China-U S Trade Issues Updated July 30 2018 Congressional Research Service https crsreports congress gov RL33536 China-U S Trade Issues Summary U S -China economic ties have expanded substantially since China began reforming its economy and liberalizing its trade regime in the late 1970s Total U S -China merchandise trade rose from $2 billion in 1979 when China’s economic reforms began to $636 billion in 2017 China is currently the United States’ largest merchandise trading partner its third-largest export market and its biggest source of imports In 2015 sales by U S foreign affiliates in China totaled $482 billion Many U S firms view participation in China’s market as critical to their global competitiveness U S imports of lower-cost goods from China greatly benefit U S consumers U S firms that use China as the final point of assembly for their products or use Chinese-made inputs for production in the United States are able to lower costs China is also the largest foreign holder of U S Treasury securities at $1 2 trillion as of April 2018 China’s purchases of U S debt securities help keep U S interest rates low Despite growing commercial ties the bilateral economic relationship has become increasingly complex and often fraught with tension From the U S perspective many trade tensions stem from China’s incomplete transition to a free market economy While China has significantly liberalized its economic and trade regimes over the past three decades it continues to maintain or has recently imposed a number of state-directed policies that appear to distort trade and investment flows Major areas of concern expressed by U S policymakers and stakeholders include China’s alleged widespread cyber economic espionage against U S firms relatively ineffective record of enforcing intellectual property rights IPR discriminatory innovation policies mixed record on implementing its World Trade Organization WTO obligations extensive use of industrial policies such as subsidies and trade and investment barriers to promote and protect industries favored by the government and interventionist policies to influence the value of its currency Many U S policymakers argue that such policies adversely impact U S economic interests and have contributed to U S job losses in some sectors The Trump Administration has pledged to take a more aggressive stance to reduce U S bilateral trade deficits enforce U S trade laws and agreements and promote “free and fair trade ” including in regard to China On March 8 2018 President Trump announced a proclamation imposing additional tariffs on steel 25% and aluminum 10% based on Section 232 national security justifications China is the world’s largest producer of both of these commodities On April 1 China announced that it had retaliated against the U S action by raising tariffs from 15% to 25% on various U S products which together totaled $3 billion in 2017 On March 22 President Trump announced that action would be taken against China under Section 301 over its IPR policies deemed harmful to U S stakeholders In addition he stated that he would seek commitments from China to reduce the bilateral trade imbalance and to achieve “reciprocity” on tariff levels On June 15 the United States Trade Representative USTR announced a two-stage plan to impose 25% ad valorem tariffs on $50 billion worth of Chinese imports Under the first stage U S tariffs would be increased on $34 billion worth of Chinese products and effective July 6 For the second stage the USTR proposed increasing tariffs on $16 billion worth of Chinese imports mainly targeting China’s industrial policies China released its own two-stage list of counter-retaliation of equal magnitude President Trump then threatened 10% ad valorem tariffs on another $400 billion worth of Chinese products On July 6 the Trump Administration implemented the first round of tariff increases and China retaliated in kind These tit-for-tat actions threaten to sharply reduce U S -China commercial ties disrupt global supply chains raise import prices for U S consumers and importers of Chinese inputs and diminish economic growth in the United States and abroad Congressional Research Service China-U S Trade Issues Contents Introduction 1 Most Recent Developments 1 U S Trade with China 2 U S Merchandise Exports to China 2 Major U S Merchandise Imports from China 6 Trade in Services 8 The U S Merchandise Trade Deficit with China 9 The Transfer of Pacific Rim Production to China by Multinational Firms 10 China as a Major Center for Global Supply Chains 12 China Trade and U S Jobs 15 U S -China Investment Ties Overview 17 China’s Holdings of U S Public and Private Securities 18 U S Residential Real Estate 20 Bilateral Foreign Direct Investment Flows 21 Alternative Measurements of Bilateral FDI Flows 22 Chinese Restrictions on U S FDI in China 25 Negotiations for a Bilateral Investment Treaty BIT 26 Concerns About Chinese FDI in the United States 28 Major U S -China Trade Issues 29 Chinese “State Capitalism” 30 China’s Plan to Modernize the Economy and Promote Indigenous Innovation 33 New Restrictions on Information and Communications Technology 37 Intellectual Property Rights IPR Issues 39 Technology Transfer Issues 44 Cyber-security Issues 45 China’s Obligations in the World Trade Organization 49 WTO Implementation Issues 50 China’s Currency Policy 54 The Trump Administration’s Approach to Commercial Relations with China 56 The Administration’s Section 301 Case on China’s IPR Policies 58 U S and Chinese Products that Have Been or Could Be Subject to Increased Tariffs Resulting from the Section 301 Dispute 62 Economic Effects of Section 301 Tariff Increases 70 Section 232 Tariffs on Steel and Aluminum 74 Implications of Recent Trade Action against China 75 Figures Figure 1 Top 5 U S Merchandise Export Markets in 2017 3 Figure 2 Top 5 Sources of U S Merchandise Imports 2017 6 Figure 3 Major U S Services Trading Partners in 2017 9 Figure 4 U S Merchandise Trade Balance with China 2000-2017 10 Figure 5 Five Largest U S Merchandise Trade Imbalances in 2017 10 Congressional Research Service China-U S Trade Issues Figure 6 U S Manufactured Imports from Pacific Rim Countries as a Percentage of Total U S Manufactured Imports 1990 and 2017 11 Figure 7 U S Manufactured Imports from China and Japan as a Percentage of U S Total Imports 1990-2017 % 12 Figure 8 Estimated Percentage Foreign Value-Added to China’s Exports in 2011 13 Figure 9 Two Measurements of U S Trade in Goods and Services 2011 13 Figure 10 Top Five Country Locations of Facilities that Supplied Apple Corporation in 2017 15 Figure 11 China’s Holdings of U S Treasury Securities 2002-2017 20 Figure 12 Sales by Foreign Affiliates of U S Firms by Country in 2015 22 Figure 13 BEA and RG Estimates of the Stock of U S -China FDI through 2016 23 Figure 14 BEA and RG Data on Annual U S FDI Flows to China 2005-2016 24 Figure 15 BEA and RG Data on Chinese FDI Flows to the United States 2005-2016 24 Figure 16 China and U S Simple Average MFN Tariff Rates 50 Figure 17 RMB-Dollar Exchange Rates January 2015 to June 2018 55 Figure 18 Estimated Sector Effect on U S Employment if Both U S and China Increased Tariffs by 25% on $150 Billion Worth of Imports from Each Other 73 Figure 19 Estimate of the Top 10 States that Could be Impact by Lost Exports if China Retaliated Against U S Section 301-Related Tariffs 74 Tables Table 1 U S Merchandise Trade with China 1980-2017 2 Table 2 Major U S Exports to China in 2017 NAIC 4-Digit Level 3 Table 3 Major U S Merchandise Export Markets 4 Table 4 Major U S Merchandise Imports From China in 2017 NAIC 4-Digit Level 7 Table 5 U S Imports of ATP Products from China by Major Category in 2017 8 Table 6 China’s Holdings of U S Treasury Securities 2002-2017 19 Table 7 Summary of BEA Data on U S -China FDI Flows 2016 21 Table 8 Top 10 Chinese Investments in the United States 2005-2017 25 Table 9 Top 20 Chinese Companies on Fortune’s Global 500 in 2018 32 Table 10 Summaries of WTO U S Dispute Settlement Cases Against China 52 Table 11 Top 15 Merchandise Imports from China on an HTS 2-Digit Level and Summary of Categories Impacted by Actual or Proposed U S Section 301 Tariffs 63 Table 12 U S Section 301 First Round of 25% Ad Valorem Tariffs on $34 Billion Worth of Imports from China Implemented July 6 66 Table 13 U S Section 301 Second Round of 25% Ad Valorem Tariffs on $16 Billion Worth of Imports from China Proposed 67 Table 14 China’s First Round of Retaliatory of 25% Ad Valorem Tariffs on U S Products in Response to U S Section 301 Action Implemented July 6 68 Table 15 China’s Proposed Second Round Retaliatory List of 25% of Ad Valorem Tariffs if U S Second Round of Section 301 Tariff Increases are Implemented 69 Table 16 Trump Administration’s Proposed 10% Ad Valorem Tariffs on $200 Billion Worth of Chinese Imports 70 Congressional Research Service China-U S Trade Issues Table 17 Sales by Selective U S Firms to China in 2017 71 Table 18 China’s Retaliatory Tariffs Against the U S for Increased Steel and Aluminum Tariffs 75 Appendixes Appendix Chinese Policies to Boost Innovation 78 Contacts Author Information 86 Acknowledgments 86 Congressional Research Service China-U S Trade Issues Introduction Economic and trade reforms begun in 1979 have helped transform China into one of the world’s biggest and fastest-growing economies China’s economic growth and trade liberalization including comprehensive trade commitments made upon its entry to the World Trade Organization WTO in 2001 have led to a sharp expansion in U S -China commercial ties Yet bilateral trade relations have become increasingly strained in recent years over a number of issues including China’s mixed record on implementing its WTO obligations infringement of U S intellectual property such as through cyber-theft of U S trade secrets and forced technology requirements placed on foreign firms increased use of industrial policies to promote and protect domestic Chinese firms extensive trade and foreign investment restrictions lack of transparency in trade rules and regulations distortionary economic policies that have led to overcapacity in several industries and its large merchandise trade surplus with the United States China’s economic and trade conditions policies and acts have a significant impact on the U S economy as whole as well as specific U S sectors and thus are of concern to Congress This report provides an overview of U S -China commercial ties identifies major issues of contention describes the Trump Administration’s trade policies toward China and reviews possible outcomes Most Recent Developments U S -China commercial ties are complex and have become increasingly contentious due largely to China’s incomplete transition to a free market economy The Trump Administration has indicated its intent to take a harder line on trade policy towards China and other countries The most significant action it has taken to date has been the initiation of a Section 301 case against China’s policies on intellectual property rights which could result in several rounds of tit-for-tat trade sanctions and retaliation 1    A July 25 joint statement by the United States and European Union said that the two sides would “work closely together with like-minded partners to reform the WTO and to address unfair trading practices including intellectual property theft forced technology transfer industrial subsidies distortions created by state owned enterprises and overcapacity ” This appears to have been largely aimed at China 2 On July 6 the Trump Administration raised tariffs by 25% on $34 billion worth of imports from China On the same day China announced it would retaliate against a comparable level of U S products In response to China’s tariff increases the United States Trade Representative USTR on July 10 threatened to increase tariffs by 10% on $200 billion worth of Chinese products On March 8 2018 the Trump Administration announced that it would impose additional imports tariffs on steel by 25% and aluminum 10% based on “national security” justifications under the 1962 Trade Act as amended On April 2 China raised duties by 15% to 25% on about $3 billion worth of imports frim from the United States largely targeting agricultural products 1 For additional information on what Section 301 is and how it works see CRS In Focus IF10708 Enforcing U S Trade Laws Section 301 and China by Wayne M Morrison 2 A copy of the joint statement can be found at http europa eu rapid press-release_STATEMENT-18-4687_en htm Congressional Research Service RL33536 · VERSION 155 · UPDATED 1 China-U S Trade Issues U S Trade with China3 U S -China trade rose rapidly after the two nations reestablished diplomatic relations in January 1979 signed a bilateral trade agreement in July 1979 and provided mutual most-favored-nation MFN treatment beginning in 1980 4 In that year which was shortly after China’s economic reforms began total U S -China trade exports plus imports was approximately $4 billion China ranked as the United States’ 24th-largest trading partner 16th-largest export market and 36thlargest source of imports In 2017 total U S merchandise trade with China was $636 billion making China the United States’ largest trading partner see Table 1 Table 1 U S Merchandise Trade with China 1980-2017 $ in billions Year U S Exports U S Imports U S Trade Balance 1980 3 8 1 1 2 7 1990 4 8 15 2 -10 4 2000 16 3 100 1 -83 8 2010 91 9 365 0 -273 0 2011 104 1 399 4 -295 3 2012 110 5 425 6 -315 1 2013 121 7 440 4 -318 7 2014 123 7 468 5 -344 8 2015 115 9 483 2 -367 3 2016 115 6 462 6 -347 0 2017 130 4 505 6 -375 2 Source U S International Trade Commission USITC DataWeb U S Merchandise Exports to China U S merchandise exports to China in 2017 were $115 6 billion up 12 8% from the previous year China was the third-largest U S merchandise export market after Canada and Mexico see Figure 1 China was the second-largest U S agricultural export market in 2017 at $19 6 billion 63% of which consisted of soybeans From 2000 to 2017 the share of total U S merchandise exports going to China rose from 2 1% to 8 4% As indicated in Table 2 the top five U S goods exports to China in 2017 were 1 aerospace products mainly civilian aircraft and parts 2 oil seeds and grains mainly soybeans 3 motor vehicles 4 semiconductors and electronic components and This report focuses primarily on U S -China trade relations For information on China’s economy see CRS Report RL33534 China’s Economic Rise History Trends Challenges and Implications for the United States by Wayne M Morrison For general information on U S -China political ties see CRS Report R41108 U S -China Relations An Overview of Policy Issues by Susan V Lawrence 4 The United States suspended China’s MFN status in 1951 which cut off most bilateral trade China’s MFN status was conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act as amended including the Jackson-Vanik freedom-of-emigration provisions China’s MFN status which was re-designated under U S trade law as “normal trade relations” status or NTR was renewed on an annual basis until January 2002 when legislation was enacted in 2000 P L 104-286 granting permanent NTR PNTR to China once it joined the WTO which it did in December 2001 3 Congressional Research Service RL33536 · VERSION 155 · UPDATED 2 China-U S Trade Issues 5 waste and scrap From 2002 to 2017 U S exports to China rose by 491% faster than the growth rate for U S exports to any of its top 10 export markets in 2017 see Table 3 During the first five months of 2018 U S merchandise exports to China rose by 7 8% year-on-year Figure 1 Top 5 U S Merchandise Export Markets in 2017 $ in billions Source USITC DataWeb Table 2 Major U S Exports to China in 2017 NAIC 4-Digit Level $ in millions and percentage change NAIC Code Products 2016 2017 Change 2016-2017 3364 AEROSPACE PRODUCTS PARTS 14 578 16 273 11 6% 1111 OILSEEDS GRAINS 15 524 13 724 -11 6% 3361 MOTOR VEHICLES 8 317 10 071 21 1% 3344 SEMICONDUCTORS OTHER ELECTRONIC COMPONENTS 6 686 6 887 3 0% 2111 OIL GAS 1 448 6 856 373 3% 9100 WASTE AND SCRAP 5 182 5 625 8 5% 3345 NAVIGATIONAL MEASURING MEDICAL CONTROL INSTRUMENTS 5 466 5 582 2 1% 3251 BASIC CHEMICALS 4 595 4 897 6 6% 3252 RESIN SYN RUBBER ARTF SYN FIBERS FIL 3 577 4 123 15 3% 3254 PHARMACEUTICALS MEDICINES 2 818 3 401 20 7% 115 602 130 370 12 8% Total Source USITC DataWeb Note NAIC is the North American Industrial Classification system Congressional Research Service RL33536 · VERSION 155 · UPDATED 3 China-U S Trade Issues Table 3 Major U S Merchandise Export Markets $ in billions and percentage change Country 2002 2017 Percent Change 2002-2017 Canada 161 282 75 7% Mexico 98 243 149 1% China 22 130 491 2% Japan 51 68 31 6% United Kingdom 33 56 69 4% Germany 27 53 100 9% Korea 23 48 113 7% Netherlands 18 42 130 3% Hong Kong 13 40 217 4% Brazil 12 37 198 8% 693 1 547 123 1% Global Total Source USITC DataWeb and Global Trade Atlas Note Ranked according to the top 10 U S merchandise export markets in 2017 Many trade analysts argue that China could prove to be a much more significant market for U S exports in the future China is one of the world’s fastest-growing economies and healthy economic growth is projected to continue in the years ahead provided that it implements new comprehensive economic reforms China’s goals of modernizing its infrastructure rebalancing the economy upgrading industries boosting the services sector and enhancing the social safety net could generate substantial new demand for foreign goods and services Economic growth has improved the purchasing power of Chinese citizens considerably especially those living in urban areas along the east coast of China In addition China’s large foreign exchange reserves at $3 1 trillion as of May 2018 and its huge population at 1 39 billion make it a potentially enormous market To illustrate   A January 2017 study prepared by Oxford Economics for the U S -China Business Council estimated that in 2015 U S exports of goods and services to China plus bilateral FDI flows directly and indirectly supported 2 6 million U S jobs and contributed $216 billion to U S GDP The study further predicted that U S exports of goods and services to China would grow from $165 billion in 2015 to over $520 billion by 2030 5 In 2016 Chinese visitors to the United States totaled 3 0 million up 15 4% over the previous year ranking China as the fifth-largest source of foreign visitors to the United States 6 Chinese visitors spent $33 billion in the United States in 2016 including on education which was the largest source of visitor spending in the 5 The U S -China Business Council Understanding the US-China Trade Relationship January 2017 available at https www uschina org sites default files Oxford%20Economics%20US%20Jobs%20and%20China%20Trade%20Report pdf 6 China reported that it had 122 million outbound tourists in 2016 and estimated that they spent $110 billion Congressional Research Service RL33536 · VERSION 155 · UPDATED 4 China-U S Trade Issues      United States 7 The U S Department of Commerce projects that by 2021 Chinese visitors to the United States will total 5 7 million 8 China has the world’s largest mobile phone network with 1 48 billion mobile phone subscribers as of April 2018 9 and the largest number of internet users at 753 million 10 as of December June 2017 China’s online sales in 2016 totaled $752 billion more than double the U S level at $369 billion 11 Boeing Corporation delivered 202 planes to China in 2017 26% of total global deliveries making it Boeing’s largest market outside the United States 12 Boeing predicts that over the next 20 years 2017-2036 China will need 7 240 new airplanes valued at nearly $1 1 trillion and will be Boeing’s largest commercial airplane customer outside the United States 13 General Motors GM reported that it sold more cars and trucks in China than in the United States each year from 2010 to 2017 14 GM’s China sales in 2017 were 4 0 million vehicles compared to 3 0 million in the United States Equity income from GM’s joint venture operations in China was $2 0 billion in 2017 GM vehicle unit sales to China accounted for 42 1% of its global total 15 GM expects China’s vehicle market to increase by 5 million units or more by 2020 16 In addition U S motor vehicle exports to China were $9 9 billion in 2017 making it the second-largest U S motor vehicle export market after Canada 17 According to estimates by Credit Suisse a global financial services company China overtook the United States in 2015 to become the country with the largest middle class at 109 million adults with wealth between $50 000 and $500 000 7 U S Department of Commerce International Trade Administration Travel Tourism Office News available at http tinet ita doc gov outreachpages download_data_table Fast_Facts_2016 pdf 8 U S Department of Commerce International Trade Administration Travel Tourism Office News available at http travel trade gov view f-2000-99-001 forecast Forecast_Summary pdf 9 Medium “China Has World’s Largest Online Population With 1 32 Bln Mobile Internet Subscribers May 22 2018 available at https medium com @yicaichina china-has-worlds-largest-online-population-with-1-32-bln-mobileinternet-subscribers-e665e890302 10 Xinhua “China’s mobile phone shipments resume growth in May ” June 10 2018 available athttp en people cn n3 2018 0610 c90000-9469677 html 11 Data for China from Digital Commerce 360 at https www digitalcommerce360 com 2017 02 06 online-shoppingchina-grows-262-2016 and U S data from the U S Census Bureau at https www2 census gov retail releases historical ecomm 16q4 pdf 12 Xinhuanet “Boeing delivers record high of 202 aircraft to China in 2017 ” January 25 2018 at http www xinhuanet com english 2018-01 25 c_136924563 htm 13 Boeing Corporation Current Market Outlook 2017-2036 September 2017 p 32 at http www boeing com resources boeingdotcom commercial market current-market-outlook-2017 assets downloads 2017-cmocompressed_091917 pdf 14 A large share of these vehicles was produced by GM and its joint-venture partners in China GM’s website states that it currently has 11 joint ventures and two wholly owned foreign enterprises employing 58 000 workers in China 15 General Motors Media Sales Data February 2018 at https media gm com content dam Media gmcom investor 2018 feb GM-Global-Q4-and-CYTD-2017-Sales-Chart pdf 16 General Motors Media China General Motors Announces Growth Strategy for China March 21 2016 available at http media gm com media cn en gm news detail html content Pages news cn en 2016 Mar 0321_annoucement html 17 Source U S Department of Commerce International Trade Administration Automotive Team Industry Trade Data available at https www trade gov td otm assets auto New_Passenger_Exports pdf Congressional Research Service RL33536 · VERSION 155 · UPDATED 5 China-U S Trade Issues  the U S level was estimated at 92 million 18 A study by the Brookings Institute predicts that spending by China’s middle class using 2011 purchasing power parity measurements will rise from $4 2 trillion in 2015 12% of global total to $14 3 trillion 22% of global total in 2030 China’s 2030 middle class consumption levels are predicted to be more than three times U S levels 19 From 2007 to 2016 China’s private consumption grew at an average annual rate of 8 9% compared to 1 6% growth in the United States 20 Major U S Merchandise Imports from China China was the largest source of U S merchandise imports in 2017 at $506 billion up 9 3% over the previous year China’s share of total U S merchandise imports rose from 8 2% in 2000 to 21 6% in 2017 The importance ranking of China as a source of U S imports has risen sharply from eighth largest in 1990 to fourth in 2000 to second in 2004-2006 and to first in 2007present see Figure 2 The top five U S imports from China in 2017 were 1 communications equipment 2 computer equipment 3 miscellaneous manufactured commodities such as toys and games 4 apparel and 5 semiconductors and other electronic components see Table 4 China was also the fourth-largest source of U S agricultural imports in 2017 at $4 5 billion Figure 2 Top 5 Sources of U S Merchandise Imports 2017 $ in billions Source USITC DataWeb 18 Credit Suisse Global Wealth in 2015 Underlying Trends Remain Positive October 3 2015 available at https www credit-suisse com us en about-us research research-institute news-and-videos articles news-and-expertise 2015 10 en global-wealth-in-2015-underlying-trends-remain-positive html 19 The Brookings Institution The Unprecedented Expansion of the Global Middle Class An Update February 2017 p 16 at https www brookings edu wp-content uploads 2017 02 global_20170228_global-middle-class pdf 20 Source Economist Intelligence Unit Country Data Congressional Research Service RL33536 · VERSION 155 · UPDATED 6 China-U S Trade Issues Table 4 Major U S Merchandise Imports From China in 2017 NAIC 4-Digit Level $ in millions and percentage change NAIC Code Products 2016 2017 Percent Change 2016-2017 3342 COMMUNICATIONS EQUIPMENT 65 674 77 957 18 7% 3341 COMPUTER EQUIPMENT 52 180 58 609 12 3% 3399 MISCELLANEOUS MANUFACTURED COMMODITIES 34 408 36 497 6 1% 3152 APPAREL 25 483 24 559 -3 6% 3344 SEMICONDUCTORS OTHER ELECTRONIC COMPONENTS 18 903 23 158 22 5% 3371 HOUSEHOLD INSTITUTIONAL FURN KITCHEN CABINETS 16 535 18 222 10 2% 3352 HOUSEHOLD APPLIANCES AND MISC MACHINES 14 062 14 494 3 1% 3162 FOOTWEAR 14 620 14 074 -3 7% 3261 PLASTICS PRODUCTS 12 319 13 771 11 8% 3363 MOTOR VEHICLE PARTS 13 117 13 533 3 2% 462 618 505 597 9 3% Total Source USITC DataWeb Throughout the 1980s and 1990s nearly all U S imports from China were low-value laborintensive products such as toys and games consumer electronic products footwear and textiles and apparel However over the past few years an increasing proportion of U S imports from China are more technologically advanced products see text box below U S -China Trade in Advanced Technology Products According to the U S Census Bureau U S imports of “advanced technology products” ATP from China in 2017 totaled $171 1 billion Information and communications products were by far the largest U S ATP import from China accounting for 91% of U S ATP imports from China and 60% of U S global imports of this category see Table 5 ATP products accounted for 33 8% of total U S merchandise imports from China In addition 36 8% of total U S ATP imports were from China compared with 14 1% in 2003 U S ATP exports to China in 2017 were $35 7 billion these accounted for 27 4% of total U S exports to China and 10 1% of U S global ATP exports In comparison U S ATP exports to China in 2003 were $8 3 billion which accounted for 29 2% of U S exports to China and 4 6% of total U S ATP exports 21 The United States ran a $135 3 billion deficit in its ATP trade with China in 2017 up from a $21 0 billion deficit in 2003 Some see the large and growing U S trade deficit in ATP with China as a source of concern contending that it signifies the growing international competitiveness of China in high technology Others dispute this noting that a large share of the ATP imports from China are in fact relatively low-end technology products and parts such as notebook computers or are products that are assembled in China using imported high