in international trade assume the value of exports comes solely from the exporting countries. These measures cannot fully reflect China’s position in its trade with other countries. Better measures should be based on value-added, as proposed by [the] WTO and OECD. . . . Under these new measures, the trade [im]balance between [the] US and China will be significantly downsized.’12 As noted by Deming Chen, ‘The trade [im]balance between [the] US and China mainly comes from processing trade and is due to different positions in the industry value chain. . . . The trade between [the] US and State Owned Enterprise in China is balanced in general. 75 per cent of trade imbalance comes from the processing trade in (p.122) Foreign Owned Enterprises and 60 per cent of these FOEs are from [the] US. Moreover, China also wants to import from [the] US, but [the] US imposed export restrictions [on] China for high-tech products.’13
In summarizing the exchange rate and trade balance debate, Premier Jiabao Wen ‘pointed out that China’s international balance of payments, particularly in trade and goods, is “approaching basic equilibrium”, citing figures to say that the current account surplus of China in 2011 only accounted for 2.8 per cent of its GDP, below the 3 per cent level that is internationally recognized as appropriate.’14
Overall, statements from China emphasize mutual rebalancing. As stated by Xiaochuan Zhou,15 ‘China has proposed a policy bundle that . . . includes increasing domestic demand, boosting rural consumption, promoting growth of the service industry, correcting “encourage export and limit import” policies, and adjusting exchange rate[s].’
These disagreements show that, while Figure 17.1 appears to tell a straightforward story, interpretation of the figures is fraught with complexity. For example, a significant portion of China’s recorded exports may represent intra-corporate transfers from subsidiaries in China to US parent companies.16
17.2 Foreign direct investment (FDI)
FDI from US multinational corporation parent companies in their subsidiaries in China has also grown dramatically since 1985, as seen in Figure 17.2.
The US FDI stock in China represented 1.27 per cent of total US FDI in 2010; and FDI from China to the US economy represented 1.06 per cent of its total FDI.17 The difference in FDI stocks and flows across the countries is very large. Some reflect the different stages of development. Approximately 10 per cent of the FDI stock in China originates from the USA. Bijian Zheng, an advisor to China’s leadership, argued in 2012 that, ‘Mutual FDI between China and [the] US will be the focus of the cooperation in the future.’18
It appears likely that investment from China to the USA will rise in the coming decade. As noted by Yukon Huang, ‘Rising labor costs in China combined with the benefits of (p.123) proximity to technology centers and more sophisticated markets are starting to generate proposals to produce more in the US. This provides an option similar to the relocation of Japanese auto plants to the USA which helped to ameliorate tensions.’19
Trade, investment, and financial relations are interconnected; as Caihua Zhu argued, ‘FDI is a very important tool in mediating the imbalance of International Payment between the two nations . . . [the] trade surplus with the U.S. will not decrease suddenly because it takes time for China to consume more and the U.S. to save more . . . China’s fast economic growth ensures sustainable FDI inflows (including from the U.S.) into China. Thus, learning from the experience of Japan in the middle of [the] 1980s, China needs to expand its overseas investment, especially investment in the U.S. to alleviate great pressures on its domestic monetary policy and exchange rate resulting from the tremendous holding of foreign reserves...’20
Premier Jiabao Wen also represented China’s official view in a 2012 interview: ‘Cooperation is the way to address trade imbalance between China and the United States as well as the difficulties and frictions arising from it . . . The United States should open its exports to China and ease related restrictions while promoting two-way investment.’21 (p.124)
17.3 Portfolio investment
Purchases from China of US government securities comprise a major part of the bilateral portfolio flow. This has brought benefits and costs to both parties.22 The practice has probably served to keep the renminbi low. The USA has benefited because China’s purchases have helped keep US interest rates low. But according to a widespread interpretation, China’s export growth has been higher because the flow raises the price of US dollars relative to the renminbi, and the result has been harm to American producers. Such purchases have similarly helped to sterilize net export inflows to China, helping to keep inflation in check. It is a classic development strategy to keep export surpluses abroad until such time as they are needed for domestic investments (including human capital) of sufficiently high return.