technology parts that are largely developed and or made elsewhere Some Members of Congress have raised concerns over possible national security implications of China’s significant role in global supply chains for various ATP products especially those that may be procured by U S government agencies 22 21 U S Census Bureau Foreign Trade at available at https www census gov foreign-trade statistics product atp 2017 12 ctryatp index html#C 22 See for example U S -China Economic and Security Review Commission Supply Chain Vulnerabilities from China Congressional Research Service RL33536 · VERSION 155 · UPDATED 7 China-U S Trade Issues Table 5 U S Imports of ATP Products from China by Major Category in 2017 Advanced Technology Products ATP Category Biotechnology U S Imports from China $ millions Total U S Imports $ millions Imports from China as percentage of global ATP total % 194 26 127 0 7 Life Sciences 2 594 45 705 5 7 Opto-Electronics 5 132 23 036 22 3 155 535 259 392 60 0 Electronics 4 482 41 426 10 8 Flexible Manufacturing 1 347 13 726 9 8 413 2 844 14 5 1 027 48 592 2 1 138 902 15 3 25 1 698 1 5 171 067 464 258 36 8 Information communications Advanced Materials Aerospace Weapons Nuclear Technology Total U S ATP imports Source U S Census Bureau Trade in Services China is a major U S trading partner in services In 2017 China was the 4th-largest services trading partner at $75 billion the 3rd-largest services export market at $57 6 billion and the 8thlargest source of services imports at $17 4 billion see Figure 3 The United States ran a $40 2 billion services trade surplus with China which was the largest services surplus of any U S trading partner in U S Federal Information and Communications Technology April 2018 available at https www uscc gov sites default files Research Interos_Supply%20Chain%20Vulnerabilities%20from%20China%20in%20U S %20Federal%20ICT_final pdf Congressional Research Service RL33536 · VERSION 155 · UPDATED 8 China-U S Trade Issues Figure 3 Major U S Services Trading Partners in 2017 $ in billions Source BEA Note Top five U S trading partners in total services trade exports plus imports in 2017 The U S Merchandise Trade Deficit with China A major concern among some U S policymakers is the size of the U S merchandise trade deficit with China which rose from $10 billion in 1990 to $367 billion in 2015 see Figure 4 The deficit fell to $347 billion in 2016 but rose to $375 billion in 2017 23 For the past several years the U S merchandise trade deficit with China has been significantly larger than with any other U S trading partner see Figure 5 Some analysts contend that the large U S merchandise trade deficits with China indicate that the trade relationship is somehow unbalanced unfair and damaging to the U S economy Others argue that such deficits are largely a reflection of shifts in global production and the emergence of extensive and complex supply chains where China is often the final point of assembly for export-oriented multinational firms that source goods from multiple countries 23 During the first five months of 2018 the U S merchandise trade deficit with China was 9 9 higher than during the comparable period in 2017 If this trend continues the total U S merchandise deficit with China could reach $412 billion in 2018 Congressional Research Service RL33536 · VERSION 155 · UPDATED 9 China-U S Trade Issues Figure 4 U S Merchandise Trade Balance with China 2000-2017 $ in billions Source USITC DataWeb Figure 5 Five Largest U S Merchandise Trade Imbalances in 2017 $ in billions Source USITC DataWeb The Transfer of Pacific Rim Production to China by Multinational Firms Many analysts contend that the sharp increase in U S imports from China and hence the growing bilateral trade imbalance is largely the result of movement in production facilities from other Congressional Research Service RL33536 · VERSION 155 · UPDATED 10 China-U S Trade Issues primarily Asian countries to China That is various products that used to be made in such places as Japan Taiwan Hong Kong etc and then exported to the United States are now made in China in many cases by foreign firms To illustrate in 1990 the share of U S manufactured imports from Pacific Rim countries including China was 47 1% and in 2017 that share remained relatively constant at 47 1% see Figure 6 24 What changed was the country source of those imports In 1990 China accounted for 7 6% of the share of U S manufactured imports from the Pacific Rim but by 2017 that share increased to 55 4% In other words between 1990 and 2016 the role of China as a supplier of U S manufactured products among Pacific Rim countries increased sharply while the relative importance of the rest of the Pacific Rim excluding China for these products sharply decreased This was partly due to many multinational firms shifting their export-oriented manufacturing facilities from other countries to China Figure 6 U S Manufactured Imports from Pacific Rim Countries as a Percentage of Total U S Manufactured Imports 1990 and 2017 Source USITC DataWeb Note Standard International Trade Classification SITC definition of manufactured imports A significant amount of the shift in production appears to have involved Japan In 1990 Japan was the source of 23 8% of U S manufactured imports but by 2017 this level had dropped to 7 0% Conversely China’s share of U S manufactured imports rose from 3 8% to 26 2% see Figure 7 Japan accounted for the single largest U S bilateral merchandise trade deficit for many years until it was overtaken by China in 2000 24 Pacific Rim countries include Australia Brunei Cambodia China Hong Kong Indonesia Japan South Korea Laos Macao Malaysia New Zealand North Korea Papua New Guinea the Philippines Singapore Taiwan Thailand Vietnam and several small island nations Congressional Research Service RL33536 · VERSION 155 · UPDATED 11 China-U S Trade Issues Figure 7 U S Manufactured Imports from China and Japan as a Percentage of U S Total Imports 1990-2017 % Source USITC DataWeb China as a Major Center for Global Supply Chains A joint study by the Organisation for Economic Co-operation and Development OECD and the WTO has sought to estimate trade flows according to the value that was added in each country For example the OECD WTO study estimated that in 2011 32 2% of the overall value of China’s gross exports was comprised of foreign imports This level increased to 40 2% for China’s total manufactured exports and for electrical and optical equipment it was 53 8% see Figure 8 The study estimated that if bilateral trade imbalances were measured according to the value of trade that occurred domestically in each country the U S trade deficit in goods and services with China in 2011 the most recent year available would decline by 35% from $278 6 billion to $181 1 billion see Figure 9 This is largely because of the role of trade in intermediate goods parts and materials imported to make products For example the World Bank estimates that U S intermediate exports and imports to and from China in 2016 were $19 3 billion and $33 5 billion respectively 25 Thus many Chinese products contain U S -made inputs and some U S products contain Chinese-made inputs 25 World Bank World Integrated Trade Solution available at http wits worldbank org Default aspx lang en Congressional Research Service RL33536 · VERSION 155 · UPDATED 12 China-U S Trade Issues Figure 8 Estimated Percentage Foreign Value-Added to China’s Exports in 2011 Source OECD WTO Trade in Value-Added October 2015 Figure 9 Two Measurements of U S Trade in Goods and Services 2011 $ in billions Source OECD WTO Trade in Value-Added October 2015 Note Gross trade balances are U S reported data while OECD data are estimated balances based on measurements of the value added that occurred in each country According to Apple Corporation it used over 200 corporate suppliers with nearly 900 facilities located around the world The top five largest country sources of these facilities in 2017 were China 358 Japan 137 the United States 64 Taiwan 55 and South Korea 34 see Figure 10 Some U S corporate suppliers to Apple have facilities located in many countries For example Intel Corporation has 10 facilities that supply products to Apple three of which are located in the United States two in China two in Malaysia and one each in Ireland Israel Congressional Research Service RL33536 · VERSION 155 · UPDATED 13 China-U S Trade Issues Malaysia and Vietnam 26 Apple iPhones are mainly assembled in China by Taiwanese companies Foxconn and Pegatron using a number of intermediate goods imported from abroad or in many cases intermediates made by foreign firms in China Many analysts have estimated that the value-added that occurs in China in the production of the iPhone is small relative to the total value of the product because it mainly involves assembling foreign-made or foreign-owned components Apple Corporation on the other hand is thought to be the single largest beneficiary in terms of gross profit on the sale of the iPhone However conventional trade data does not accurately attribute the value-added that occurs in each stage of making the iPhone Rather when the United States imports iPhones from China U S trade data attributes nearly the full value of the product as originating in China which some argue artificially inflates the size of the U S trade deficit with China One 2010 study estimated that in 2009 China exported 11 3 million iPhones to the United States with a shipping price of $179 per unit and total export value at $2 0 billion The study estimated that 96 4% of the value of the iPhone was attributed to foreign suppliers and producers of components and parts including the United States at $122 million Standard trade data would put China’s trade surplus in iPhone trade with the United States at $1 9 billion but that level would fall to $73 5 million if that trade was measured according to the value-added that occurred in each country 27 Several analysts have concluded that Apple’s innovation in developing and engineering its products along with its ability to source most of its production in low-cost countries such as China has helped enable the company to become a highly competitive and profitable firm as well as a source for high-paying jobs in the United States 28 Apple products illustrate that the rapidly changing nature of global supply chains has made it increasingly difficult to interpret the implications of U S trade data because while they may show where products are being imported from they often fail to reflect who benefits from that trade 26 Apple Corporation 2017 Supplier List February 2018 available at https images apple com supplier-responsibility pdf Apple-Supplier-List pdf 27 ADB Institute How the iPhone Widens the United States Trade Deficit with the People’s Republic of China December 2010 available at http www adb org publications how-iphone-widens-united-states-trade-deficit-peoplesrepublic-china Note given the changing nature of Apple’s supply chains it is unclear if the estimates of value-added still hold true today 28 Communications of the ACM Who Captures Value in a Global Innovation Network The Case of Apple’s iPod March 2009 Congressional Research Service RL33536 · VERSION 155 · UPDATED 14 China-U S Trade Issues Figure 10 Top Five Country Locations of Facilities that Supplied Apple Corporation in 2017 Source Apple Corporation 2017 Supplier List Note Includes suppliers of materials manufacturing and assembly of products worldwide China Trade and U S Jobs Measuring and assessing the benefits and costs of growing U S -China economic ties are often hotly debated among U S policymakers and economists particularly in regard to its impact on various manufacturing sectors and workers The impact on U S employment especially in various manufacturing sectors resulting from imports from China particularly after it joined the WTO in 2001 has been a major point of contention Some critics of U S trade policy toward China attempt to link U S job losses to the growth and size of U S imports from China and or the bilateral trade imbalance For example a study by the Economic Policy Institute EPI in December 2014 claims that growth in the U S goods trade deficit with China between 2001 and 2013 “eliminated or displaced” 3 2 million U S jobs three-fourths of which were in manufacturing 29 The authors stated that they used an inputoutput model that “estimated the amount of labor or number of jobs that is required to produce a given volume of exports and the labor displaced when a given volume of imports is substituted for domestic output ” The difference between the two numbers is thus the estimated jobs displaced by the trade deficit Critics of the EPI study argue that the methodology used is flawed First the study essentially takes the Department of Commerce’s estimates of the number of jobs “supported” by each $1 billion in exports 5 744 in 2016 30 and makes the assumption that each $1 billion in imports must displace the same level of jobs a notion that most economists would disagree with For example not all imports from China compete directly with U S producers Many are products that used to be made in other countries and thus an increase in imports from 29 EPI China Trade Outsourcing and Jobs December 11 2014 available at http www epi org publication chinatrade-outsourcing-and-jobs 30 U S Department of Commerce International Trade Administration Jobs Supported by Exports 2016 An Update August 2 2017 available at https www trade gov mas ian build groups public @tg_ian documents webcontent tg_ian_005543 pdf Congressional Research Service RL33536 · VERSION 155 · UPDATED 15 China-U S Trade Issues China alone did not necessarily displace U S domestic producers In addition some imports from China contain U S -made intermediate parts such as semiconductors made in the United States Many imports from China are final assembled products such as Apple iPhones with a relatively small share of value-added from China and the jobs generated or supported by innovating the products are not accounted for in the trade data Finally factors other than trade such as technological innovation may also affect job levels in some sectors Similarly while China is the largest source of U S merchandise imports the overall impact on the U S economy is relatively small A Federal Reserve Bank of San Francisco study examined U S consumer spending and estimated that in 2010 U S personal consumption expenditures PCE of domestically sourced goods and services goods was 88 5% of total U S PCE total imports accounted for 11 5% Imports from China accounted for 2 7% of U S PCE but less than half of this amount was attributed to the actual cost price of Chinese imports—the rest went to U S businesses and workers transporting selling and marketing the Chinese-made products which the study estimated would reduce China’s share of U S PCE to 1 9% 31 Economists generally argue that trade has an overall positive impact on the economy Low-cost imports boost consumer welfare increase consumer choices and help lower inflation However some economists contend that the benefits of trade are not equally spread Some sectors can be negatively impacted affecting employment and wages and such negative effects can be concentrated in certain regions or industries and adjusting to such shocks can be challenging A 2014 study by the National Bureau of Economic Research NBER concluded that increased import penetration from China from 1999 to 2011 directly and indirectly resulted in net U S job losses of 2 0 million to 2 4 million U S jobs and accounted for 10% of the decline in U S manufacturing jobs during this period 32 Another NBER study asserted that China’s rise as an economic power has “induced an epochal shift in patterns of world trade” and has “challenged much of the received empirical wisdom about how labor markets adjust to trade shocks ” The study said that for workers in importcompeting firms “adjustment in local labor markets is remarkably slow with wages and laborforce participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences Exposed workers experience greater job churning and reduced lifetime income ” in part because workers that may lose their jobs due to imports often remain in highly exposed industries or regions which are subject to further trade shocks 33 The study claimed that there is little evidence for substantial off-setting employment gains in local industries not exposed to the trade shock Critics of the two NBER studies contend that while trade may impact the composition of jobs in the U S economy it has little long-term effect on the number of jobs which they argue is largely a function of aggregate demand They also point out that between 2010 and 2015 the number of U S manufacturing jobs rose by 6 8% even though U S imports from China increased by 32 4% In addition U S manufacturing output during this period rose by 15 3% Some economists contend that U S productivity has been a major cause of job losses in manufacturing A study by Ball State University attributed 88% of U S manufacturing job losses from 2000 to 2010 to 31 Federal Reserve Bank of San Francisco FRBSF Economic Letter August 11 2016 available at http www frbsf org economic-research publications economic-letter 2011 august us-made-in-china 32 NBER Import Competition and the Great U S Employment Sag of the 2000s August 2014 available at http www nber org papers w20395 pdf 33 NBER The China Shock Learning from Labor Market Adjustment to Large Changes in Trade January 2016 available at http nber org papers w21906 Congressional Research Service RL33536 · VERSION 155 · UPDATED 16 China-U S Trade Issues productivity gains noting that had the United States “kept 2000-levels of productivity and applied them to 2010-levels of production we would have required 20 9 million manufacturing workers Instead we employed only 12 1 million ”34 Similarly while China is the largest source of U S merchandise imports the overall impact on the U S economy is relatively small A Federal Reserve Bank of San Francisco study examined U S consumer spending and estimated that in 2010 U S personal consumption expenditures PCE of domestically sourced goods and services goods was 88 5% of total U S PCE total imports accounted for 11 5% Imports from China accounted for 2 7% of U S PCE but less than half of this amount was attributed to the actual cost price of Chinese imports—the rest went to U S businesses and workers transporting selling and marketing the Chinese-made products which the study estimated would reduce China’s share of U S PCE to 1 9% 35 U S -China Investment Ties Overview Investment plays a large and growing role in U S -China commercial ties 36 China’s investment in U S assets can be broken down into several categories including holdings of U S securities foreign direct investment FDI and other non-bond investments The Department of the Treasury defines foreign holdings of U S securities as “U S securities owned by foreign residents including banks and other institutions except where the owner has a direct investment relationship with the U S issuer of the securities ”37 U S statutes define FDI as “the ownership or control directly or indirectly by one foreign resident of 10% or more of the voting securities of an incorporated U S business enterprise or the equivalent interest in an unincorporated U S business enterprise including a branch ”38 The Bureau of Economic Analysis BEA is the main U S government agency that collects and reports data on FDI flows to and from the United States which is done on a balance of payment basis 39 China has also invested in a number of U S companies projects and various ventures that do not meet the U S definition of FDI and thus are not reflected in BEA’s data For many years the accumulation of foreign exchange reserves FERs has been a major driver of China’s overseas investment China’s FERs result from 1 large annual trade surpluses and FDI inflows 2 intervention by the Chinese government to halt or slow the value of its currency the 34 Ball State University The Myth and the Reality of Manufacturing in America June 2015 available at http conexus cberdata org files MfgReality pdf 35 Federal Reserve Bank of San Francisco FRBSF Economic Letter August 11 2016 available at http www frbsf org economic-research publications economic-letter 2011 august us-made-in-china 36 Investment is often a major factor behind trade flows Firms that invest overseas often import machinery parts and other inputs from the parent company abroad to manufacture products for export or sale locally Other such invested overseas firms may produce inputs and ship them to their parent company for final production 37 U S Department of the Treasury Federal Reserve Bank of New York and Board of Governors of the Federal Reserve System Foreign Portfolio Holdings of U S Securities as of June 30 2016 April 2017 available at http ticdata treasury gov Publish shla2016r pdf 38 15 CFRS 806 15 a 1 The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the management of an enterprise See BEA International Economic Accounts BEA Series Definitions available at http www bea gov international 39 BEA also reports FDI data according to broad industrial sections including mining utilities wholesale trade information depository institutions finance excluding depository institutions professional scientific and technical services nonbank holding companies manufacturing including food chemicals primary and fabricated metals machinery computers and electronic products electrical equipment appliances and components transportation equipment and other manufacturing and other industries Congressional Research Service RL33536 · VERSION 155 · UPDATED 17 China-U S Trade Issues renminbi RMB and 3 restrictions on capital outflows by private Chinese citizens Rather than holding foreign currencies such as U S dollars which would earn no interest the Chinese government has invested much of those reserves abroad For many years much of that investment has gone into U S Treasury securities Although they generate low returns such securities are generally viewed globally as a relatively safe investment because they are backed by the full faith and credit of the U S government and are liquid e g easily sold albeit generating relatively small rates of returns More recently the Chinese government has diversified its investments in order to obtain higher returns such as by encouraging its firms especially SOEs to invest overseas to become more globally competitive as well as to help China gain access to raw materials such as oil food and technology As a result Chinese annual FDI outflows have grown significantly in recent years rising from $21 billion in 2006 to $183 billion in 2016 making China the second-largest source of annual global FDI outflows 40 U S investment in China has largely been in the form of FDI flows due in part to Chinese restrictions on portfolio investment 41 Initially most U S FDI flows especially after China began to open up its economy in 1979 likely went toward export-oriented manufacturing to take advantage of China’s relatively low wages In more recent years as China’s economy has rapidly grown a larger share of U S FDI in China has gone to tap into the country’s booming domestic demand for goods and services However many U S firms raise concerns that Chinese investment restrictions and requirements such as technology sharing often hamper their efforts China’s Holdings of U S Public and Private Securities42 China’s holdings of U S public and private securities are significant and by far constitute the largest category of Chinese investment in the United States 43 These securities include U S Treasury securities U S government agency such as Freddie Mac and Fannie Mae securities corporate securities and equities such as stocks China’s investment in public and private U S securities totaled $1 54 trillion as of June 2017 making it the fourth-largest holder after Japan the Cayman Islands and the United Kingdom 44 U S Treasury securities which help the federal government finance its budget deficits are the largest category of U S securities held by China 45 As indicated in Table 6 and Figure 11 which show end-year data China’s holdings of U S Treasury securities increased from $118 billion in 2002 to $1 24 trillion in 2014 but fell to $1 06 trillion in 2016 They rose to nearly $1 19 trillion in 2017 making China the largest foreign holder of U S Treasury securities 46 China’s holdings of U S Treasury securities as a share of total foreign holdings rose from 9 6% in 2002 to a historical high of 26 1% in 2010 That level 40 United Nations Conference on Trade and Development World Investment Report 2016 June 22 2016 available at http unctad org en PublicationsLibrary wir2016_Overview_en pdf 41 U S portfolio investment in China through 2016 was $101 4 billion mostly in equities Source U S Department of Treasury Federal Reserve Bank of New York and Board of Governors of the Federal Reserve System U S Portfolio Holdings of Foreign Securities as of December 31 2016 October 2017 42 For additional information on this issue see CRS Report RL34314 China’s Holdings of U S Securities Implications for the U S Economy by Wayne M Morrison and Marc Labonte 43 About 70% of China’s total holdings of U S government and private securities are in U S Treasury securities 44 U S Department of the Treasury Preliminary Report on Foreign Portfolio Holdings of U S Securities as of June 2017 February 2018 available at https home treasury gov news press-releases sm0301 45 Some describe foreign holdings of U S Treasury securities as “foreign ownership of U S government debt ” 46 China’s holdings of U S Treasuries could be higher as Department of the Treasury data may not always capture Chinese purchases of U S Treasury securities that may occur in global financial centers Congressional Research Service RL33536 · VERSION 155 · UPDATED 18 China-U S Trade Issues fell to 17 6% in 2016 but rose to 18 8% in 2017 47 China’s holdings of U S Treasury securities as of April 2018 were $1 18 trillion and constituted 19 2% of total foreign holdings Table 6 China’s Holdings of U S Treasury Securities 2002-2017 2002 China’s holdings $ billions China’s holdings as a percentage of total foreign holdings 2004 2006 2008 2010 2012 2014 2016 2017 118 223 397 727 1 160 1 203 1 244 1 058 1 185 9 6% 12 1% 18 9% 23 6% 26 1% 23 0% 21 7% 17 6% 18 7% Source U S Department of the Treasury Note Annual data are year-end Data excludes Hong Kong and Macau which are treated separately Some analysts and Members of Congress have sometimes raised concerns that China’s large holdings of U S debt securities could give it leverage over U S foreign policy including trade policy They argue for example that China might attempt to sell or threaten to sell a large share of its U S debt securities over a policy dispute which could damage the U S economy Others counter that China’s holdings of U S debt give it very little practical leverage over the United States They argue that given China’s economic dependency on a stable and growing U S economy and its substantial holdings of U S securities any attempt to try to sell a large share of those holdings would likely damage both the U S and Chinese economies It could also cause the U S dollar to sharply depreciate against global currencies which could reduce the value of China’s remaining holdings of U S dollar assets In addition to China’s FDI in the United States and its holdings in U S Treasury securities China as of June 2016 held $178 billion in U S equities such as stocks up from $3 billion in June 2005 It also held $196 billion in U S agency securities and $15 billion in corporate debt 47 Congressional Research Service RL33536 · VERSION 155 · UPDATED 19 China-U S Trade Issues Figure 11 China’s Holdings of U S Treasury Securities 2002-2017 $ in billions Source U S Department of the Treasury Notes Data are year-end and exclude Hong Kong and Macau which are treated separately In the 112th Congress the conference report accompanying the National Defense Authorization Act of FY2012 H R 1540 P L 112-81 included a provision requiring the Secretary of Defense to conduct a national security risk assessment of U S federal debt held by China The Secretary of Defense issued a report in July 2012 stating that “attempting to use U S Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States As the threat is not credible and the effect would be limited even if carried out it does not offer China deterrence options whether in the diplomatic military or economic realms and this would remain true both in peacetime and in scenarios of crisis or war ”48 U S Residential Real Estate Over the past few years Chinese purchases of U S residential real estate have risen sharply from $11 2 billion in 2010 to $31 7 billion in 2017 Chinese investors were the largest foreign purchases of U S residential restate buyers each year from 2015 to 2017 In 2017 Chinese investors purchased 40 572 properties 49 48 Office of the Secretary of Defense Report to Congress Assessment of the National Security Risks Posed to the United States as a Result of the U S Federal Debt Owed to China as a Creditor of the U S Government July 2012 49 Values are for 12 months from April-March Source National Association of Realtors 2017 Profile of International Activity in U S Residential Real Estate July 2017 available at https www nar realtor sites default files documents 2017-Profile-of-International-Activity-in-US-Residential-Real-Estate pdf Congressional Research Service RL33536 · VERSION 155 · UPDATED 20 China-U S Trade Issues Bilateral Foreign Direct Investment Flows50 The level of foreign direct investment FDI flows between China and the United States is relatively small given the large volume of trade between the two countries Many analysts contend that an expansion of bilateral FDI flows could greatly expand commercial ties 51 BEA data on U S -China FDI see Table 7 indicate that in 2016    U S FDI flows to China were $9 5 billion up 28 2% over 2015 flows making China the ninth-largest destination of U S FDI outflows The stock of U S FDI in China on a historical-cost basis i e the book value was $92 5 billion up 9 4% over the previous year making China the 12th-largest overall destination of U S FDI through 2016 Chinese FDI flows to the United States were $10 3 billion up 74 7% over 2015 levels making China the 11th-largest source of U S FDI inflows in 2016 At the end of 2016 the stock of Chinese FDI in the United States on a historical-cost basis was $27 5 billion up 63 7% over the previous year making China the 16th-largest overall source of U S FDI through 2016 52 Table 7 Summary of BEA Data on U S -China FDI Flows 2016 FDI Data Quantity $millions Ranking of FDI Flows U S FDI flows to China in 2016 9 474 9th China FDI flows to U S in 2016 10 337 11th Stock of U S FDI in China through 2016 92 481 12th Stock of Chinese FDI in U S through 2016 58 154 16th Source Bureau of Economic Analysis Notes FDI stock data are on a historical-cost basis Rankings were made using only countries and exclude broad groupings of territories or islands Data for China exclude Hong Kong and Macau which are counted separately BEA also collects various financial data of foreign-invested multilateral firms Data for 2015 the most recent year available indicate that sales by foreign affiliates of U S firms in China totaled $481 billion 53 which was the third-largest market for U S -affiliated firms overseas after the United Kingdom $697 billion and Canada $625 billion see Figure 12 In addition U S affiliates in China employed 2 1 million workers paid $35 billion in employment compensation and spent $3 4 billion on R D 54 50 For a general discussion of U S FDI data and issues see CRS In Focus IF10636 Foreign Direct Investment Overview and Issues by James K Jackson and Shayerah Ilias Akhtar 51 According to the BEA direct investment implies that a person in one country has a lasting interest in and a degree of influence over the management of a business enterprise in another country As such it defines FDI as ownership or control of 10% or more of an enterprise’s voting securities or the equivalent is considered evidence of such a lasting interest or degree of influence over management 52 Data on country sources of U S FDI inflows should be interpreted with caution as they may not fully reflect the ultimate beneficiary of that investment owner UBO For example a foreign company located in one country that invests in the United States may be owned by a multinational corporation headquartered in another country 53 That level rises to $630 billion when sales by U S affiliates in Hong Kong are included 54 BEA at https www bea gov international direct_investment_multinational_companies_comprehensive_data htm Congressional Research Service RL33536 · VERSION 155 · UPDATED 21 China-U S Trade Issues Figure 12 Sales by Foreign Affiliates of U S Firms by Country in 2015 $ in billions Source BEA Alternative Measurements of Bilateral FDI Flows The Rhodium Group RG a private consulting firm estimates that Chinese FDI in the United States is significantly higher than BEA estimates RG notes that “official data often exhibit a 1-2 year time lag and do not capture major trends due to problems such as significant round tripping and trans-shipping of investments ”55 The Rhodium Group’s approach is to calculate the full value of a Chinese acquisition in the year it was made attributing it to China if a Chinese entity is the investor regardless of where the financing of the deal originated such as through oft-used Hong Kong and Caribbean offshore centers RG’s data on U S -China FDI are significantly higher than BEA’s data see Figure 13 Figure 14 and Figure 15 56 To illustrate     RG’s data on the stock of Chinese FDI in the United States through 2016 $110 1 billion is 300 4% higher than BEA’s data at $27 5 billion RG’s estimate of the stock of U S FDI in China at $242 6 billion is 162 3% higher than BEA’s estimate at $92 5 billion RG puts Chinese FDI flows to the United States in 2016 at $46 2 billion which was 348 5% higher than BEA’s data $10 3 billion RG’s estimate of U S FDI flows to China in 2016 at $13 8 billion was 45 3% higher than BEA’s data $9 5 billion 55 The Rhodium Group China Investment Monitor Methodology Update July 21 2015 available at http rhg com notes china-investment-monitor-methodology-update 56 The Rhodium Group China Investment Monitor available at http rhg com interactive china-investment-monitor Congressional Research Service RL33536 · VERSION 155 · UPDATED 22 China-U S Trade Issues Both BEA and RG data indicate a sharp increase in Chinese FDI flows to the United States in 2016 over the previous year BEA’s data show a 28 2% rise while RG’s data indicate a 201 9% surge The Chinese government reports in 2017 that its global overseas nonfinancial FDI dropped by 29 4% over the same period in 2016 57 The RG’s data of 2017 indicate that Chinese FDI flows to the United States in 2017 were $29 4 billion a 36 4% decline over the previous year RG estimates that during the first half of 2018 Chinese FDI in the United States totaled $1 8 billion a 90% drop over the first half of 2017 and the lowest level in seven years 58 Some of the decline in China’s overseas FDI appears to be largely driven by new Chinese policies to seek to increase scrutiny of proposed overseas investments to ensure that they are not “irrational or illegal ” In February 2018 the Chinese government announced that it would take over Anbang Insurance Company which owns the Waldorf Astoria in New York City and other U S properties for a year because of illegal business practices that allegedly threatened the solvency of the company 59 Falling Chinese FDI in the United States may also be the result of closer scrutiny to proposed Chinese acquisitions of U S assets by U S officials Figure 13 BEA and RG Estimates of the Stock of U S -China FDI through 2016 $ in billions Source Bureau of Economic Analysis and the Rhodium Group Note BEA and the Rhodium Group use different methodologies to measure China’s FDI in the United States China Daily “China outbound investment drops 29 4% in 2017 ” January 16 2018 at http www chinadaily com cn a 201801 16 WS5a5dab1ea3102c394518f95c html 58 Rhodium Group Arrested Development Chinese FDI in the US in 1H 2018 June 19 2018 available at https rhg com research arrested-development-chinese-fdi-in-the-us-in-1h-2018 59 Xinhuanet “Chinese insurance regulator takes control of Anbang Insurance Group ” February 23 2018 available at http www xinhuanet com english 2018-02 23 c_136993912 htm 57 Congressional Research Service RL33536 · VERSION 155 · UPDATED 23 China-U S Trade Issues Figure 14 BEA and RG Data on Annual U S FDI Flows to China 2005-2016 $ in millions Source Bureau of Economic Analysis and the Rhodium Group Note BEA and RG methodologies for measuring FDI differ significantly Figure 15 BEA and RG Data on Chinese FDI Flows to the United States 2005-2016 $ in millions Source Bureau of Economic Analysis and the Rhodium Group Note BEA and RG methodologies for measuring FDI differ significantly The American Enterprise Institute AEI and the Heritage Foundation jointly maintain the China Global Investment Tracker database which lists Chinese global investments of $100 million or more since 2005 Table 8 lists the 10 largest Chinese investments in the United States through 2017 which include HNA’s purchase of CIT Group’s aircraft leasing business for $10 4 billion Shuanghui’s now called WH Group purchase of Smithfield Foods for $7 1 billion HNA’s $6 5 Congressional Research Service RL33536 · VERSION 155 · UPDATED 24 China-U S Trade Issues billion investment in Hilton from Blackstone HNA’s purchase of Ingram Micro for $6 billion and Anbang’s $5 7 billion acquisition of hotel properties from Blackstone Table 8 Top 10 Chinese Investments in the United States 2005-2017 Year Investor Transaction Value $millions Share Size 2017 HNA 10 380 2013 Shuanghui 7 100 100% 2016 HNA 6 500 25% 2016 HNA 6 000 100% 2016 Anbang 2016 Transaction Party Sector CIT Group Transport Smithfield Foods Agriculture Blackstone Tourism Ingram Micro Technology 5 720 Blackstone Tourism Haier 5 400 General Electric Other 2007 CIC 5 000 10% Morgan Stanley Finance 2016 Dalian Wanda 3 500 100% Legendary Entertainment Entertainment 2016 Zhuhai Seine Technology and Legend 3 400 Lexmark Technology 2007 CIC 3 030 Blackstone Finance 9% Source American Enterprise Institute and Heritage Foundation China Global Investment Tracker Chinese Restrictions on U S FDI in China U S trade officials have urged China to liberalize its FDI regime in order to boost U S business opportunities in and expand U S exports to China Although China is one of the world’s top recipients of FDI the Chinese central government imposes numerous restrictions on the level and types of FDI allowed in China According to the U S -China Business Council USCBC China imposes ownership barriers on nearly 100 industries 60 The OECD’s 2016 FDI Regulatory Restrictiveness Index which measures statutory restrictions on FDI in 62 countries ranked China’s FDI regime as the fourth most restrictive 61 Some recent surveys by U S and European business groups suggest that foreign firms in China may be less optimistic about the Chinese market than in the past due in part to perceived growing protectionism To illustrate  A 2017 American Chamber of Commerce in China AmCham China business climate survey of 500 member companies found that while a majority of respondents felt optimistic about their investments in China 81% said that foreign businesses in China were less welcome in China than before compared to 41% who asserted that in 2013 The survey found that 55% of respondents said that foreign firms are treated less favorably treated by the Chinese government than domestic Chinese firms 62 U S -China Business Council China’s WTO Compliance September 20 2013 OECD FDI Regulatory Restrictiveness Index at http www oecd org investment fdiindex htm 62 AmCham China 2017 China Business Climate Survey Report January 2017 60 61 Congressional Research Service RL33536 · VERSION 155 · UPDATED 25 China-U S Trade Issues  A 2016 European Union Chamber of Commerce in China business confidence survey stated that the business environment in China was becoming “increasingly hostile” and “perpetually tilted in favor of domestic enterprises ” For example among respondents 56% said doing business in China was becoming more difficult and 57% claimed foreign companies tend to receive unfavorable treatment in China compared to domestic Chinese firms 63 Negotiations for a Bilateral Investment Treaty BIT 64 The United States and China initiated negotiations on reaching a bilateral investment treaty BIT in 2008 with the goal of expanding bilateral investment opportunities U S negotiators hoped such a treaty if implemented would improve the investment climate for U S firms in China by enhancing legal protections and dispute resolution procedures and by obtaining a commitment from the Chinese government that it would treat U S investors no less favorably than Chinese investors In April 2012 the Obama Administration released a “Model Bilateral Investment Treaty” that was developed to enhance U S objectives in the negotiation of new BITs 65 The new model BIT addressed six core principles or issues for investors including national treatment and mostfavored nation MFN treatment at all stages of investment rules on expropriations and compensation if this occurs ability to transfer funds in and out of the country limits on performance requirements such as domestic content targets or mandated technology transfer neutral arbitration of disputes and freedom by investors to appoint their own senior officials 66 During the July 10-11 2013 session of the U S -China Strategic and Economic Dialogue S ED China indicated its intention to negotiate a high-standard BIT with the United States that would include all stages of investment and all sectors a commitment a U S official described as “a significant breakthrough and the first time China has agreed to do so with another country ”67 A press release by the Chinese Ministry of Commerce stated that China was willing to negotiate a BIT on the basis of nondiscrimination and a negative list meaning the agreement would identify only those sectors not open to foreign investment on a nondiscriminatory basis as opposed to a BIT with a positive list which would only list sectors open to foreign investment During the July 9-10 2014 S ED session the two sides agreed to a broad timetable for reaching agreement on core issues and major articles of the treaty text and committed to initiate the “negative list” negotiation early in 2015 68 During BIT negotiations held in June 2015 each side submitted their first negative list proposals and later agreed to submit a revised list in September 2015 right before President Xi’s summit visit to the United States which they did but a 63 European Chamber European Business in China Business Confidence Survey 2016 available at http www europeanchamber com cn en publications-business-confidence-survey 64 For additional information see CRS In Focus IF10307 A U S -China Bilateral Investment Treaty BIT Issues and Implications by Wayne M Morrison 65 The Administration began efforts to review and revise the U S BIT model in 2009 The previous model BIT dated to 2004 The Administration’s review process likely meant that negotiations with China for a BIT were limited Model BIT can be found at https ustr gov sites default files BIT%20text%20for%20ACIEP%20Meeting pdf 66 See CRS In Focus IF10052 U S International Investment Agreements IIAs by Martin A Weiss and Shayerah Ilias Akhtar 67 U S Department of the Treasury Remarks of Treasury Secretary Jacob J Lew at the Close of the Fifth U S -China Strategic and Economic Dialogue July 13 2013 68 U S Department of the Treasury U S -China Joint Fact Sheet Sixth Meeting of the Strategic and Economic Dialogue July 11 2014 Congressional Research Service RL33536 · VERSION 155 · UPDATED 26 China-U S Trade Issues breakthrough was not achieved New negative lists were submitted in June 2016 and August 2016 69 and the BIT was discussed at the September 2016 G-20 Summit held in Hangzhou China but no breakthrough was announced Many analysts contend that a U S -China BIT could have significant implications for bilateral commercial relations and the Chinese economy According to then-USTR Michael Froman such an agreement “offers a major opportunity to engage on China’s domestic economic reforms and to pursue greater market access a more level playing field and a substantially improved investment environment for U S firms in China ”70 For China a high-standard BIT could help facilitate greater competition in China and result in a more efficient use of resources factors which economists contend could boost economic growth Some observers contend that China’s pursuit of a BIT with the United States represents a strategy that is being used by reformers in China to jumpstart widespread economic reforms which appear to have stalled in recent years This strategy it is argued is similar to that used by Chinese reformers in their efforts to get China into the WTO in 2001 Such international agreements may give political cover to economic reformers because they can argue that the agreements build on China’s efforts to become a leader in global affairs This may make it harder for vested interests in China who benefit from the status quo to resist change Some critics raise concerns that even if a high standard BIT is reached ensuring China’s full compliance may prove difficult given China’s extensive use of industrial policies Others have raised questions as to the effect of such an agreement in boosting FDI flows and how that might impact U S jobs in affected industries 71 A BIT would have to be approved in the U S Senate by a two-thirds majority The BIT was not concluded by the end of the Obama Administration’s term the original goal of completion While the Chinese government has indicated that it supports continuing BIT negotiations the Trump Administration has been less clear on its position U S Secretary of Treasury Steven Mnuchin was quoted by Inside Trade in June 2017 as saying It’s on our agenda I wouldn't say it’s at the very top of our agenda I think what we're looking for is opposed to just negotiating a large agreement we're looking to negotiate very specific issues that deal with market issues today deal with market fairness today deal with opening their markets to the same extent that our markets are open and that’s really our focus Once we can make progress in that we can turn to the bilateral investment treaty 72 The U S -China Economic and Security Review Commission’s USCC’s November 2015 annual report recommended that the Administration provide a comprehensive publicly available assessment of Chinese FDI in the United States prior to completion of BIT negotiations that includes an identification of the nature of investments whether investments received support of any kind from the Chinese government and at any level and the sector in which the investment was made 73 The USCC’s 2016 annual report recommended that Congress should “amend the 69 The White House Fact Sheet U S -China Economic Relations September 4 2016 available at https www whitehouse gov the-press-office 2016 09 04 fact-sheet-us-china-economic-relations 70 USTR Remarks by Ambassador Michael Froman to AmCham China and the U S Chamber of Commerce April 27 2015 available at https ustr gov about-us policy-offices press-office speechestranscripts 2015 april remarksambassador-michael 71 See for example the U S -China Economic and Security Commission Policy Considerations for Negotiating a U S China Bilateral Investment Treaty August 1 2016 available at http www uscc gov Research policy-considerationsnegotiating-us-china-bilateral-investment-treaty 72 https insidetrade com daily-news mnuchin-china-bit-agenda-only-if-quicker-specific-deals-can-be-reached 73 U S -China Economic and Security Review Commission 2015 Report to Congress November 2015 p 33 Congressional Research Service RL33536 · VERSION 155 · UPDATED 27 China-U S Trade Issues statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U S companies ”74 Concerns About Chinese FDI in the United States Chinese FDI in the United States has come under increasing scrutiny by U S policymakers Some have expressed concerns over Chinese investments especially by SOEs or government-backed entities that appear to target industries and technologies that the Chinese government has identified as critical to China’s future economic development Some have called for reforms to the process in which the Federal government evaluates certain FDI such as the Committee on Foreign Investment in the United States CFIUS an interagency committee that reviews the national security aspects of certain foreign acquisitions seek to modify the terms of the proposed acquisition and makes recommendations to the President who can block the transaction 75 The USCC’s 2017 Annual Report identified three trends that may impact the ability of CFIUS to review Chinese investment in the United States including China’s targeting investments in industries it deems as strategic the use of private entities as fronts by the Chinese government SOEs to obtain assets in strategic sectors and attempting to bypass U S regulatory procedures such as investing through shell companies outside China and using cyber-espionage to financially undermine the targeted firm before acquiring it 76 The commission made a number of recommendations to Congress on Chinese investment in the United States including a ban on acquisition of U S assets by Chinese state-owned or state-controlled entities including sovereign wealth funds In September 2017 President Trump citing national security concerns blocked the acquisition of the U S firm Lattice Semiconductor by China Venture Capital Fund Corporation Limited77 for $1 3 billion 78 In March 2018 national security concerns were also used by President Trump when he blocked a bid to purchase Qualcomm Incorporated a U S high-technology firm to Broadcom Limited a semiconductor firm headquartered in Singapore The decision to block the sale appears to have been motivated in part by concerns it would weaken Qualcomm’s position and enable China to according to CFIIUS dominate 5G technology and the standards setting process 79 Some Members of Congress argue that the structure and scope of CFIUS needs to modernized and strengthened in order to close loopholes that may exist in the current system for certain types of foreign investments Several CFIUS bills have been introduced in Congress many of which be appear to be largely aimed at Chinese FDI activities For example a press release by 74 Ibid p 126 For additional information on CFIUS see CRS Report RL33388 The Committee on Foreign Investment in the United States CFIUS by James K Jackson 76 U S -China Economic and Security Review Commission 2017 Annual Review November 15 2017 pp 2-3 at https www uscc gov Annual_Reports 2017-annual-report 77 Bloomberg describes the Chinese firm as “a private-equity firm backed by a Chinese state-owned asset manager ” See https www bloomberg com news articles 2017-09-13 trump-blocks-china-backed-bid-for-chipmaker-oversecurity-risk 78 The White House Press Release September 13 2017 at https www whitehouse gov the-press-office 2017 09 13 order-regarding-proposed-acquisition-lattice-semiconductor-corporation 79 The letter can be found at https www wsj com articles a-deal-with-broadcom-may-weaken-qualcomms-innovationcfius-says-1520353879 75 Congressional Research Service RL33536 · VERSION 155 · UPDATED 28 China-U S Trade Issues Representative Pittenger for his introduction of H R 4311 the Foreign Investment Risk Review Modernization Act of 2017 stated China is buying American companies at a breathtaking pace While some are legitimate business investments many others are part of a backdoor effort to compromise U S national security For example China recently attempted to purchase a U S missile defense supplier using a shell company to evade detection The global economy presents new security risks and so our bipartisan legislation provides Washington the necessary tools to better track and evaluate Chinese investment 80 Some CFIUS reform bills have been taken up by Congress including H R 5841 the Foreign Investment Risk Review Modernization Act of 2018 introduced by Representative Pittenger which passed the House on June 26 2018 and S 2098 the Foreign Investment Risk Review Modernization Act of 2018 introduced by Senator Cornyn which was added as an amendment by the Senate to H R 5515 the National Defense Authorization Act for Fiscal Year 2019 and passed by the Senate on June 18 81There is also support by some in Congress to modernize and reform U S export control laws such as H R 5040 the Export Control Reform Act of 2018 82 The Trump Administration had indicated under its Section 301 investigation of China’s IPR policies that it would to impose new FDI restrictions and tighter export controls against China However on June 27 President Trump announced that legislation currently under consideration in Congress to reform CFIUS and export control laws would if enacted meet the Administration’s goals on these issues 83 Major U S -China Trade Issues China’s economic reforms and rapid economic growth along with the effects of globalization have caused the economies of the United States and China to become increasingly integrated 84 Although growing U S -China economic ties are considered by most analysts to be mutually beneficial overall tensions have risen over a number of Chinese economic and trade policies that many U S critics charge are protectionist economically distortive and damaging to U S economic interests According to the USTR most U S trade disputes with China stem from the consequences of its incomplete transition to a free market economy Major areas of concern for U S stakeholders include China’s  Extensive network of industrial policies including widespread use of trade and investment barriers financial support and indigenous innovation policies that seek to promote and protect domestic sectors and firms especially SOEs deemed by the government to be critical to the country’s future economic growth 80 Representative Robert Pittenger Press Release