Fred Bergsten has argued, ‘The two governments will need to take further policy steps to sustain and build on this progress. . . . China has blocked further appreciation of its exchange rate against the dollar. . . . For its part, the United States must substantially reduce its budget deficits as soon as the recovery permits if it is to avoid a renewed escalation of its external imbalances.’
As a final note, other aspects of US–China relations also play important roles. In particular, disagreements concerning protection of intellectual property rights (IPRs) in China have become increasingly sharp. Interactions between the countries’ individual responses to the global financial crisis appear to have been more cooperative. At the same time, China’s growing role in global (economic) governance, and the diplomatic objectives to project influence, also influence the shape of negotiations over economic relations. If a US–China ‘G2’ is ever to rival the role of the G8 or G20, a great deal of economic and diplomatic progress must be made.
(1) We have benefited from perspectives gained from the annual ‘Conference on China’s Development and US-China Economic Relations’ (2008–2011) at GWU’s Institute for International Economic Policy (IIEP); see <http://www.gwu.edu/~iiep/G2_at_GW/G2_at_GW_2011.cfm>. Research support from IIEP is gratefully acknowledged.
(2) This has required some translations from original Chinese media sources, as noted.
(3) Yasheng Huang, book and talk at 2010 Conference on China’s Development and US–China Economic Relations at GWU, ‘Capitalism with Chinese Characteristics’.
(4) The history of China’s market reforms—and reasons for their emergence and path taken—are examined in Chapters 2, 4, 23, 68, and 88, this volume.
(5) Data source: United Nations Service Trade Statistics Database.
(6) See Chapter 18, this volume.
(8) Details of exchange rate management—and the active debate on whether the renminbi is overvalued and if so by how much—are outside the scope of this review. See Chapter 15, this volume.
(9) For a forceful example see the presentation of Tim Punke, ‘The US–China Relationship—Redefining the Terms’, at the September 2011 Conference on China’s Development and US–China Economic Relations, at GWU.
(10) Fred Bergsten, ‘The United States–China Economic Relationship and the Strategic and Economic Dialogue’, presentation at November 2009 Conference on China’s Development and US–China Economic Relations, at GWU.
(11) Shang-Jin Wei, ‘Trade Reforms and Current Account Imbalances: When Can the Common Sense Be Wrong?’ a paper presented at the September 2011 Conference on China’s Development and US–China Economic Relations, at GWU.
(12) China Daily, 1 June 2012; translation by Yao Pan.
(13) Deming Chen (Minister of the Chinese Ministry of Commerce) quoted in the Shanghai Financial News, 20 March 2012; translation by Yao Pan.
(14) ‘Wen urges co-operation to address Sino-US trade imbalance’, Xinhua News Agency, 14 March 2012, Translation by Yao Pan.
(15) Chinanews.com, December 12, 2007, Translation by Yao Pan.
(16) According to US Census Bureau, Related Party Database, 28 per cent of US goods imported from China were intra-firm in 2011.
(17) Source for total inward/outward FDI stock China or US: UNCTADstat.
(18) Bijian Zheng, quoted from China Chinanews.com; translation by Yao Pan. See:‘中美专家“居安思危” 望创造新利益汇合’.
(19) Yukon Huang, ‘Will the US and China Ever Invest in Each Other?’ Financial Times, 25 July 2012.
(20) Caihua Zhu: ‘Constraints by US against China investment in the US’, presentation at the October 2010 Conference on China’s Development and US–China Economic Relations, at GWU.
(21) ‘Wen urges co-operation to address Sino-US trade imbalance’, Xinhua news agency, 14 March 2012, Translation by Yao Pan.
(22) Yongtu Long (Secretary-General, Boao Forum For Asia), Sohu Finance, 12 December 2008.