November 7 2017 at https pittenger house gov media-center press-releases pittenger-takes-aim-at-china 81 For more information on CFIUS legislation see CRS Insight IN10924 Foreign Investment Risk Review Modernization Act FIRRMA by James K Jackson and Cathleen D Cimino-Isaacs 82 See CRS Report R41916 The U S Export Control System and the Export Control Reform Initiative by Ian F Fergusson and Paul K Kerr 83 See https www whitehouse gov briefings-statements statement-president-regarding-investment-restrictions 84 The impact of globalization has been a somewhat controversial topic in the United States Some argue that it has made it easier for U S firms to shift production overseas resulting in lost jobs in the United States especially in manufacturing and lower wages for U S workers Others contend that globalization has induced U S firms to become more efficient and to focus a greater share of their domestic manufacturing on higher-end or more technologically advanced production while sourcing lower-end production abroad making such firms more globally competitive The result has been that the United States continues to be a major global manufacturer in terms of value-added but there are fewer U S workers in manufacturing Congressional Research Service RL33536 · VERSION 155 · UPDATED 29 China-U S Trade Issues    Failure to provide adequate protection of U S intellectual property rights IPR and alleged widespread government-directed cyber-theft of U S trade secrets security to help Chinese firms Mixed record on implementing its WTO obligations and Government-directed financial policies that promote high savings but reduce private consumption encourage high fixed investment levels but may contribute to overcapacity in many industries and a managed exchange rate policy that may distort trade flows Chinese “State Capitalism” Currently a significant share of China’s economy is thought to be driven by market forces A 2010 WTO report estimated that the private sector now accounted for more than 60% of China’s gross domestic product GDP 85 A 2016 WTO study estimated that the private sector accounted for 41 8% of China’s exports 86 However the Chinese government continues to play a major role in economic decision-making For example at the macroeconomic level the Chinese government maintains policies that induce households to save a high level of their income much of which is deposited in state-controlled Chinese banks This enables the government to provide low-cost financing to Chinese firms especially SOEs At the microeconomic level the Chinese government at the central and local government level seeks to promote the development of industries deemed critical to the country’s future economic development by using various policies such as subsidies tax breaks preferential loans trade barriers FDI restrictions discriminatory regulations and standards export restrictions on raw materials including rare earths technology transfer requirements imposed on foreign firms public procurement rules that give preferences to domestic firms and weak enforcement of IPR laws Many analysts argue that the Chinese government’s intervention in various sectors through industrial policies has intensified in recent years The December 2013 USTR report on China’s WTO trade compliance stated During most of the past decade the Chinese government emphasized the state’s role in the economy diverging from the path of economic reform that had driven China’s accession to the WTO With the state leading China’s economic development the Chinese government pursued new and more expansive industrial policies often designed to limit market access for imported goods foreign manufacturers and foreign service suppliers while offering substantial government guidance resources and regulatory support to Chinese industries particularly ones dominated by state-owned enterprises This heavy state role in the economy reinforced by unchecked discretionary actions of Chinese government regulators generated serious trade frictions with China’s many trade partners including the United States 87 The extent of SOE involvement in the Chinese economy is difficult to measure due to the opaque nature of the corporate sector in China and the relative lack of transparency regarding the 85 World Trade Organization Trade Policy Review Body Trade Policy Review Report by the Secretariat China Revision 2010 Part 2 p 1 86 WTO Trade Policy Review China June 15 2016 p 20 available at https www wto org english tratop_e tpr_e s342_e pdf 87 U S Trade Representative 2013 USTR Report to Congress on China’s WTO Compliance December 2013 p 2 Congressional Research Service RL33536 · VERSION 155 · UPDATED 30 China-U S Trade Issues relationship between state actors including those at the central and noncentral government levels and Chinese firms According to one study by the USCC The state sector in China consists of three main components First there are enterprises fully owned by the state through the State-owned Assets and Supervision and Administration Commission SASAC of the State Council and by SASACs of provincial municipal and county governments Second there are SOEs that are majority owners of enterprises that are not officially considered SOEs but are effectively controlled by their SOE owners Finally there is a group of entities owned and controlled indirectly through SOE subsidiaries based inside and outside of China The actual size of this third group is unknown Urban collective enterprises and Government-owned Township and village enterprises TVEs also belong to the state sector but are not considered SOEs The stateowned and controlled portion of the Chinese economy is large Based on reasonable assumptions it appears that the visible state sector—SOEs and entities directly controlled by SOEs accounted for more than 40 percent of China’s nonagricultural GDP If the contributions of indirectly controlled entities urban collectives and public TVEs are considered the share of GDP owned and controlled by the state is approximately 50 percent 88 According to the Chinese government there are 150 000 state-owned or state-controlled enterprises at the central and local government excluding financial institutions with total assets worth $15 2 trillion and 30 million workers 89 Chinese SOEs have undergone significant restructuring over the years The government contends that 68% of all SOE-funded firms in 2016 were mixed-ownership The Chinese government has identified a number of industries where the state should have full control or where the state should dominate These include autos aviation banking coal construction environmental technology information technology insurance media metals such as steel oil and gas power railways shipping telecommunications and tobacco 90 Many SOEs are owned or controlled by local governments According to one analyst The typical large industrial Chinese company is wholly or majority-owned by a local government which appoints senior management and provides free or low-cost land and utilities tax breaks and where possible guarantees that locally made products will be favored by local governments consumers and other businesses In return the enterprise provides the local state with a source of jobs for local workers tax revenues and dividends 91 China’s banking system is largely dominated by state-owned or state-controlled banks In 2011 the top five largest banks in China all of which were shareholding companies with significant state ownership accounted for 57 5% of Chinese banking assets The Chinese government also has four banks that are 100% state-owned and holds shares in a number of joint stock commercial banks 92 SOEs are believed to receive preferential credit treatment by government banks while U S -China Economic and Security Review Commission An Analysis of State‐owned Enterprises and State Capitalism in China by Andrew Szamosszegi and Cole Kyle October 26 2011 p 1 89 China Daily “China eyes breakthroughs in SOE reform ” December 23 2016 at http www chinadaily com cn business 2016-12 23 content_27753459 htm 90 Testimony for the U S –China Economic and Security Review Commission by Derek Scissors Ph D Chinese State Owned Enterprises and the US Policy on China February 12 2012 91 Anderson G E PhD Designated Drivers How China Plans to Dominate the Global Auto Industry 2012 p 2 92 Lund University Lending for Growth An Analysis of State-Owned Banks in China by Fredrik N G Anderson Katarzyna Burzynska and Sonja Opper June 2013 p 41 88 Congressional Research Service RL33536 · VERSION 155 · UPDATED 31 China-U S Trade Issues private firms must often pay higher interest rates or obtain credit elsewhere According to one estimate SOEs accounted for 85% $1 4 trillion of all bank loans in 2009 93 Not only are SOEs dominant players in China’s economy many are quite large by global standards Fortune’s 2018 list of the world’s 500 largest companies includes 111 Chinese firms compared to 29 listed firms in 2007 the top 20 of which are listed in Table 9 94 Table 9 Top 20 Chinese Companies on Fortune’s Global 500 in 2018 Company Global 500 Rank State or Nonstate Industry Revenue $billions State Grid 2 State Utility 349 Sinopec Group 3 State Energy 327 China National Petroleum 4 State Energy 326 China State Construction Engineering 23 State Engineering Construction 156 Industrial Commercial Bank of China 26 State Banking 153 Ping An Insurance 29 Nonstate Insurance 144 China Construction Bank 31 State Banking 139 SAIC Motor 36 State Motor Vehicles Parts 129 Agricultural Bank of China 40 State Banking 122 China Life Insurance 42 State Insurance 120 Bank of China 46 State Banking 115 China Mobile Communications 53 State Telecommunications 110 China Railway Engineering Group 56 State Engineering Construction 107 China Railway Construction 58 State Engineering Construction 101 Dongfeng Motor 65 State Motor Vehicles Parts 93 Huawei Investment Holding 72 Nonstate Telecommunications 89 China Resources 86 State Pharmaceuticals 82 China National Offshore Oil 87 State Mining Crude-Oil Production 81 China Communications Construction 91 State Engineering Construction 79 Pacific Construction Group 96 Nonstate Engineering Construction 77 Source Fortune 2017 Global 500 Notes State companies are those to have government ownership of 50% or more in the firm The Economist “State Capitalism’s Global Reach New Masters of the Universe How State Enterprise is Spreading ” January 21 2012 94 The listing can be found at http fortune com global500 93 Congressional Research Service RL33536 · VERSION 155 · UPDATED 32 China-U S Trade Issues Out of the top 20 Chinese firms listed in the Fortune Global 500 17 85% are majority-owned 50% or more by Chinese government and for the entire list 78 or 70% are primarily owned by the government Some of the 111 Chinese firms on the Fortune 500 list while not majorityowned by the government may be partially state-controlled or favored by the government For example     Several of the listed firms are banks where the Chinese government owns a large or controlling share including 26 5% of the Bank of Communications 15 7% of China Minsheng Banking Corp 21% of China Industrial Bank 17 9% of China Merchant Bank and 20% of Shanghai Pudong Development Bank 95 Lenovo a major global computer producer was started by the Chinese National Academy of Social Sciences which started Legend Holdings in 1984 Lenovo was spun off from Legend in 2001 but Legend still owns 31% of Lenovo’s shares 96 Huawei a major telecommunications company describes itself as an employeeowned firm However many U S analysts contend that Huawei has strong links with the Chinese government including the Chinese People’s Liberation Army PLA and has not published a full breakdown of its ownership structure In addition in the past the Chinese government reportedly ordered state banks to extend loans to the company early in its development so that it could compete against foreign firms in the domestic telecommunications market 97 Ping An Insurance is the largest nonstate company on the 2017 Global 500 list In 2012 The New York Times published an article that reported that in 2004 a network of family and friends of then-Chinese Premier Wen Jiabao owned 135 million shares of Ping An Insurance through a series of investment companies 98 A March 2016 Times article described Ping An as a “labyrinthine shareholding structure made up of 37 interlocking holding companies ”99 China’s Plan to Modernize the Economy and Promote Indigenous Innovation Many of the industrial policies China has implemented or formulated since 2006 appear to stem largely from a comprehensive document issued by China’s State Council the highest executive organ of state power in 2006 titled the National Medium-and Long-Term Program for Science and Technology Development 2006-2020 often referred to as the MLP 100 The MLP appears to represent an ambitious plan to modernize the structure of China’s economy by transforming it from a global center of low-tech manufacturing to a major center of innovation by the year 2020 and a global innovation leader by 2050 101 It also seeks to sharply reduce the country’s dependence on foreign technology The MLP includes the stated goals of “indigenous innovation 95 Lund University Lending for Growth An Analysis of State-Owned Banks in China by Fredrik N G Anderson Katarzyna Burzynska and Sonja Opper June 2013 p 41 96 Lenovo Investor Relations Stock Information Shareholding 97 McGregor Richard The Party the Secret World of China’s Communist Rulers 2010 p 204 98 The New York Times Ping An’s Hidden Shareholders Friends and Family of Wen Jiabao November 23 2012 99 The New York Times Starwood Bidder Is a Reclusive Chinese Insurer With Opaque Backing March 29 2016 100 An English translation of the MLP can be found at http sydney edu au global-health international-networks National_Outline_for_Medium_and_Long_Term_ST_Development1 doc 101 As some observers describe it China wants to go from a model of “made in China” to “innovated in China ” Congressional Research Service RL33536 · VERSION 155 · UPDATED 33 China-U S Trade Issues leapfrogging in priority fields enabling development and leading the future ”102 Some of the broad goals of the MLP state that by 2020    The progress of science and technology will contribute 60% or above to China’s development The country’s reliance on foreign technology will decline to 30% or below from an estimated current level of 50% Gross expenditures for research and development R D would rise to 2 5% of gross domestic product from 1 3% in 2005 Priority areas for increased R D include space programs aerospace development and manufacturing renewable energy computer science and life sciences 103 The document states that “China must place the strengthening of indigenous innovative capability at the core of economic restructuring growth model change and national competitiveness enhancement Building an innovation-oriented country is therefore a major strategic choice for China’s future development ” This goal according to the document is to be achieved by formulating and implementing regulations in the country’s government procurement law to “encourage and protect indigenous innovation ” establishing a coordination mechanism for government procurement of indigenous innovative products requiring a first-buy policy for major domestically made high-tech equipment and products that possess proprietary intellectual property rights providing policy support to enterprises in procuring domestic high-tech equipment and developing “relevant technology standards” through government procurement Reaction by U S Stakeholders Beginning in 2009 several U S companies began to raise concerns over a number of Chinese government circulars that would establish an “Indigenous Innovation Product Accreditation” system For example in November 2009 the Chinese government released a “Circular on Launching the 2009 National Indigenous Innovation Product Accreditation Work ” requiring companies to file applications by December 2009 for their products to be considered for accreditation as “indigenous innovation products ” Similar proposed circulars were issued at the provincial and local government levels U S business representatives expressed deep concern over the circulars arguing that they were protectionist in nature because they extended preferential treatment for Chinese government procurement to domestic Chinese firms that developed and owned intellectual property IP and thus largely excluded foreign firms 104 AmCham China described China’s attempt to link IP ownership with market access as “unprecedented worldwide ”105 A letter written by the U S Chamber of Commerce and 33 business associations to the Chinese government on December 10 2009 stated that the indigenous innovations circulars would “make it virtually impossible for any non-Chinese company to participate in China’s government procurement market—even those that have made 102 The MLP identifies main areas and priority topics including energy water and mineral resources the environment agriculture manufacturing communications and transport information industry and modern service industries population and health urbanization and urban development public security and national defense The report also identifies 16 major special projects and 8 “pioneer technologies ” 103 R D Magazine December 22 2009 104 U S business representatives also claim that the Chinese government is using tax incentives standards setting and requirements security regulations subsidies technology transfer requirements and other measures to promote the goals of indigenous innovation 105 AmCham China 2011 White Paper April 26 2011 p 66 Congressional Research Service RL33536 · VERSION 155 · UPDATED 34 China-U S Trade Issues substantial and long-term investments in China employ Chinese citizens and pay taxes to the Chinese government ” Such groups contend that a large share of their technology is developed globally and thus it would be difficult to attribute the share of technology developed in China needed to obtain accreditation 106 A 2011 AmCham China survey found that 40% of respondents believed that China’s indigenous innovation policies would hurt their businesses and 26% said their businesses were already being hurt by such policies At a November 2011 WTO review of China’s IPR policies the U S WTO representative stated that China’s policies of adopting indigenous innovation had “created a troubling trend toward increased discriminatory policies which were aimed at coercing technology transfer ” He stated that “Chinese regulations rules and other regulatory measures frequently called for technology transfer and in certain cases conditioned or proposed to condition the eligibility for government benefits or preferences on intellectual property being owned or developed in China or being licensed in some cases exclusively to a Chinese party ”107 China’s Response to U S Concerns The Chinese government responded to U S concerns over its indigenous innovation policies by arguing that they did not discriminate against foreign firms or violate global trade rules 108 However during the visit of then Chinese President Hu Jintao to the United States in January 2011 the Chinese government stated that it would not link its innovation policies to the provision of government procurement preferences 109 During the May 2011 session of the U S -China Strategic and Economic Dialogue S ED China pledged that it would eliminate all of its indigenous innovation products catalogs 110 During the November 2011 talks held under the U S China Joint Commission on Commerce and Trade JCCT the Chinese government announced that the State Council had issued a measure requiring governments of provinces municipalities and autonomous regions to eliminate by December 1 2011 any catalogues or other measures linking innovation policies to government procurement preferences 111 This occurred after foreign business groups raised concerns that discriminatory indigenous innovation policies might continue to be implemented at the local level even after Hu Jintao’s commitment For example the USCBC reported in February 2011 that it had identified 22 municipal and provincial governments that had issued at least 61 indigenous innovation catalogues U S business representatives sought to ensure that Beijing’s pledge on indigenous innovation would apply at all levels of government in China Some U S business representatives argue that one of the main goals of China’s indigenous innovation regulations is to induce foreign firms to boost their R D activities in China in order to qualify for government contracts 107 WTO Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic of China Report to the General Council by the Chair November 17 2011 p 4 108 Wall Street Journal China Defends Rule on ‘Indigenous’ Tech December 15 2009 109 The White House U S -China Joint Statement January 19 2011 110 According to a U S fact sheet on the meeting “China pledged to eliminate all of its government procurement indigenous innovation products catalogues and revise Article 9 of the draft Government Procurement Law Implementing Regulations which have preferences in government procurement to national indigenous innovation products in fulfillment of President Hu’s January 2011 commitment not to link Chinese innovation policies to government procurement preferences See U S Department of the Treasury The 2011 U S -China Strategic and Economic Dialogue U S Fact Sheet – Economic Track May 10 2011 111 U S Department of Commerce 22nd U S -China Joint Commission on Commerce and Trade Fact Sheet November 21 2011 106 Congressional Research Service RL33536 · VERSION 155 · UPDATED 35 China-U S Trade Issues In May 2013 the USCBC reported that although the central government had largely been successful in ensuring that sub-national governments complied with Hu Jintao’s January 2011 commitments 13 provinces had not yet issued any measures to comply 112 In addition an October 2012 USCBC survey found that 85% of respondents said they had seen little impact on their businesses resulting from China’s commitments delinking indigenous innovation with government procurement 113 Remaining U S Concerns While many U S business leaders have applauded China’s pledge to delink indigenous innovation from government procurement some remain wary that China will implement new policies that attempt to provide preferences to local Chinese firms over foreign firms According to Adam Segal with the Council on Foreign Relations “Even if China reverses certain policies under U S pressure it will remain dedicated to those goals U S policy is likely to become a game of Whac-a-Mole beating down one Chinese initiative on indigenous innovation only to see another pop up ”114 U S business groups are also concerned with how the MLP blueprint will affect China’s commitment to enforcing foreign IPR They note for example that the MLP states “Indigenous innovation refers to enhancing original innovation integrated innovation and re-innovation based on assimilation and absorption of imported technology in order to improve our national innovation capability ” To some this seems to indicate that China intends to take existing technology make some changes and improvements on it and then claim it as its own without acknowledging or compensating the original IPR holders A 2011 report by the U S Chamber of Commerce stated that China’s indigenous innovation policies led many international technology companies to conclude that the MLP is a “blueprint for technology theft on a scale the world has never seen before ”115 U S officials have attempted to convince Beijing that while its desire to increase innovation in China is a commendable goal its efforts to limit the participation of foreign firms in such efforts or attempting to condition market access in China to the development of IPR by foreign firms in China will hinder not promote the advancement of innovation in China The direction China takes on this issue could have a significant impact on U S economic interests as noted by USITC To the extent that China’s policies succeed in accelerating technological progress productivity and innovation in the Chinese economy they could provide spillover benefits for other countries But if indigenous innovation policies act as a form of technological import substitution systematically favoring Chinese domestic firms over foreign firms in relevant industries they would be expected to have a negative effect on foreign firms and economies roughly analogous to what would occur if China simply imposed a protective tariff on imports of goods in the relevant sectors or levied a discriminatory excise tax on the sales of FIEs in the Chinese market 116 U S -China Business Council Status Report China’s Innovation and Government Procurement Policies May 1 2013 at https www uschina org sites default files innovation-status-report pdf 113 U S -China Business Council USCBC 2012 China Business Environment Survey Results Continued Growth and Profitability Tempered Optimism Due to Rising Costs Competition and Market Barriers October 2012 p 6 available at https www uschina org advocacy press uscbc-2012-china-business-environment-survey-results-uscompanies-report-continued 114 Foreign Affairs China’s Innovation Wall Beijing’s Push for Homegrown Technology September 28 2010 115 U S Chamber of Commerce China’s Drive for ‘Indigenous Innovation’ - A Web of Industrial Policies February 2011 p 4 116 USITC China Intellectual Property Infringement Indigenous Innovation Policies and Frameworks for Measuring the Effects on the U S Economy Investigation No 332-514 USITC Publication 4199 November 2010 pp 6-7 112 Congressional Research Service RL33536 · VERSION 155 · UPDATED 36 China-U S Trade Issues New Restrictions on Information and Communications Technology According to the USTR’s 2015 report on China’s WTO accession while progress has been made to delink China’s efforts to link indigenous innovation goals with procurement at the central and local efforts such policies have continued in other areas Many foreign business groups have expressed increasing concerns over a number of recently proposed or enacted laws and regulations on information and communications technology ICT products and services that could limit foreign access to ICT markets in China on so-called national security grounds Several proposals include language stating that critical information infrastructure should be “secure and controllable ” an ambiguous term that has not been precisely defined by Chinese authorities Other proposals lay out policies to promote indigenous ICT industries or would require foreign firms to hand over proprietary information According to the U S Department of Commerce The policies set forth in these measures could cause long-term damage to U S businesses trying to sell ICT products into China a market estimated to be worth about $465 billion this year They also could add significant costs to foreign ICT companies operating in China and could prevent them from supplying the China market with the most technologically advanced and reliable products Such restrictions could have a significant impact on U S ICT firms According to BEA U S exports of ICT services and potentially ICT-enabled services i e services that are delivered remotely over ICT networks to China totaled $12 8 billion in 2015 117 Examples of recently passed or proposed measures of concern to foreign ICT firms include the following   In 2014 the China Banking Regulatory Commission issued guidelines for IT security equipment used in banks such as cash machines and smartcard chips which included provisions on encryption and the disclosure of source code It emphasized the importance of developing local technology and stated that the need for “secure and controllable technologies” in the banking sector with the goal of 15% in 2015 growing to no less than 75% in 2019 China suspended some of the guidelines in April 2015 At the June 2015 S ED session China agreed to ensure that bank ICT regulations “will be nondiscriminatory are not to impose nationality-based requirements and are to be developed in a transparent manner ”118 China’s national security law enacted in July 2015 includes a provision Article 24 that says “the State strengthens the establishment of capacity for independent innovation accelerating the development of autonomously controlled strategic advanced technologies and key technologies in core fields strengthens the use of intellectual property rights protects capacity building in protection of technological secrets and ensures security in technology and engineering ”119 Article 59 says that “the State establishes national security review and oversight management systems and mechanisms conducting national security review of foreign commercial investment special items and technologies internet 117 China was the fourth-largest U S export market for such services for countries where data is available See BEA International Trade Data U S Trade in Services available at http www bea gov iTable iTable cfm ReqID 62 step 1#reqid 62 step 1 isuri 1 6210 4 118 U S Department of Commerce U S Fact Sheet 26th U S -China Joint Commission on Commerce and Trade November 23 2016 available at https www commerce gov news fact-sheets 2015 11 us-fact-sheet-26th-us-chinajoint-commission-commerce-and-trade 119 Translation from the Council on Foreign Relations National Security Law of the People’s Republic of China July 1 2015 available at http www cfr org homeland-security national-security-law-peoples-republic-china p36775 Congressional Research Service RL33536 · VERSION 155 · UPDATED 37 China-U S Trade Issues    information technology products and services projects involving national security matters as well as other major matters and activities that impact or might impact national security ” In October 2015 the China Insurance Regulatory Commission issued new draft rules on cyber-security in the insurance industry The draft rules called for the adoption of “secure and controllable” technology by insurance companies data localization requirements and the use of products and systems employing domestic encryption methods On June 1 2016 28 business groups sent a letter to the chairman of the China Insurance Regulatory Commission arguing that the draft rules “would create unnecessary obstacles to international trade and likely to constitute a means of arbitrary or unjustifiable discrimination against providers in countries where the same conditions prevail ”120 On June 2 2016 the United States raised concerns about the draft regulations with the WTO Committee on Trade-Related Measures arguing that such language appears to require that Chinese insurance firms give preferences to Chinese domestic providers of hardware equipment and software over foreign firms 121 In December 2015 China enacted a new counterterrorism law 122 It requires telecommunications operators and internet service providers to “provide technical interfaces decryption and other technical support assistance to public security organs and state security organs conducting prevention and investigation of terrorist activities ”123 Originally the Chinese government sought to require providers to provide it encryption codes i e security back-door access and to store local user data on servers within China but these provisions were later dropped from the final draft of the law in part because of sharp criticism by President Obama who contended that such rules “would essentially force all foreign companies including U S companies to turn over to the Chinese government mechanisms where they can snoop and keep track of all the users of those services ” China passed a new cyber-security law on November 7 2016 124 which appears to promote the development of indigenous technologies and impose restrictions on foreign firms Article 15 directs government entities to “support key network security technology industries and programs support network security technology research and development application and popularization spread safe and trustworthy network products and services protect the intellectual property rights for network technologies and support research and development institutions schools of higher learning and so forth to participate in State network security technology innovation programs ” Article 23 states that “Critical network equipment and specialized network security products shall 120 The letter can be found at https www uschina org sites default files Industry%20letter%20on%20TBT%20notification%20of%20CIRC%20Tech%20Regulations%20 ENG pdf 121 Inside U S Trade’s China Trade Extra “U S Signals It Wants China To Slow Implementation Of Draft Insurance Regs ” June 3 2016 122 A translated copy of the law can be found at the China Law Translate at http chinalawtranslate com lang en 123 Translation from China Law Translate available at http chinalawtranslate com lang en 124 The law follows China’s assertion of its right to “cyber-sovereignty which it describes as “an individual country’s right to choose its own Internet regulation model ” See Xinhuanet “China Voice Why does cyber-sovereignty matter ” December 12 2016 available at http news xinhuanet com english 2015-12 16 c_134923687 htm Congressional Research Service RL33536 · VERSION 155 · UPDATED 38 China-U S Trade Issues  follow the national standards and mandatory requirements and be safety certified by a qualified establishment or meet the requirements of a safety inspection before being sold or provided The state network information departments together with the relevant departments of the State Council formulate and release a catalog of critical network equipment and specialized network security products and promote reciprocal recognition of safety certifications and security inspection results to avoid duplicative certifications and inspections ”125 Article 37 states that personal information and other important data gathered or produced by critical information infrastructure operators during operations within China must store it in China 126 A statement issued by Amcham on November 7 said the new law would not “do much to improve security ” but rather would “create barriers to trade and investment ” Other critics contend that provisions of the law are too broad or vague as to the level of cooperation internet firms are required to give to government authorities and would impose new internet restrictions 127 China’s 13th five-year plans and other government policy pronouncements have laid out a number of plans to boost innovation and promote the development of indigenous ICT and other high tech sectors including semiconductors see Appendix A U S Chamber of Commerce report estimated that a decision by China to “purge foreign ICTs” would reduce China’s annual GDP by 1 77% up to 3 44% or at least $200 billion based on 2015 GDP and would cost the Chinese economy at a minimum nearly $3 trillion overall by 2025 128 Intellectual Property Rights IPR Issues129 U S business and government representatives voice growing concern over economic losses suffered by U S firms as a result of IPR infringement in China and elsewhere including those from cyber-attacks U S innovation and the intellectual property IP that it generates have been cited by various economists as a critical source of U S economic growth and global competitiveness 130 For example according to the Department of Commerce in 2014 U S IPintensive industries either directly or indirectly supported 45 5 million jobs and contributed $6 6 trillion in value added to the economy up 30% from 2010 equal to 48 2% of U S GDP In addition total merchandise exports of IP-intensive industries totaled $842 billion 131 According to the U S Bureau of Economic Analysis in 2017 foreign entities paid U S IP holders $128 4 125 See translation of the law at http chinalawtranslate com cybersecuritylaw lang en#LBQMwbmaWhGozeMj 99 For additional information on digital trade issues see CRS Report R44565 Digital Trade and U S Trade Policy coordinated by Rachel F Fefer 127 Lawfare Understanding China’s Cybersecurity Law November 8 2016 available at https www lawfareblog com understanding-chinas-cybersecurity-law 128 U S Chamber of Commerce Preventing Deglobalization March 17 2016 p 8 available at https www uschamber com sites default files documents files preventing_deglobalization_1 pdf 129 China’s IPR policies subject to the Section 301 investigation are discussed later in the report 130 See CRS Report RL34292 Intellectual Property Rights and International Trade by Shayerah Ilias Akhtar and Ian F Fergusson 131 U S Department of Commerce Intellectual Property and the U S Economy 2016 Update March 2012 available at https www uspto gov sites default files documents IPandtheUSEconomySept2016 pdf 126 Congressional Research Service RL33536 · VERSION 155 · UPDATED 39 China-U S Trade Issues billion $8 8 billion was paid by Chinese entities for use of their IPR and $42 2 billion for telecommunications computer and information services 132 A study by NDP Consulting estimated that in 2008 U S workers in IP-intensive production earned 60% more than workers at similar levels in non-IP industries 133 A study on the Apple iPod concluded that Apple’s innovation in developing and engineering the iPod and its ability to source most of its production to low-cost countries such as China have enabled it to become a highly competitive and profitable firm as well as a creator of high-paying jobs such as engineers engaged in the design of Apple products in the United States 134 IPR piracy and infringement is a significant global problem Lack of effective and consistent protection of IPR has been cited by U S firms as one of the most significant problems they face in doing business in China Other U S firms have expressed concern over pressures they often face from Chinese government entities to share technology and IPR with a Chinese partner Although China has significantly improved its IPR protection regime over the past few years U S IP industries complain that piracy rates in China remain unacceptably high and economic losses are significant as illustrated by studies and estimates made by several stakeholders     An April 3 2018 USTR press release estimated annual U S economic losses from China’s “unfair” IPR policies at $50 billion 135 A May 2013 study by the Commission on the Theft of American Intellectual Property estimated that global IPR theft costs the U S economy $300 billion of which China accounted for 50% $150 billion to 80% $240 billion of those losses 136 The U S Department of Homeland Security reported that in FY2017 goods from China and Hong Kong together accounted for 78% of seized counterfeit goods with a total value of $941 million based on their estimated manufacturer’s retail price 137 Business surveys reveal mixed reactions to China’s IPR enforcement efforts For example a majority of respondents in a 2016 AmCham China survey said IPR enforcement was effective for patents 54% and trademarks or brand protection 51% but less than a majority found copyrights 48% and trade secrets 40% enforcement to be effective At the same time 91% of respondents agreed that IPR enforcement over the last five years had improved 138 The European Chamber’s 2016 China business survey found that although 59% of its members 132 U S Bureau of Economic Affairs International Data International Services at http www bea gov index htm Nam Pham The Impact of Innovation and the Role of Intellectual Property Rights on U S Productivity Competitiveness Jobs Wages and Exports 2010 NDP Consulting 134 Communications of the ACM Who Captures Value in a Global Innovation Network The Case of Apple’s iPod March 2009 135 USTR Press Release April 3 2018 available at https ustr gov about-us policy-offices press-office press-releases 2018 april under-section-301-action-ustr 136 The Commission on the Theft of American Intellectual Property the Report of the Commission on the Theft of Intellectual Property May 2013 137 U S Department of Homeland Security Intellectual Property Rights Seizure Statistics Fiscal Year 2017 April 2018 available at https www cbp gov sites default files assets documents 2018-Apr ipr-seizure-stats-fy2017 pdf 138 AmCham China China Business Climate Survey Report 2016 January 2016 available at http www amchamchina org about press-center amcham-statement amcham-china-releases-2016-business-climatesurvey 133 Congressional Research Service RL33536 · VERSION 155 · UPDATED 40 China-U S Trade Issues      said China’s IPR enforcement was “inadequate ” this was an improvement from the 95% rate reported for 2009 139 The USCBC’s 2017 member survey found that IPR enforcement and cybersecurity ranked as the fifth and sixth respectively biggest challenges among its member firms Among respondents 94% stated they concerned about IPR enforcement in China and 82% expressed concerns about data flow restrictions and cyber-security Major cyber-related areas of greatest concern include restrictions on cross-border data flows in Chinese regulations cited by 65% of respondents inability to use global IT solutions or non-Chinese cloud-based applications in China 55% consumer or company data theft 53% Internet access and performance issues 53% and IPR theft 51% 140 The USTR’s 2016 report on foreign trade barriers stated that over the past decade China’s internet restrictions have “posed a significant burden to foreign suppliers ” and that 8 out of the top 25 most globally visited sites such as Yahoo Facebook YouTube eBay Twitter and Amazon are blocked in China 141 Freedom House’s 2015 Freedom on the Net report ranked China’s internet regime as the most restrictive out of 65 countries surveyed 142 The U S International Trade Commission USITC in 2001 estimated that U S intellectual property-intensive firms that conducted business in China lost $48 2 billion in sales royalties and license fees in 2009 because of IPR violations It also estimated that an effective IPR enforcement regime in China that was comparable to U S levels could increase employment by IP-intensive firms in the United States by 923 000 jobs 143 The Business Software Alliance BSA estimated the commercial value of illegally used software in China at $8 7 billion in 2015 up from $7 6 billion in 2009 and that the software piracy rate in China was 70% down from 79% in 2007 144 BSA further estimated that legitimate software sales in China were only $3 7 billion compared to legal sales of $41 0 billion in the United States The Organization for Economic Development and Cooperation OECD estimates that counterfeit products accounted for 2 5% of global trade in 2013 or $461 billion 145 Chinese officials contend that they have significantly improved their IPR protection regime but argue that the country lacks the resources and a sophisticated legal system to effectively deal with IPR violations They also contend that IPR infringement is a serious problem for domestic 139 European Chamber European Business in China Business Confidence Survey 2016 July 7 2016 available at http www europeanchamber com cn en publications-business-confidence-survey 140 USCBC 2017 Membership Survey available at https www uschina org sites default files 2017_uscbc_member_survey pdf 141 USTR the 2016 National Trade Estimate Report March 23 2016 p 91 available at https ustr gov sites default files 2016-NTE-Report-FINAL pdf 142 Freedom House Freedom on the Net 2015 available at https freedomhouse org sites default files FH_FOTN_2015Report pdf 143 The United States International Trade Commission China Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U S Economy USITC Publication 4226 May 2011 p xiv 144 BSA Shadow Market 2011 BSA Global Software Piracy Study Ninth Edition May 2012 at http portal bsa org globalpiracy2011 downloads study_pdf 2011_BSA_Piracy_Study-Standard pdf 145 OECD Trade in Counterfeit and Pirated Goods Mapping the Economic Impact 2016 p 5 Congressional Research Service RL33536 · VERSION 155 · UPDATED 41 China-U S Trade Issues Chinese firms as well A survey by the Chinese State Administration for Industry and Commerce found that 58 7% of products sold online in China were genuine in 2014 146 Many analysts contend that China’s goals of becoming a global leader in innovation will induce the government to strengthen IPR laws and enforcement However some analysts contend that China’s relatively poor record on IPR enforcement can be partially explained by the fact that Chinese leaders want to make China a major producer of capital-intensive and high-technology products and thus they are tolerant of IPR piracy if it helps Chinese firms become more technologically advanced According to an official at the U S Chamber of Commerce The newer and emerging challenge to U S IPR is not a function of China’s lack of political will to crackdown on infringers Rather it is a manifestation of a coherent and government-directed or at least government-motivated strategy to lessen China’s perceived reliance on foreign innovations and IP China is actively working to create a legal environment that enables it to intervene in the market for IP help its own companies to “re-innovate” competing IPR as a substitute to American and other foreign technologies and potentially misappropriate U S and other foreign IP as components of its industrial policies and internal market regulation The common themes throughout these policies are 1 undermine and displace foreign IP 2 leverage China’s large domestic market to develop national champions and promote its own IP displacing foreign competitors in China and 3 building on China’s domestic successes by displacing competitors in foreign markets 147 An illustration of alleged IPR theft in China involves American Superconductor Corporation AMSC On September 14 2011 AMSC announced that it was filing criminal and civil complaints in China against Sinovel Wind Group Co Ltd Sinovel China’s largest wind turbine producer and other parties alleging the illegal use of AMSC’s intellectual property According to AMSC Sinovel illegally by bribing an AMSC employee obtained and used AMSC’s wind turbine control software code to upgrade its 1 5 megawatt wind turbines in the field to meet proposed Chinese grid codes and to potentially allow for the use of core electrical components from other manufacturers 148 In addition AMSC claimed that Sinovel refused to pay for past shipments from AMSC as well as honoring for future shipments of components and spare parts as well 149 AMSC has brought several civil cases against Sinovel seeking to recover more than $1 2 billion for contracted shipments and damages caused by Sinovel’s contract breaches 150 In 2013 the U S Justice Department issued indictments against Sinovel and two of its employees along with a former AMSC employee with trade secrets theft describing the action as “nothing short of attempted corporate homicide ”151According to AMSC it lost about half of its market capitalization after Sinovel refused to honor its contracts and that as of 2017 AMSC’s stock valued had dropped by 96% and its workforce by 70% One AMSC official said that it Quartz “Chinese government study based on shoddy data claims 40% of China’s online products are shoddy ” November 3 2015 available at http qz com 539824 chinese-government-study-based-on-shoddy-data-claims-40-ofchinas-online-products-are-shoddy 147 Testimony of Jeremie Waterman Senior Director Greater China U S Chamber of Commerce before the U S International Trade Commission Hearing on China Intellectual Property Infringement Indigenous Innovation Policies and Frameworks for Measuring the Effects on the U S Economy June 15 2010 148 AMSC claims Sinovel had obtained the intellectual property from a former AMSC employee who was then under arrest in Austria for economic espionage and fraudulent manipulation of data 149 AMSC Press Release “AMSC Filing Criminal and Civil Complaints Against Sinovel ” September 14 2011 150 AMSC Press Release April 10 2012 at http files shareholder com downloads AMSC 2346100399x0x558743 f01e0c5a-a526-4102-a818-f61f2d71ef79 AMSC_News_2012_4_10_Commercial pdf 151 Department of Justice Press Release June 27 2013 at https www justice gov opa pr sinovel-corporation-andthree-individuals-charged-wisconsin-theft-amsc-trade-secrets 146 Congressional Research Service RL33536 · VERSION 155 · UPDATED 42 China-U S Trade Issues possessed emails that “include the actual transfer and Skype messages indicating that senior level Sinovel officials ordered the theft of AMSC IP and understood the devastating impact it would have on AMSC ” and it estimated that 8 000 windmills in China 20% of the country’s total were operating on AMSC’s stolen technology 152 According to a specialist in intellectual property at Tufts University “Chinese companies once they acquire the needed technology will often abandon their Western partners on the pretext that the technology or product failed to meet Chinese governmental regulations This is yet another example of a Chinese industrial policy aimed at procuring by virtually any means technology in order to provide Chinese domestic industries with a competitive advantage ”153 to pursue trade secret and copyright infringement litigation in China and the United States 154 Market access in China remains a significant problem for many U S IP industries such as music and films and is considered a significant cause of high IPR piracy rates For example China’s growing middle class has resulted in a surge in movie box office sales in recent years which hit $6 8 billion in 2015 up 49% over the previous year making China the largest market outside the United States and Canada 155 When China joined the WTO in 2001 it agreed to allow 20 imported foreign films per year 156 During the visit to the United States by then-Chinese Vice President Xi Jinping in February 2012 China agreed that it would allow in more American exports of 3D IMAX and similarly enhanced format movies on favorable commercial terms strengthen the opportunities to distribute films through private enterprises rather than the state film monopoly and ensure fairer compensation levels for U S blockbuster films distributed by Chinese SOEs 157 This extended China’s foreign movie quota to 34 based on a revenue-sharing agreement foreign studios receive 25% of the box office receipts with a Chinese SOE 158 Some business groups complain that China has failed to allow competition in the distribution of movies noting that no private firms have been given a license to distribute movies nationally Two Chinese government entities determine which foreign films will enter the market set opening dates and determine the number of screens on which films can be shown which some argue is mainly based on the goal of protecting and promoting Chinese films 159 The share of Hollywood movies in box office sales in China dropped from 45 5% in 2014 to 38 4% in 2015 160 USTR Section 301 Investigation China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation October 10 2017 at https ustr gov sites default files 03142013%20Update%20Org%20Chart pdf 153 “Data Theft Case May Test U S China Ties ” Boston Globe September 19 2011 154 AMSC Press Release April 23 2015 available at http ir amsc com releasedetail cfm ReleaseID 908308 155 Motion Picture Association of America 2015 Theatrical Statistics April 2016 available at http www mpaa org wp-content uploads 2016 04 MPAA-Theatrical-Market-Statistics-2015_Final pdf 156 Such restrictions are mainly imposed to protect China’s domestic film industry from foreign competition 157 The White House Press Release February 17 2012 at http www whitehouse gov the-press-office 2012 02 17 united-states-achieves-breakthrough-movies-dis pute-china 158 China also allows 30-40 imported foreign movies into the country on a flat fee basis and foreign firms can coproduce movies in China or provide films for TV or online viewing See China Briefing Navigating Restrictions in China’s Film Industry December 2015 available at http www hollywoodreporter com news china-box-office-growsastonishing-851629 159 Bloomberg China Could Beat Hollywood by 2017 February 25 2016 160 The Hollywood Reporter China Box Office Grows Astonishing 48 7 Percent in 2015 Hits $6 78 Billion December 31 2015 available at http www hollywoodreporter com news china-box-office-grows-astonishing-851629 152 Congressional Research Service RL33536 · VERSION 155 · UPDATED 43 China-U S Trade Issues Technology Transfer Issues When China entered the WTO in 2001 it agreed that foreign firms would not be pressured by government entities to transfer technology to a Chinese partner as part of the cost of doing business in China However many U S firms argue that this is a common Chinese practice although this is difficult to quantify because oftentimes U S business representatives appear to try to avoid negative publicity regarding the difficulties they encounter doing business in China out of concern over retaliation by the Chinese government 161 In addition Chinese officials reportedly pressure foreign firms through oral communications to transfer technology for example as a condition to invest in China so as to avoid putting such requirements in writing in order to evade accusations of violating WTO rules A 2010 study by the U S Chamber of Commerce stated that growing pressure on foreign firms to share technology in exchange for market access in China was forcing such firms to “anguish over balancing today’s profits with tomorrow’s survival ”162 In 2011 then-U S Treasury Secretary Timothy Geithner charged that “we’re seeing China continue to be very very aggressive in a strategy they started several decades ago which goes like this you want to sell to our country we want you to come produce here If you want to come produce here you need to transfer your technology to us ” A 2012 AmCham China survey reported that 33% of its respondents stated that technology transfer requirements were negatively affecting their businesses 163 U S officials continue to press China on this issue A U S Commerce Department fact sheet from the December 2014 U S -China Joint Commission on Commerce and Trade JCCT meeting stated China clarified and underscored that it will treat IPR owned or developed in other countries the same as domestically owned or developed IPR and it further agreed that enterprises are free to base technology transfer decisions on business and market considerations and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises 164 Following President Obama’s meeting with President Xi in September 2016 the White House issued a fact sheet that said that the two sides committed “not to advance generally applicable policies or practices that require the transfer of intellectual property rights or technology as a condition of doing business in their respective markets ”165 Technology transfer issues have also been raised over a number of new Chinese laws and regulations that advance “secure and controllable technology” discussed below 161 China denies that public officials exert such pressure and that any technology transfers that do occur in China are the result of commercial agreements between companies 162 U S Chamber of Commerce China’s Drive for ‘Indigenous Innovation’ - A Web of Industrial Policies July 29 2010 163 AmCham China 2012 China Business Climate Survey Report March 2012 available at http www amchamchina org businessclimate2012 164 U S Department of Commerce U S -China Joint Fact Sheet on 25th Joint Commission on Commerce and Trade December 29 2014 available at https www commerce gov news fact-sheets 2014 12 us-china-joint-fact-sheet-25thjoint-commission-commerce-and-trade 165 The White House Fact Sheet U S -China Economic Relations September 4 2016 available at https www whitehouse gov the-press-office 2016 09 04 fact-sheet-us-china-economic-relations Congressional Research Service RL33536 · VERSION 155 · UPDATED 44 China-U S Trade Issues Cyber-security Issues Cyber-attacks against U S firms have raised concerns over the potential large-scale theft of U S IPR and its economic implications for the United States A 2011 report by McAfee a U S global security technology company stated that its investigation had identified targeted intrusions into more than 70 global companies and warned that “every conceivable industry with significant size and valuable intellectual property has been compromised or will be shortly with the great majority of the victims rarely discovering the intrusion or its impact ”166 Many U S analysts and policymakers contend that the Chinese government is a major source of cyber economic espionage against U S firms For example Representative Mike Rogers chairman of the House Permanent Select Committee on Intelligence stated at an October 4 2011 hearing that Attributing this espionage isn’t easy but talk to any private sector cyber analyst and they will tell you there is little doubt that this is a massive campaign being conducted by the Chinese government I don’t believe that there is a precedent in history for such a massive and sustained intelligence effort by a government to blatantly steal commercial data and intellectual property China’s economic espionage has reached an intolerable level and I believe that the United States and our allies in Europe and Asia have an obligation to confront Beijing and demand that they put a stop to this piracy 167 A 2011 report by the U S Office of the Director of National Intelligence DNI stated “Chinese actors are the world’s most active and persistent perpetrators of economic espionage U S private sector firms and cyber-security specialists have reported an onslaught of computer network intrusions that have originated in China but the IC Intelligence Community cannot confirm who was responsible ” The report goes on to warn that China will continue to be driven by its longstanding policy of “catching up fast and surpassing” Western powers The growing interrelationships between Chinese and U S companies—such as the employment of Chinese-national technical experts at U S facilities and the off-shoring of U S production and R D to facilities in China—will offer Chinese government agencies and businesses increasing opportunities to collect sensitive US economic information 168 On February 19 2013 Mandiant a U S information security company issued a report documenting extensive economic cyber-espionage by a Chinese unit which it designated as APT1 with alleged links to the Chinese People’s Liberation Army PLA against 141 firms covering 20 industries since 2006 The report stated Our analysis has led us to conclude that APT1 is likely government-sponsored and one of the most persistent of China’s cyber threat actors We believe that APT1 is able to wage such a long-running and extensive cyber espionage campaign in large part because it receives direct government support In seeking to identify the organization behind this activity our research found that People’s Liberation Army PLA’s Unit 61398 is similar to APT1 in its mission capabilities and resources PLA Unit 61398 is also located in precisely the same area from which APT1 activity appears to originate 169 166 The report did not identify China or any country as the source of the intrusions McAfee Revealed Operation Shady Rat An Investigation of Targeted Intrusions Into More Than 70 Global Companies Governments and Nonprofit Organizations During the Last Five Years 2011 167 House Permanent Select Committee on Intelligence Chairman Mike Rogers Opening Statement at the Hearing on Cyber Threats and Ongoing Efforts to Protect the Nation October 4 2011 168 DNI Office of the National Counterintelligence Executive Foreign Spies Stealing U S Economic Secrets in Cyberspace Report to Congress on Foreign Economic Collection and Industrial Espionage 2009-2011 October 2011 169 Mandiant APT1 Exposing One of China’s Cyber Espionage Units February 19 2013 p 2 Congressional Research Service RL33536 · VERSION 155 · UPDATED 45 China-U S Trade Issues On March 11 2013 Tom Donilon then-National Security Advisor to President Obama stated in a speech that the United States and China should engage in a constructive dialogue to establish acceptable norms of behavior in cyberspace that China should recognize the urgency and scope of the problem and the risks it poses to U S trade relations and the reputation to Chinese industry and that China should take serious steps to investigate and stop cyber-espionage 170 Following a meeting with Chinese President Xi Jinping in June 2013 President Obama warned that if cybersecurity issues are not addressed and if there continues to be direct theft of United States property then “this was going to be a very difficult problem in the economic relationship and was going to be an inhibitor to the relationship really reaching its full potential ”171 On May 19 2014 the U S Department of Justice issued a 31-count indictment against five members of the Chinese People’s Liberation Army PLA for cyber-espionage and other offenses that allegedly targeted five U S firms and a labor union for commercial advantage the first time the Federal government has initiated such action against state actors The named U S victims were Westinghouse Electric Co Westinghouse U S subsidiaries of SolarWorld AG SolarWorld United States Steel Corp U S Steel Allegheny Technologies Inc ATI the United Steel Paper and Forestry Rubber Manufacturing Energy Allied Industrial and Service Workers International Union USW and Alcoa Inc The indictment appears to indicate a high level of U S government concern about the extent of Chinese state-sponsored cyber commercial theft against U S firms 172 China strongly condemned the U S indictment and announced that it would suspend its participation in the U S -China Cyber Working Group established in 2013 Some Members of Congress have called on the USTR to initiate a case against China in the World Trade Organization WTO Others have called for new measures to identify foreign governments that engage in cyber-espionage and to impose sanctions against entities that benefit from that theft For example in the 114th Congress H R 3039 would have authorized the President to impose certain penalties on state-sponsors of cyber-attacks Some analysts warn that growing U S -China disputes over cyber-theft could significantly impact commercial ties The Obama Administration sought ways to enhance U S commercial cyber-security at home develop bilateral and global rules governing cyber-theft of commercial trade secrets strengthen U S trade policy tools and promote greater cooperation with trading partners that share U S concerns On April 1 2015 President Obama issued Executive Order 13964 authorizing certain sanctions against “persons engaging in significant malicious cyber-enabled activities ”173 Shortly before Chinese President Xi’s state visit to the United States in September 2015 some press reports indicated that the Obama Administration was considering the imposition of sanctions against Chinese entities over cyber-theft even possibly before the arrival of President Xi which some analysts speculated might have caused Xi to cancel his visit This appears to have prompted China to send a high-level delegation headed by Meng Jianzhu Secretary of the Central Political 170 U S Asia Society Complete Transcript Thomas Donilon at Asia Society New York March 11 2013 National Public Radio Chinese Cyber-Hacking Discussed At Obama-Xi Summit June 9 2013 available at http www npr org sections thetwo-way 2013 06 09 190058558 chinese-cyber-hacking-discussed-at-obama-xisummit 172 U S Department of Justice at http www justice gov iso opa resources 5122014519132358461949 pdf 173 A copy can be found at http www treasury gov resource-center sanctions Programs Documents cyber_eo pdf The EO was extended for an additional year by President Obama on March 29 2016 171 Congressional Research Service RL33536 · VERSION 155 · UPDATED 46 China-U S Trade Issues and Legal Affairs Commission of the Chinese Communist Party to Washington DC to hold four days of talks September 9-12 with U S officials over cyber issues 174 On September 25 2015 Chinese President Xi and President Obama announced that they had reached an agreement on cyber-security The agreement stated that neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors 175 They also agreed to set up a high-level dialogue mechanism which would meet twice a year to address cybercrime and to improve twoway communication when cyber-related concerns arise including the creation of a hotline The first meeting of the U S -China High-Level Joint Dialogue on Cybercrime and Related Issues was held in December 2015 in Washington DC The two sides reached agreement on a document establishing guidelines for requesting assistance on cybercrime or other malicious cyber-activities and for responding to such requests They decided to conduct a tabletop exercise in the spring of 2016 held in April 2016 on agreed-upon cybercrime malicious cyber-activity and network protection scenarios pledged to develop the scope goals and procedures for use of the hotline for the next dialogue and agreed to further develop case cooperation on combatting cyberenabled crimes including child exploitation theft of trade secrets fraud and misuse of technology and communications for terrorist activities 176 The second Cyber Dialogue was held in Beijing in June 2016 The two sides agreed to begin implementation of a cyber-hotline mechanism which reportedly became operational in August 2016 177 continue to strengthen cooperation in network protection enhance case investigations and information exchanges prioritize cooperation on combatting cyber-enabled IP theft for commercial gain and cooperate in law enforcement operations and agreed to create an action plan to address the threat posed from business email compromise scams 178 The first session of the U S -China Law Enforcement and Cybersecurity Dialogue established by President Trump and President Xi in April 2017 as part of the U S -China Comprehensive Economic Dialogue was held in October 2017 On cyber issues the two sides pledged to continue cooperation based on the 2015 agreement including based on five main commitments to   give timely responses should be provided to requests for information and assistance concerning malicious cyber activities ensure that neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property including trade secrets or other 174 The White House Press Release September 12 2015 available https www whitehouse gov the-press-office 2015 09 12 readout-senior-administration-officials-meeting-secretary-central 175 The November 2015 meeting of the G-20 countries which includes China included language in its communiqué “In the ICT environment just as elsewhere states have a special responsibility to promote security stability and economic ties with other nations In support of that objective we affirm that no country should conduct or support ICTenabled theft of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors ” 176 U S Department of Justice First U S -China High-Level Joint Dialogue on Cybercrime and Related Issues Summary of Outcomes December 2 2015 available at https www justice gov opa pr first-us-china-high-level-jointdialogue-cybercrime-and-related-issues-summary-outcomes-0 177 Cyber Administration of China Sino-US High-level Joint Dialogue Hotline on Combating Cybercrime and Related Matters August 28 2016 available in Chinese at http www cac gov cn 2016-08 28 c_1119466923 htm 178 U S Department of Justice Second U S -China Cybercrime and Related Issues High Level Joint Dialogue June 14 2016 available at https www justice gov opa pr second-us-china-cybercrime-and-related-issues-high-level-jointdialogue Congressional Research Service RL33536 · VERSION 155 · UPDATED 47 China-U S Trade Issues    confidential business information with the intent of providing competitive advantages to companies or commercial sectors make efforts to further identify and promote appropriate norms of state behavior in cyberspace within the international community maintain a high-level joint dialogue mechanism on fighting cybercrime and related issues and enhance law enforcement communication on cyber security incidents and to mutually provide timely responses 179 Agreement on Cyber-security Issues at the September 2015 U S-China Summit  Neither country’s government will conduct or knowingly support cyber-enabled theft of IP including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors  They will establish a high-level joint dialogue mechanism on fighting cybercrime and related issues  They will seek to work together to identify and promote appropriate norms of state behavior in cyberspace internationally and  Each side will provide timely responses to requests for information and assistance concerning malicious cyber-activities Source The White House On April 27 2016 the United States Steel Corporation USS filed a Section 337180 case with the USITC against several major Chinese steel producers and their distributors in regard to certain carbon and alloy steel products 181 USS contends that in January 2011 the Chinese government hacked U S Steel’s research computers and equipment stealing proprietary methods for manufacturing these products and that soon thereafter Baosteel a Chinese SOE and largest Chinese steel firm and possibly other Chinese steel firms began producing and exporting “the very highest grades of advanced high-strength steel even though they had previously been unable to do so ” USS charged that imports of such products into the United States using USS’s stolen trade secrets competed against and undercut USS’s own products This is the first Section 337 case that has involved alleged cyber-theft of U S trade secrets Analysts differ on how the U S -China cyber agreement will address bilateral cyber-theft issues Some have called it a good first start to developing rules governing cyber-theft of commercial IPR Others are more skeptical noting that the Chinese government denies engaging in cybertheft of trade secrets for gaining a competitive advantage and instead claims China is the “biggest victim” of such activity In addition critics contend it is often extremely difficult to identify hackers let alone trace it back to a government entity According to CrowdStrike a U S cyber-security firm cyber-attacks against U S firms continued shortly after the agreement was reached It detected 11 breaches of its customers from September 26 2015 to October 16 2016 182 179 U S Department of Justice First U S -China Law Enforcement and Cybersecurity Dialogue Summary of Outcomes October 4 2017 available at https www justice gov opa pr first-us-china-law-enforcement-and-cybersecuritydialogue 180 Section 337 of the Tariff Act of 1930 tasks the USITC to investigate certain unfair practices in import trade 181 Section 337 of the Tariff Act of 1930 19 U S C §1337 enables U S firms to seek relief from imports that infringe on U S IPR such as patent or registered trademark infringement and misappropriation of trade secrets and other forms of unfair competition such as violations of U S antitrust laws Relief under Section 337 cases can result in a U S ban on certain products from entering the United States 182 CrowdStrike Blog The Latest on Chinese-affiliated Intrusions into Commercial Companies October 19 2015 Congressional Research Service RL33536 · VERSION 155 · UPDATED 48 China-U S Trade Issues A report by cyber-security firm Fireeye stated that while Chinese cyber-attacks against U S European and Japanese firms continued after the U S -China cyber agreement was reached the overall level of cyber-intrusions have declined since mid-2014 Fireeye attributed the decline to military reforms in China widespread exposure of Chinese cyber-activity and actions by the U S government 183 However CrowdStrike contends that the economic slowdown in China and the innovation goals of the 13th Five-Year Plan would likely continue to drive China’s statesponsored cyber-espionage activities 184 China’s Obligations in the World Trade Organization Negotiations for China’s accession to the General Agreement on Tariffs and Trade GATT and its successor organization the WTO began in 1986 and took over 15 years to complete During the WTO negotiations Chinese officials insisted that China was a developing country and should be allowed to enter under fairly lenient terms The United States insisted that China could enter the WTO only if it substantially liberalized its trade regime In the end a compromise was reached that required China to make immediate and extensive reductions in various trade and investment barriers while allowing it to maintain some level of protection or a transitional period of protection for certain sensitive sectors China’s WTO membership was formally approved at the WTO Ministerial Conference in Doha Qatar on November 10 2001 On November 11 2001 China notified the WTO that it had formally ratified the WTO agreements and on December 11 2001 it formally joined the WTO 185 Under the WTO accession agreement China agreed to do the following       Reduce the average tariff for industrial goods from 17% to 8 9% and average tariffs on U S priority agricultural products from 31% to 14% Limit subsidies for agricultural production to 8 5% of the value of farm output eliminate export subsidies on agricultural exports and notify the WTO of all government subsidies on a regular basis Within three years of accession grant full trade and distribution rights to foreign enterprises with some exceptions such as for certain agricultural products minerals and fuels Provide nondiscriminatory treatment to all WTO members such as treating foreign firms in China no less favorably than Chinese firms for trade purposes End discriminatory trade policies against foreign invested firms in China such as domestic content rules and technology transfer requirements Implement the WTO’s Trade-Related Aspects of Intellectual Property Rights TRIPS Agreement which sets basic standards on IPR protection and rules for enforcement upon accession available at https www crowdstrike com blog the-latest-on-chinese-affiliated-intrusions-into-commercial-companies 183 Fireeye Redline Drawn China Recalculates its Use of Cyber Espionage June 2016 p 3 available at https www fireeye com content dam fireeye-www current-threats pdfs rpt-china-espionage pdf 184 CrowdStrike 2015 Global Threat Report September 5 2015 available at https www crowdstrike com globalthreat-report-2015 185 Following China’s WTO accession the United States in January 2002 granted China permanent normal trade relations PNTR status prior to that time that status was on a conditional basis to ensure that the United States and China had a formal trade relationship under the rules of the WTO Congressional Research Service RL33536 · VERSION 155 · UPDATED 49 China-U S Trade Issues   Fully open the banking system to foreign financial institutions within five years by the end of 2006 Allow joint ventures in insurance and telecommunication with various degrees of foreign ownership allowed China’s implementation of its tariff concessions was largely on time Its simple average tariff fell from 15 9% in 2001 to its current average level of 9 9% 186 Some tariff cuts were significant China’s 2001 tariff rates of 80-100% on autos were reduced to 25% by 2006 Despite these cuts China’s simple average tariff rate is three times the U S level see Figure 16 China’s tariff on autos is 10 times the U S level of 2 5% China also levies a value-added tax on most imports Figure 16 China and U S Simple Average MFN Tariff Rates percentage Source World Trade Organization Note Simple average MFN rates reflect the average of all rates listed in the tariff schedule and exclude tariff rates under bilateral or plurilateral FTAs Data exclude China’s consumption taxes on imports WTO Implementation Issues Getting China into the WTO under a comprehensive trade liberalization agreement was a major U S trade objective during the late 1990s Many U S policymakers at the time maintained that China’s WTO membership would encourage the Chinese government to deepen market reforms promote the rule of law reduce the government’s role in the economy further integrate China into the world economy and enable the United States to use the WTO’s dispute resolution mechanism to address major trade issues As a result it was hoped China would become a more reliable and stable U S trading partner U S trade officials contend that in the first few years after it joined the WTO China made noteworthy progress in adopting economic reforms that 186 Another way to compare tariff burdens is to calculate the trade weighted average tariff which is the sum of duties collected over the sum of import values China’s average tariff under this measurement is 4 5% down from 14 1% in 2001 while the U S level is 2 4% For agricultural and nonagricultural products China’s trade weighted tariffs were 9 7% and 4% respectively Congressional Research Service RL33536 · VERSION 155 · UPDATED 50 China-U S Trade Issues facilitated its transition toward a market economy and increased its openness to trade and FDI However beginning in 2006 progress toward further market liberalization appeared to slow By 2008 U S government and business officials noted evidence of trends toward a more restrictive trade regime 187 The USTR’s 2015 report on China’s WTO compliance summarized U S concerns over China’s trade regime as follows Many of the problems that arise in the U S -China trade and investment relationship can be traced to the Chinese government’s interventionist policies and practices and the large role of state-owned enterprises and other national champions in China’s economy which continue to generate significant trade distortions that inevitably give rise to trade frictions 188 The 2016 report identified several priority areas of U S concern       Intellectual property rights and market access including trade secrets pharmaceutical patents software piracy online piracy and counterfeit goods Industrial policies including “secure and controllable” ICT policies indigenous innovation policies technology transfer requirements export restraints on raw materials export subsidies excess capacity in certain industries e g steel and aluminum value-added taxes on exports support of “strategic emerging industries 189 import bans on remanufactured products discriminatory standards and technology policies failure to join the WTO’s GPA investment restrictions and use of trade remedy measures for retaliatory purposes Restrictions on services including electronic payments theatrical films and audio-visual services banking telecommunications insurance commercial internet activities express delivery and legal services Restriction on agricultural products including sanitary and phytosanitary SPS measures on beef pork and poultry biotechnology approvals and domestic support subsidies Inadequate transparency including in regard to publication of trade-related laws regulations notice and comment procedures e g publishing draft laws for comment and translation of all trade-related laws regulations and other measures at all levels of government in one or more of the WTO languages and Restrictive aspects of the legal framework especially in regard to administrative licenses and China’s competition policy The United States has used the WTO dispute settlement mechanism on a number of occasions to address China’s alleged noncompliance with its WTO commitments To date it has brought 23 dispute settlement cases against China or 55% of the total number of cases brought by all WTO members against China through July 2018 190 These are summarized in Table 10 191 China in turn has brought 12 dispute settlement cases against the United States including over U S 187 China generally implemented its tariff reductions on schedule USTR 2016 Report to Congress on China’s WTO Compliance January 2017 available at https ustr gov sites default files 2016-China-Report-to-Congress pdf 189 These industries include energy and environmental protection new generation information technology biotechnology high-end equipment manufacturing new energy new materials and new-energy vehicles 190 The United States has been the largest target of China’s dispute settlement cases in the WTO as well 191 These cases can be found on the WTO’s Dispute Settlement website at https www wto org english tratop_e dispu_e dispu_by_country_e htm 188 Congressional Research Service RL33536 · VERSION 155 · UPDATED 51 China-U S Trade Issues Section 232 and Section 301 tariffs on Chinese products Another significant WTO case China has brought involves the United States’ continued treatment of China as a nonmarket economy for the purpose of calculating and imposing antidumping measures China contends that the terms of its WTO accession agreement in 2001 required all WTO members to treat it as a market economy by December 2017 while the United States argues China must first demonstrate that it is a market economy before it can obtain that status 192 Table 10 Summaries of WTO U S Dispute Settlement Cases Against China Date Initiated Issue Status Outcome China’s imposition of additional duties on U S imports on July 6 in response to U S Section 301 action Pending March 2018 Discriminatory technology licensing requirements related to the U S Section 301 investigation Pending January 2017 Subsidies to Chinese aluminum producers Pending December 2016 Administration of tariff-rate quotas for rice wheat and corn Pending September 2016 Use of excessive domestic subsidies for rice wheat and corn Pending July 2016 Export duties on nine later expanded to 15 different raw materials Pending December 2015 Hidden and discriminatory tax exemptions for domestic Chinese aircraft producers Pending February 2015 Measures providing subsidies contingent upon export performance to enterprises in several industries In April 2016 the two sides reached a Memorandum of Understanding China agreed to remove WTO-inconsistent provisions September 2012 Export subsidies to auto and auto parts manufacturers in China Pending July 2012 WTO-inconsistent use of antidumping and countervailing measures duties of up to 21 5% against certain imported U S made vehicles In May 2014 WTO panel ruled several measures were inconsistent with China’s WTO obligations May 2012 Improper use of antidumping and countervailing duties on broiler products In August 2013 WTO panel found certain Chinese measures inconsistent with WTO obligations In July 2014 China informed DSB that it had implemented the DSB rulings U S disagreed with China’s assertion and requested creation of WTO compliance panel which was formed in July 2016 March 2012 Export restrictions on rare earths and two other minerals separate cases brought by EU and Japan Panel ruled several policies were inconsistent with WTO rules which was largely upheld on appeal by China In May 2015 China informed DSB it had implemented the ruling 192 April 2018 See CRS In Focus IF10385 China’s Status as a Nonmarket Economy NME by Wayne M Morrison Congressional Research Service RL33536 · VERSION 155 · UPDATED 52 China-U S Trade Issues Date Initiated Issue Status Outcome December 2010 Government programs extending subsidies to Chinese wind power equipment manufacturers that use parts and components made in China rather than foreign-made parts and components On June 7 2011 USTR announced China had agreed to end these subsidies but noted that China had failed to fully report all of its subsidy programs September 2010 Discrimination against U S suppliers of electronic payment services In 2012 USTR announced that the U S had largely prevailed in the ruling by a WTO dispute panel In July 2013 China announced it had implemented the WTO’s ruling but the U S disagreed with that assertion and said it would continue to monitor China’s actions September 2010 Improper application of antidumping duties and countervailing duties on imports of grain oriented flat-rolled electrical steel from the United States In June 2012 a panel ruled largely in favor of U S position and this was generally upheld on appeal in October 2012 In December 2013 USTR stated that China had failed to remove the duties and in February 2014 requested a WTO compliance panel That panel called on China to implement the WTO findings In August 2015 China said that the duties had expired June 2009 Export restraints on various raw materials In July 2011 a panel found that China’s export taxes and quotas on raw materials violated its WTO commitments and this ruling was largely upheld on appeal In January 2013 China reported that it implemented the ruling December 2008 Export subsidies for Chinese “Famous Chinese” brands programs In December 2009 the USTR announced that China had agreed to eliminate these programs March 2008 Discriminatory treatment of U S suppliers of financial information services in China In November 2008 the USTR announced that China had agreed to eliminate discriminatory restrictions April 2007 Noncompliance with the WTO TRIPS agreement namely in terms of its enforcement of IPR laws In January 26 2009 the WTO ruled that many of China’s IPR enforcement policies failed to fulfill its WTO obligations In June 2009 China announced that it would implement the WTO ruling by March 2010 April 2007 Failure to provide sufficient market access to IPR-related products namely in terms of trading rights and distribution services In August 2009 a panel ruled that many of China’s regulations on trading rights and distribution of films for theatrical release DVDs music and books and journals were inconsistent with China’s WTO obligation and this was largely upheld on appeal In February 2010 China stated that it would implement the WTO’s ruling February 2007 Government regulations giving WTOinconsistent import and export subsidies to various industries in China In November 20007 China agreed to eliminate the subsidies in question by January 1 2008 March 2006 Discriminatory regulations on imported auto parts which often applied the high tariff rate on finished autos 25% to certain auto parts which normally averaged 10% In February 2008 a panel ruled that China’s discriminatory tariffs were inconsistent with its WTO obligations China appealed the decision but a WTO Appellate Body largely upheld the WTO panel’s decision In August 2009 China said it had implemented the decision Congressional Research Service RL33536 · VERSION 155 · UPDATED 53 China-U S Trade Issues Date Initiated March 2004 Issue Status Outcome Discriminatory tax treatment of imported semiconductors The USTR announced in July 2004 that China had agreed to end its preferential tax policy and in October 2005 both sides announced that the issue had been resolved However the USTR expressed concerns over new forms of financial assistance given by the Chinese government to its domestic semiconductor industry Source WTO and USTR press releases Note Cases summarized by CRS China’s Currency Policy Unlike most advanced economies China does not maintain a market-based floating exchange rate For several years China pegged its currency directly to the U S dollar Each day China’s central bank announced a central rate of exchange between the renminbi RMB and the dollar and would buy and sell as much currency as needed to reach a targeted exchange rate within a specific band In order to maintain the targeted exchange rate with the dollar and other currencies the Chinese government imposed restrictions and controls over capital flows in and out of China 193 Currency intervention by the Chinese government in the past contributed to a sharp rise in Chinese foreign exchange reserves some of which were invested in U S dollar assets such as U S Treasury securities Starting around 1998 the Chinese government set the central target exchange rate at around 8 28 yuan the base unit of the RMB per dollar and this rate was generally maintained consistently through June 2005 194 Many Members of Congress around this time argued that China’s currency intervention constituted a de facto subsidy that contributed to a sharp rise in U S imports from China hence spiking the U S trade deficit with China and negatively affected some U S industrial sectors and many Members called on the U S Department of the Treasury to designate China as a “currency manipulator” in its biannual report to Congress on exchange rates Due in part to pressure from its trading partners including the United States the Chinese government in July 2005 announced reforms to its currency policy China immediately appreciated the RMB to the dollar by 2 1% and moved to a “managed float” exchange rate system based on a basket of major foreign currencies that included the U S dollar and other major currencies although the composition of that basket has not been made public From July 2005 to July 2008 the official exchange rate went from 8 27 to 6 83 yuan per dollar However once the effects of the global financial crisis became apparent the Chinese government halted its appreciation of the RMB and subsequently kept the yuan dollar exchange rate relatively constant at 6 83 from July 2008 to June 2010 in order to help limit the impact of the sharp decline in global demand for Chinese products Currency appreciation resumed in June 2010 although at a slower pace than in previous years From June 2005 through July 2015 the RMB appreciated by 35 3% on a nominal basis against the dollar On August 11 2015 China’s central bank announced that it was taking new measures to improve the market-orientation of its daily central parity rate of the RMB However over the next three Much of China’s trade is believed to be in U S dollars e g exporters are often paid in dollars The central government requires firms to exchange most of their dollars for RMB 194 The official name of China’s currency is the renminbi which is denominated in units of yuan 193 Congressional Research Service RL33536 · VERSION 155 · UPDATED 54 China-U S Trade Issues days the RMB depreciated against the dollar by 4 4% it went from 6 12 yuan to 6 40 yuan From July 2015 to mid-December 2016 the RMB depreciated by 13 6% against the U S dollar and from 2015 to 2017 it depreciated by 7 6% From January 2017 to December 2017 the RMB appreciated by 4 4% see Figure 17 However the RMB experienced a 7% depreciation against the dollar from April 26 2018 to July 26 2018 The RMB’s decline over this period may in part reflect concerns in the market over recent tariff increases by the United States and China on each other’s products stemming the U S Section 301 dispute See “The Administration’s Section 301 Case on China’s IPR Policies” although some have suggested that China’s government may be attempting to push down the RMB’s value in order to boost its exports to other markets Figure 17 RMB-Dollar Exchange Rates January 2015 to June 2018 Yuan per U S dollar Source Bank of China “middle rate ” Notes Graph inverted for illustrative purposes A falling line indicates the RMB is depreciating against the dollar while a rising line shows RMB appreciation In February 2016 the Trade Facilitation and Enforcement Act of 2015 P L 114-125 went into effect It included several new provisions on monitoring and addressing foreign exchange rates and listed new enhanced factors for the Department of the Treasury to consider when determining if any country should be listed as currency manipulators in its semi-annual report 195 Treasury established certain benchmarks to determine which countries would be subject to enhanced analysis and subject to a monitoring list including those with a bilateral trade surplus larger than $20 billion a current account surplus of more than 3% of GDP and engagement in persistent one-sided intervention in foreign exchange markets that resulted in net purchases equal to 2% or more of GDP over the past year The law also established new remedies in regard to countries that 195 It requires Treasury to include in its report an enhanced analysis of countries that have a significant trade surplus with the United States a material current account surplus and engage in persistent one-sided intervention in the foreign exchange market The enhanced analysis is to describe developments with respect to currency intervention a description of the real effective exchange rate and estimate of undervaluation analysis of changes in the capital controls and trade restrictions of that country and patterns in the reserve accumulation of that country Treasury must then assess whether a country has a significant bilateral trade surplus with the United States has a material current account surplus and has engaged in persistent one-sided intervention in the foreign exchange market Congressional Research Service RL33536 · VERSION 155 · UPDATED 55 China-U S Trade Issues do not adopt appropriate policies to correct the identified undervaluation and surpluses prohibitions of financing by the Overseas Private Investment Corporation OPIC in that country 196 restrictions on U S government procurement additional efforts by U S officials to urge IMF action and taking into account such currency policies before initiating or entering into any bilateral or regional trade agreement negotiations China met two out of the three criteria large trade surplus and current account surplus at over 3% of GDP for enhanced analysis in Treasury’s April 2016 report The report urged China to continue to rebalance the economy by boosting private consumption and said that “the RMB should continue to experience real appreciation over the medium-term ” Treasury’s October 2016 report stated that China had met only one of the criteria large trade surplus but went on to say that “despite the recent downward pressure on the RMB the Chinese currency is still 21 percent stronger than the dollar since December 2005 and 38 percent stronger on a real trade‐weighted basis ”197 The first Treasury report on exchange rates under the Trump Administration issued on April 14 2017 did not conclude that China or any country had manipulated its currency noting that the Chinese government over the past year or so had intervened heavily to prevent rapid RMB depreciation as opposed to trying to prevent RMB appreciation which often occurred in the past Although the report indicated that China had met only one of the criteria trade surplus Treasury stated that China’s currency policy would be “closely monitored ” noting that China’s trade surplus “accounts for a disproportionate share of the overall U S trade deficit ” Treasury said that it would also monitor the currency policies of Japan Korea Taiwan Germany and Switzerland The October 2017 Department of the Treasury report noted that China had intervened in 2017 to prevent RMB depreciation and that its current account surplus in the first half of the year as a percent of GDP was 1 4% However Treasury complained that China’s trade surplus with the United States remained high and urged China to deepen economic reforms Treasury’s April 2018 report on exchange rates emphasized China’s commitments not to engage in competitive devaluations and to improve the transparency of its foreign exchange regime 198 The Trump Administration’s Approach to Commercial Relations with China The Trump Administration has taken a number of steps in regard to U S-China commercial relations At their first official meeting as heads of state in April 2017 President Trump and Chinese President Xi Jinping announced the establishment of a “100-day plan on trade” as well as a new high-level forum called the “U S -China Comprehensive Dialogue ”199 Following the meeting then-U S Secretary of State Rex Tillerson stated that “President Trump noted the challenges caused by Chinese government intervention in its economy and raised serious concerns about the impact of China’s industrial agricultural technology and cyber policies on U S jobs and exports The President underscored the need for China to take concrete steps to 196 OPIC is already banned from operating in China under previous law The October 2016 is available at https www treasury gov resource-center international exchange-rate-policies Documents 2016-10-14%20%28Fall%202016%20FX%20Report%29%20FINAL PDF 198 See https home treasury gov sites default files 2018-04 2018-04-13-Spring-2018-FX-Report-FINAL pdf 199 The U S -China Comprehensive Dialogue has four pillars the diplomatic and security dialogue the comprehensive economic dialogue the law enforcement and cybersecurity dialogue and the social and cultures issues dialogue The new dialogue is a continuation of high level forums under the previous two Administrations 197 Congressional Research Service RL33536 · VERSION 155 · UPDATED 56 China-U S Trade Issues level the playing field for American workers stressing repeatedly the need for reciprocal market access ”200 The Trump Administration’s December 2017 National Security Strategy Report took aim at a number of Chinese economic policies of concern to the United States see Text Box Trump’s 2017 National Security Strategy Report in Regard to China’s Economy The report highlighted a number of Chinese economic policies of concern to the United States Below are a few excerpts —“Today the United States must compete for positive relationships around the world China and Russia target their investments in the developing world to expand influence and gain competitive advantages against the United States China is investing billions of dollars in infrastructure across the globe ” —“Although the United States seeks to continue to cooperate with China China is using economic inducements and penalties influence operations and implied military threats to persuade other states to heed its political and security agenda ” —“China is gaining a strategic foothold in Europe by expanding its unfair trade practices and investing in key industries sensitive technologies and infrastructure ” —“China and Russia challenge American power influence and interests attempting to erode American security and prosperity They are determined to make economies less free and less fair to grow their militaries and to control information and data to repress their societies and expand their influence ” —“Every year competitors such as China steal U S intellectual property valued at hundreds of billions of dollars Stealing proprietary technology and early-stage ideas allows competitors to unfairly tap into the innovation of free societies ” —“China’s infrastructure investments and trade strategies reinforce its geopolitical aspirations Its efforts to build and militarize outposts in the South China Sea endanger the free flow of trade threaten the sovereignty of other nations and undermine regional stability China presents its ambitions as mutually beneficial but Chinese dominance risks diminishing the sovereignty of many states in the Indo-Pacific ” On May 11 2017 the two sides announced that China would open its markets to U S beef biotechnology products credit rating services electronic payment services and bond underwriting and settlement The United States agreed to open its markets to Chinese cooked poultry and welcomed Chinese purchases of U S liquefied gas Chinese officials also indicated their support for continuing negotiations for continuing the BIT negotiations although the Trump Administration did not indicate its position on this proposal Following the meeting President Trump in a series of tweets appeared to indicate that he would link U S trade policy toward China with China’s willingness to pressure North Korea to curb its nuclear and missile programs On July 19 2017 the two sides held the first session of the CED in Washington DC which sought to build on the 100-day action plan through a new one-year action plan on trade and investment seeking to achieve “a more balanced economic relationship ” The outcome of the meeting is unclear as unlike past high-level meetings no joint fact sheet was released The U S side issued a short statement that said that “China acknowledged our shared objective to reduce the trade deficit which both sides will work cooperatively to achieve ” This led some U S observers to claim that the CED was marred with high tensions and disagreements and failed to produce any meaningful results They noted for example that China’s CED representative Vice Premier Wang Yang stated that “ d ialogue cannot immediately address all differences but confrontation will immediately damage the interests of both ” Politico reported that China’s 200 The White House Briefing by Secretary Tillerson Secretary Mnuchin and Secretary Ross on President Trump’s Meetings with President Xi of China April 7 2017 at https www whitehouse gov the-press-office 2017 04 07 briefing-secretary-tillerson-secretary-mnuchin-and-secretary-ross Congressional Research Service RL33536 · VERSION 155 · UPDATED 57 China-U S Trade Issues excess steel capacity was a contentious issue and may have stalemated the talks 201 The United States and China have not indicated if and when the CED talks will resume The Trump Administration has taken a number of trade actions that have raised tensions with China in recent months and could result in a series of tit-for-tat retaliation These include using Section 301 trade action against China’s IPR policies and Section 232 tariffs on U S steel and aluminum imports The Administration’s Section 301 Case on China’s IPR Policies On August 14 2017 President Trump issued a Presidential Memorandum directing the USTR to determine whether it should launch a Section 301 investigation into China’s protection of U S intellectual property rights IPR and forced technology transfer polices to determine their impact on U S economic interests 202 On August 18 2017 the USTR announced it had launched a Section 301 case against China the first use of Section 301 since 2010 203 On March 22 2018 President Trump signed a Memorandum on Actions by the United States Related to the Section 301 Investigation 204 Described by the White House as a targeting of China’s “economic aggression ” the memorandum identified four broad IPR-related policies that justified U S action under Section 301 It said China 1 uses joint venture requirements foreign investment restrictions and administrative review and licensing processes to force or pressure technology transfers from American companies 2 uses discriminatory licensing processes to transfer technologies from U S companies to Chinese companies 3 directs and facilitates investments and acquisitions which generate large-scale technology transfer and 4 conducts and supports cyberintrusions into U S computer networks to gain access to valuable business information The USTR which released a 215-page study of China’s IPR policies that negatively impact U S stakeholders estimated losses to the U S economy of at least $50 billion per year 205 Under the Section 301 action the Administration proposed to 1 implement 25% ad valorem tariffs on certain Chinese imports which in sum are comparable to U S trade losses including color TVs machinery parts electrical parts and motor vehicles 2 initiate a WTO dispute settlement case against China’s “discriminatory” technology licensing which it did on March 23 and 3 propose new investment restrictions on Chinese efforts to acquire sensitive U S technology At his March 22 announcement on Section 301 and China President Trump stated the following “We have a tremendous intellectual property theft situation going on which likewise is hundreds of billions of dollars And that’s on a yearly basis I’ve spoken to the President I’ve spoken to representatives of China We’ve been dealing with it very seriously ” However he went on to mention other non-IPR issues He said that the United States had a trade deficit with China of Politico ” Steel topples U S -China talks ” July 20 2017 at http www politico com tipsheets morning-trade 2017 07 20 steel-topples-us-china-talks-221440 202 Sections 301 through 310 of the Trade Act of 1974 as amended are commonly referred to as “Section 301 ” It is one of the principal statutory means by which the United States enforces U S rights under trade agreements and addresses “unfair” foreign barriers to U S exports 203 For additional information see CRS In Focus IF10708 Enforcing U S Trade Laws Section 301 and China by Wayne M Morrison 204 The document is available at https www whitehouse gov presidential-actions presidential-memorandum-actionsunited-states-related-section-301-investigation 205 USTR Press Release March 22 2018 available at https ustr gov about-us policy-offices press-office pressreleases 2018 march president-trump-announces-strong 201 Congressional Research Service RL33536 · VERSION 155 · UPDATED 58 China-U S Trade Issues either $504 billion or $375 billion which he called “the largest deficit of any country in the history of our world ” He also stated that he had spoken to Chinese officials including President Xi to “reduce the trade deficit immediately by $100 billion ” He further emphasized that trade should be “reciprocal ” claiming that the United States assessed a 2% import tariff on Chinese cars while China charged a 25% tariff Finally Trump noted that the two sides were “in the midst of a very large negotiation” on trade 206 China has sharply criticized the proposed U S Section 301 actions On March 24 a spokesperson for China’s Ministry of Commerce MOFCOM stated the following The U S acts in disregard of China’s efforts to strengthen the protection of intellectual property rights and the voices of the broad masses of the industry ignoring WTO rules It is a typical unilateralism and trade protectionism to which China firmly opposes This move by the U S is neither conducive to the interests of China nor those of the United States It also goes against the global interests a very bad precedent China will not sit idly in the event of damages to own legitimate rights and interests We are fully prepared to defend our legitimate interests With regard to the 301 investigation China has clearly stated its position on many occasions China does not want to fight a trade war but it is absolutely not afraid of that We are confident and capable of meeting any challenge It is hoped that the U S will pull back before it is too late and not drag bilateral economic and trade relations into danger 207 According to a March 26 Reuters article China’s WTO Ambassador Zhang Xiangchen said that the U S use of Section 301 sanctions violated its WTO commitments and warned that “the WTO is under siege and all of us should lock arms to defend it ” He asserted that “WTO members should jointly lock this beast back into the cage of the WTO rules ”208 However A U S representative at the WTO countered China’s contention by stating the following More broadly the WTO system is not threatened—as China claims—where a Member takes steps to address harmful trade distorting policies not directly covered by WTO rules To the contrary what does threaten the WTO is where a Member such as China asserts that the mere existence of the WTO prevents any action by any Member to address unfair trade-distorting policies—unless those policies are currently subject to WTO dispute settlement If the WTO is seen instead as protecting those Members that choose to adopt policies that can be shown to undermine the fairness and balance of the international trading system then the WTO and the international trading system will lose all credibility and support among our citizens 209 On April 3 the USTR released a list of proposed 25% ad valorem tariffs on about $50 billion worth of Chinese products The USTR stated that the proposed tariffs targeted Chinese products in sectors related to China’s high technology industrial policies such as “Made in China 2025 ”210 The White House Remarks by President Trump at Signing of a Presidential Memorandum Targeting China’s Economic Aggression March 22 2018 available at https www whitehouse gov briefings-statements remarkspresident-trump-signing-presidential-memorandum-targeting-chinas-economic-aggression 207 MOFCOM the MOFCOM Spokesman Comments on the U S 301 Investigation Decision March 24 2018 available at http english mofcom gov cn article newsrelease policyreleasing 201803 20180302723374 shtml 208 Reuters “China urges WTO members Put U S tariff ‘beast back in the cage’ ” March 26 2018 available at https www reuters com article us-usa-china-trade-wto china-urges-wto-members-put-u-s-tariff-beast-back-in-thecage-idUSKBN1H2151 209 Inside U S Trade “U S China tussle over Section 301’s compatibility with WTO rules at DSB ” March 29 2018 210 The Made in China 2025 initiative is discussed in more detail in the Appendix 206 Congressional Research Service RL33536 · VERSION 155 · UPDATED 59 China-U S Trade Issues The USTR identified aerospace information and communication technology robotics and machinery as sectors targeted by the Section 301 list China responded on April 4 with a list targeting various U S products including soybeans aircraft and motor vehicles and parts that would be subject to 25% ad valorem tariffs if U S Section 301 tariffs went into effect On the same day China initiated a WTO dispute settlement case against the United States over the Section 301 action 211 On April 5 President Trump asked the USTR to propose additional tariffs on $100 billion worth of Chinese products On the same day USTR Robert Lighthizer issued a statement about President Trump’s request saying the following President Trump is proposing an appropriate response to China’s recent threat of new tariffs After a detailed investigation USTR found overwhelming evidence that China’s unreasonable actions are harming the U S economy In the light of such evidence the appropriate response from China should be to change its behavior as China’s government has pledged to do many times Economies around the world – including China’s own – would benefit if China would implement policies that truly reward hard work and innovation rather than continuing its policies that distort the vital high-tech sector Unfortunately China has chosen to respond thus far with threats to impose unjustified tariffs on billions of dollars in U S exports including our agricultural products Such measures would undoubtedly cause further harm to American workers farmers and businesses Under these circumstances the President is right to ask for additional appropriate action to obtain the elimination of the unfair acts policies and practices identified in USTR’s report 212 On May 3-4 the two sides held high-level talks in Beijing The U S side released a draft Framework for Discussion It included calls for China to reduce the bilateral trade imbalance by $200 billion over two years address each of the four IPR practices identified in the Section 301 findings halt subsidies for the Made in China 2025 initiative remove foreign investment restrictions make China’s tariff levels comparable to U S tariff rates and remove certain nontariff barriers improve market access for U S service providers and agricultural products and agree not to oppose challenge or take any other action against the United States’ action including in the WTO if China failed to live up to a framework agreement On May 19 the United States and China released a joint statement outlining progress on a number of trade issues China agreed that it would “significantly increase purchases of United States goods and services ” including U S agricultural and energy products China also said it would strengthen its IPR laws and regulations including on patents On May 21 U S Secretary of the Treasury Steven Mnuchin stated that a framework agreement had been reached with China and that both sides had suspended threatened trade sanctions He estimated that U S exports of agricultural products to China could increase by 35-40% in 2018 and that U S energy exports to China could double However on May 29 the White House announced that it planned to move ahead with the proposed Section 301 sanctions against China by imposing 25% ad valorem tariffs on $50 billion worth of imports from China including those related to the Made in China 2025 initiative final list of imports to be issued by June 15 2 implementing new investment restrictions and enhanced export controls on Chinese entities and persons in regards to the acquisition of “industrially significant technology” for national security purposes details to be released by June 30 and 3 continuing to pursue the WTO case against China’s licensing policies initiated on See China’s request for WTO consultations at https www wto org english tratop_e dispu_e cases_e ds543_e htm USTR Press Release April 5 2018 at https ustr gov about-us policy-offices press-office press-releases 2018 april ustr-robert-lighthizer-statement 211 212 Congressional Research Service RL33536 · VERSION 155 · UPDATED 60 China-U S Trade Issues March 23 The White House further stated that it would request China to remove “all of its many trade barriers” and make taxes and tariffs between the two countries “reciprocal in nature and value ” A May 29 statement from the Chinese government said that the White House actions were “clearly contrary to the recent agreement between the two sides ” Following a visit by a U S trade delegation to China on June 3 the Chinese government warned that “all economic and trade outcomes of the talks will not take effect if the U S side imposes any trade sanctions including raising tariffs ” On June 15 the USTR announced a two-stage plan to impose 25% ad valorem tariffs on $50 billion worth of Chinese imports Under the first stage U S tariffs would be increased on 818 tariff lines on roughly $34 billion worth of Chinese products on July 6 For the second stage the USTR proposed increasing tariffs on 228 tariff lines on $16 billion worth of Chinese imports mainly targeting China’s industrial policies 213 China on June 16 issued its own two-stage retaliation plan against the United States 214 In response to China’s actions President Trump directed the USTR on June 18 to come up with a new list of that would increase tariffs by 10% tariffs on $200 billion worth of Chinese products which would be imposed if China retaliated against U S tariffs and he further warned that if China raised its tariffs yet again the United States would pursue tariffs on another $200 billion worth of Chinese products On July 6 the Trump Administration implemented the first round of tariff increases on $34 billion worth of Chinese products 215 China said it had taken measures to increase its import tariffs of U S products 216 On the same day the USTR announced procedures that it would use to consider requests for exclusions from the increased tariffs 217 China announced it would implement countermeasures On July 10 the USTR announced plans to retaliate against China for implementing countersanctions against the United States on July 6 by raising tariffs on over 6 000 tariff lines by 10% on $200 billion worth of Chinese products 218 On July 24-25 the USTR held public hearings on its proposed $16 billion worth of imports from China To date the United States implemented increased tariffs on $34 billion worth of Chinese products under Section 301 has released proposed lists that would raise tariffs on $16 billion and $200 billion respectively worth of Chinese products and has threatened increased tariffs on another $200 billion worth of Chinese products Together these tariff increases could impact $450 billion in imports or 89% percent of U S imports from China 213 See https ustr gov about-us policy-offices press-office press-releases 2018 june ustr-issues-tariffs-chineseproducts 214 For a translated copy of China’s tariff announcement see https translate google com translate sl zh-CN tl en js y prev _t hl en ie UTF-8 u http%3A%2F%2Fgss mof gov cn%2Fzhengwuxinxi%2Fzhengcefabu%2F201806%2Ft20180616_2930325 html edittext 215 See https www cbp gov trade programs-administration entry-summary section-301-trade-remedies-be-assessedcertain-products-china-effective-july-6-2018 216 See http www chinadaily com cn a 201807 06 WS5b3eec6ca3103349141e1258 html 217 See https ustr gov sites default files enforcement 301Investigations FRN%20exclusion%20process pdf 218 See USTR press release at https ustr gov about-us policy-offices press-office press-releases 2018 july statementus-trade-representative Congressional Research Service RL33536 · VERSION 155 · UPDATED 61 China-U S Trade Issues U S and Chinese Products that Have Been or Could Be Subject to Increased Tariffs Resulting from the Section 301 Dispute The U S International Trade Commission USITC is responsible for publishing the Harmonized Tariff Schedule of the United States Annotated HTSA which is the basis for applying applicable tariff rates on various categories for all merchandise imported into the United States The HTS classification is used globally The HTSA is arranged according to chapters at two-digit level descriptions which are further expanded in greater and greater detail at 4-digit 6-digit 8digit and 10-digit levels 219 The USTR’s Section 301 tariff lists have been issued on an 8-digit level On way of putting these tariffs in perspective and to estimate their impact is to look at the largest U S imports from China on an HTS 2-digit level and identify which of these categories could be impacted by the Section 301 tariff lists Table 11 lists the top U S 15 merchandise from China in 2017 Of these USTR tariffs apply or would apply to 10 of the 15 import categories The largest U S import on a two digit level is HTS 85 electrical machinery and equipment and parts thereof sound recorders and reproducers television recorders and reproducers parts and accessories which is also the category most impacted in terms of total trade by the USTR’s tariff list HTS 84 nuclear reactors boilers machinery and mechanical appliances parts thereof were the second largest U S HTS 2-digit level U S import from China and is the second biggest category impacted by the USTR’s tariff lists Several consumer products have not been included on the Section 301 lists including toys and games apparel and textiles and footwear 220 219 U S tariffs are assessed and collected on imports at the 10-digit level In addition the USTR established a process by which U S stakeholders may request that particular products classified within a covered tariff subheading be excluded from the additional duties See https www federalregister gov documents 2018 07 11 2018-14820 procedures-to-consider-requests-for-exclusion-ofparticular-products-from-the-determination-of 220 Congressional Research Service RL33536 · VERSION 155 · UPDATED 62 China-U S Trade Issues Table 11 Top 15 Merchandise Imports from China on an HTS 2-Digit Level and Summary of Categories Impacted by Actual or Proposed U S Section 301 Tariffs HTS Number 85 HTS description 2017 Imports $millions Electrical machinery and equipment and parts thereof sound recorders and reproducers television recorders and reproducers parts and accessories 147 011 84 Nuclear reactors boilers machinery and mechanical appliances parts thereof 109 568 94 Furniture bedding cushions etc lamps and lighting fittings nesoi illuminated signs nameplates and the like prefabricated buildings 31 917 95 Toys games and sports equipment parts and accessories thereof 25 515 39 Plastics and articles thereof 16 328 87 Vehicles other than railway or tramway rolling stock and parts and accessories thereof 14 645 61 Articles of apparel and clothing accessories knitted or crocheted 14 304 64 Footwear gaiters and the like parts of such articles 14 255 62 Articles of apparel and clothing accessories not knitted or crocheted 12 979 90 Optical photographic cinematographic measuring checking precision medical or surgical instruments and apparatus parts and accessories thereof 11 960 73 Articles of iron or steel 11 555 63 Made-up textile articles nesoi needlecraft sets worn clothing and worn textile articles rags 7 966 29 Organic chemicals 7 754 42 Articles of leather saddlery and harness travel goods handbags and similar containers articles of gut other than silkworm gut 7 339 Miscellaneous articles of base metal 5 002 83 Total top 15 Affected by implemented or proposed higher U S tariffs Yes The largest category impacted Yes Second largest category impacted Yes A major category None Yes A major category Yes A major category None None None Yes A major category Yes None Yes Yes Yes 438 099 All Other 67 371 Total U S imports from China 505 470 Source USITC Dataweb and USTR Congressional Research Service RL33536 · VERSION 155 · UPDATED 63 China-U S Trade Issues A breakdown of some of the commodities that could be the most impacted by U S and Chinese tariff increases related to U S action on Section 301 and Chinese reactions based on each country’s 2017 imports Table 12 lists the top 15 U S imports from China in 2017 affected by the first round of U S Section 301 which imposed 25% ad valorem tariffs on 818 tariffs lines under the U S Harmonized Tariff Schedule HTS on an 8-digit level covering $34 billion worth of Chinese products which went into effect on July 6 221 The largest import affected by the tariffs on an 8-digit are certain motor vehicles at $1 4 billion computer storage drives pump parts and printer parts U S dependency on China as an import supplier for the covered products varies but range from 1 4% for certain motor vehicles to 44 8% for light-emitting diodes Looking at the categories on a HTS 2-dgit level indicates that    The largest category impacted is HTS 84 machinery and mechanical appliances electrical equipment parts thereof sound recorders and reproducers television mage and sound recorders and reproducers and parts and accessories of such articles U S imports from China in 2017 of the commodities affected by the tariff increases were estimated at $15 9 billion The second category is HTS 85 Electrical machinery and equipment and parts thereof sound recorders and reproducers television image and sound recorders and reproducers and parts and accessories of such articles The impacted items in this category totaled $9 7 billion The largest 8-digit commodity impacted by the tariffs is radio navigational aid apparatus other than radar was the largest impacted item at $671 million The third largest category is HTS 90 Optical photographic cinematographic measuring checking precision medical or surgical instruments and apparatus parts and accessories thereof The impacted HTS 90 items total $4 4 billion The largest 8-digit item impacted are automatic thermostats at $418 million Table 13 lists top 15 commodities imported from China that would be covered by the USTR’s second proposed list $16 billion worth of products that would be subject to additional 25% tariffs 222 According to the USTR these sanctions attempt to target the Made in China 2025 initiative The USTR held hearings on July 24-25 on its proposed list and will later issue a final list 223 The top three broad HTS 2-digit commodities on the proposed list are HTS 85 at $7 4 billion HTS 84 $2 1 billion and HTS 39 plastics and articles thereof at $1 6 billion One major Chinese sector targeted by the USTR is the semiconductor industry Increased U S tariffs would impact $3 5 billion worth of U S semiconductor and semiconductor manufacturing equipment imports from China Table 14 lists China’s top imported commodities from the United States that would likely be impacted by China’s first round of retaliatory 25% tariffs on $34 billion worth of U S products which were implemented by China on July 6 in retaliation to U S implemented Section 301 tariffs 224 Agricultural products accounted for $20 8 billion about 62% of total of the targeted 221 The complete list can be found at https ustr gov sites default files enforcement 301Investigations List%201 pdf The proposed list can be found at https ustr gov sites default files enforcement 301Investigations List%202 pdf 223 See Federal Register announcement at https www gpo gov fdsys pkg FR-2018-06-20 pdf 2018-13248 pdf 224 An English translation of the list can be found at https translate google com translate sl zhCN tl en js y prev _t hl en ie UTF8 u http%3A%2F%2Fgss mof gov cn%2Fzhengwuxinxi%2Fzhengcefabu%2F201806%2Ft20180616_2930325 html edit-text 222 Congressional Research Service RL33536 · VERSION 155 · UPDATED 64 China-U S Trade Issues products of which $14 billion were soybeans The other major category was HTS 97 nonrailway vehicles and parts $9 7 billion China’s proposed second list see Table 15 indicates China’s second stage retaliation list that could go into effect if the U S proposed 25% ad valorem tariffs on an additional $16 billion worth of imported Chinese products are implemented 225 Broad U S commodities targeted include HTS 39 plastics $7 8 billion HTS 27 mineral fuels at $6 6 billion and HTS 38 miscellaneous chemical products $4 7 billion On an 8-digit level the largest products targeted were petroleum oils $3 1 billion liquefied propone $1 8 billion and chemical products and preparations $775 million Table 16 indicates the top 15 imports from China that would be impacted by the Trump Administration’s proposed 10% increased tariff on 6 000 8-digit tariff codes covering about $200 billion worth of imports from China Major broad 2-digit HTS categories that could be affected include HTS 85 $48 8 billion HTS 84 $38 4 billion and HTS 94 furniture bedding mattresses mattress supports cushions and similar stuffed furnishings lamps and lighting fittings not elsewhere specified or included illuminated sign illuminated nameplates and the like prefabricated buildings $29 2 billion China has not issued a counter-retaliation list 225 An English translation of the list can be found at https translate google com translate sl zhCN tl en js y prev _t hl en ie UTF8 u http%3A%2F%2Fgss mof gov cn%2Fzhengwuxinxi%2Fzhengcefabu%2F201806%2Ft20180616_2930325 html edit-text Congressional Research Service RL33536 · VERSION 155 · UPDATED 65 China-U S Trade Issues Table 12 U S Section 301 First Round of 25% Ad Valorem Tariffs on $34 Billion Worth of Imports from China Implemented July 6 HTS Number HTS Description 87032301 Motor vehicles to transport persons w spark-ign IC recip piston engine w cyl capacity 1 500cc but 3 000cc 84717040 2017 imports $millions Imports from China as % of global total 1 420 1 4% ADP magnetic disk drive storage units disk dia n ov 21 cm not in cabinet w o attached external power supply n entered w rest of a system 882 16 9% 84139190 Parts of pumps nesoi 814 30 2% 84439920 Parts of printer units of subheading 8443 32 10 specified in additional U S note 2 to this chapter 691 29 4% 84819090 Parts of taps cocks valves and similar appliances for pipes boiler shells tanks vats or the like nesoi 672 27 6% 85269100 Radio navigational aid apparatus other than radar 671 23 9% 84314990 Parts suitable for use solely or principally with the machinery of heading 8429 or 8430 nesoi 670 22 9% 85414020 Light-emitting diodes LED's 638 44 8% 85256020 Transmission apparatus incorporating reception apparatus other than transceivers 619 42 8% 85366940 Connectors coaxial cylindrical multi-contact rack and panel printed circuit ribbon or flat cable for a voltage not exceeding 1 000 V 533 26 3% 85443000 Insulated ignition wiring sets and other wiring sets of a kind used in vehicles aircraft or ships 498 4 8% 85365090 Switches nesoi for switching or making connections to or in electrical circuits for a voltage not exceeding 1 000 V 483 20 3% 88033000 Parts of airplanes and helicopters nesoi 460 3 2% 84186901 Refrigerating or freezing equipment nesoi 456 30 0% 84807180 Molds for rubber or plastics injection or compression types other than for shoe machinery or for manufacture of semiconductor devices 426 22 1% Total Top 15 9 933 — Source USTR and Global Trade Atlas Notes Top 15 U S imports from China affected by increased 25% tariff based on 2017 data Nesoi stands for not elsewhere specified or included Congressional Research Service RL33536 · VERSION 155 · UPDATED 66 China-U S Trade Issues Table 13 U S Section 301 Second Round of 25% Ad Valorem Tariffs on $16 Billion Worth of Imports from China Proposed HTS number HTS Description U S 2017 Imports $ Percent of Total 85437099 Other machinery in this subheading Electrical machinery and apparatus having individual functions 1 471 30 7% 85423100 Processors and controllers whether or not combined with memories converters logic circuits amplifiers clock and timing circuits or other 1 116 5 3% 85423200 Memories 754 30 4% 73089095 Iron or steel structures excluding prefab structures of 9406 and parts of structures nesoi 711 36 5% 85423900 Electronic integrated circuits nesoi 705 8 5% 85414060 Diodes for semiconductor devices other than light-emitting diodes nesoi 562 10 0% 85030095 Other parts nesoi suitable for use solely or principally with the machines in heading 8501 or 8502 Electric motors and generators and Electric generating sets and rotary converters 485 30 2% 84869000 Parts and accessories of the machines and apparatus for the manufacture of semiconductor devices electronic integrated circuits and flat panels 480 13 7% 85363080 Electrical apparatus for protecting electrical circuits for a voltage not exceeding 1 000 V nesoi 347 54 6% 86090000 Containers including containers for transport of fluids specially designed and equipped for carriage by one or more modes of transport 335 72 0% 84079090 Spark-ignition rotary or reciprocating internal-combustion piston engines for machinery or equipment nesoi 310 45 3% 84862000 Machines and apparatus for the manufacture of semiconductor devices or electronic integrated circuits 288 8 6% 85411000 Diodes other than photosensitive or light-emitting diodes 280 44 8% 85013140 DC motors nesoi of an output exceeding 74 6 W but not exceeding 735 W 271 22 9% 90251980 Thermometers for direct reading not combined with other instruments other than liquid-filled thermometers 253 43 8% Total Top 15 8 621 Source USTR and Global Trade Atlas Notes Top 15 U S imports from China in 2017 likely impacted by increased U S 25% tariffs based on 2017 trade data Nesoi stands for not elsewhere specified or included Congressional Research Service RL33536 · VERSION 155 · UPDATED 67 China-U S Trade Issues Table 14 China’s First Round of Retaliatory of 25% Ad Valorem Tariffs on U S Products in Response to U S Section 301 Action Implemented July 6 HTS number HTS Description 12019010 Yellow Soya Beans Not For Cultivation 87032362 2017 Chinese imports $millions Imports from U S as a percent of total % 13 959 35 1 Cross-Country Cars 4Wd With Only Spark-Ignition Internal Combustion Reciprocating Piston Engine 2500Cc＜Cylinder Capacity≤3000Cc 5 428 36 6 87032342 Cross-Country Cars 4Wd With Only Spark-Ignition Internal Combustion Reciprocating Piston Engine 1500Cc＜Cylinder Capacity≤2000Cc 2 363 50 3 87038000 Motor Vehicles Designed Mainly For Transport Of Persons With Only Electric Motors For Propulsion 1 403 96 5 52010000 Cotton Not Carded Or Combed 980 44 9 10079000 Grain Sorghum Excl For Sowing 956 93 3 02064900 Edible Offal Of Swine Frozen Excl Livers 874 41 4 87032343 Station Wagons Seats≤9 With Only Spark-Ignition Internal Combustion Reciprocating Piston Engine 1500Cc＜Cylinder Capacity≤2000Cc 861 18 7 87084099 Parts For Gear Boxes For Tractors Motor Vehicles 660 12 7 87032363 Station Wagons Seats≤9 With Only Spark-Ignition Internal Combustion Reciprocating Piston Engine 2500Cc＜Cylinder Capacity≤3000Cc 609 80 4 12149000 Other Forage Products not elsewhere specified 399 77 5 87032413 Hearses 367 28 4 87032353 Station Wagons Seats≤9 With Only Spark-Ignition Internal Combustion Reciprocating Piston Engine 2000Cc＜Cylinder Capacity≤2500Cc 366 85 5 03031200 Other Frozen Pacific Salmon 295 67 0 10011900 Durum Wheat Excl Seed For Sowing 289 57 1 Total Top 15 29 809 Source Global Trade Atlas and USTR Note Top 15 imports from the United States likely impacted by increased Chinese tariffs based on 2017 trade data Congressional Research Service RL33536 · VERSION 155 · UPDATED 68 China-U S Trade Issues Table 15 China’s Proposed Second Round Retaliatory List of 25% of Ad Valorem Tariffs if U S Second Round of Section 301 Tariff Increases are Implemented HTS Number HTS Description 2017 Imports $millions 27090000 Petroleum Oils Oils Obtained From Bituminous Minerals Crude 3 149 27111200 Propane Liquefied 1 761 38249999 Chemical Products and Preparations Of The Chemical Or Allied Industries N E S O I Residual Products Of The Chemical Or Allied Industries 775 38220090 Prepared Diagnostic Or Laboratory Reagents not elsewhere specified 557 27011210 Coking Coal Whether Or Not Pulverized Non-Agglomerated 427 39269090 Articles of plastics not elsewhere specified 368 38151200 Supported Catalysts With Precious Metal Or Its Compounds 360 39074000 Polycarbonates In Primary Forms 331 39199090 Plates Sheets Film Foil Tape And Other Flat Shapes Of Plastics Self-Adhesive not elsewhere specified 326 39209990 Plates Sheets Film Foil And Strip Of Plastics Not Self-Adhesive Non-Cellular Not Reinforced Or Laminated Etc not elsewhere specified or included 304 39041090 Other Poly Not Mixed With Any Other Substances 270 39079999 Polyesters In Primary Forms not elsewhere specified 241 90221400 Apparatus Based On The Use Of X-Rays For Medical 237 27131190 Other petroleum coke not calcined 236 39072090 Other Polyethers In Primary Forms 230 Total Top 15 9 572 Source Global Trade Atlas and Chinese Ministry of Finance Notes Top 15 Chinese imports from the United States in 2017 that could be impacted by increased tariffs based on 2017 imports Congressional Research Service RL33536 · VERSION 155 · UPDATED 69 China-U S Trade Issues Table 16 Trump Administration’s Proposed 10% Ad Valorem Tariffs on $200 Billion Worth of Chinese Imports HTS Description $ in millions 85176200 Machines for the reception conversion and transmission or regeneration of voice images or other data including switching and routing apparatus 22 935 84733011 Printed circuit assemblies not incorporating a cathode ray tube of the machines of 8471 11 558 84715001 Processing units other than those of subheading 8471 41 and 8471 49 nesoi 4 412 94032000 Furniture o than seats of metal nesoi o than of a kind used in offices 3 532 84733051 Parts and accessories for automatic data processing machines and units thereof magnetic or optical readers transcribing machines etc nesoi 3 060 94036080 Furniture o than seats o than of 9402 of wooden o than bentwood nesoi 2 735 94016160 Seats o than chairs nesoi w wooden frames upholstered 2 326 85044095 Static converters for example rectifiers nesoi 2 290 87087045 Pts access of mtr vehic of 8701 nesoi and of 8702-8705 road wheels 2 170 94017900 Seats nesoi w metal frame o than of heading 9402 not upholstered 2 035 94054084 Electric lamps and lighting fixtures nesoi not of base metal 1 850 85081100 Vacuum cleaners with self-contained electric motor of a power not exceeding 1 500 W and having a dust bag or other receptacle capacity not 1 714 39181010 Vinyl tile floor coverings 1 651 85371091 Other boards panels consoles desks cabinets etc equipped with apparatus for electric control for a voltage not exceeding 1 000 nesoi 1 591 87083050 Pts access of mtr vehicles of 8701 nesoi and 8702-8705 brakes and servo-brakes pts thereof 1 525 Total Top 15 65 384 Source USTR and Global Trade Atlas Notes Top 15 U S imports that could be impacted from higher tariffs based on 2017 trade data Economic Effects of Section 301 Tariff Increases It is difficult to measure the possible economic impact that increased tariffs could have on the U S Chinese and global economy in part because it is unclear how extensive such tariffs will be employed by both sides and whether other commercial restrictions will be used as well For example in addition to raising tariffs on imported U S products China could Congressional Research Service RL33536 · VERSION 155 · UPDATED 70 China-U S Trade Issues       Encourage its citizens to boycott American products and services 226 Impose new restrictions on the commercial activities of U S firms in China such as limiting U S FDI in China or halting production of iPhones and other major consumer goods Selectively increase “enforcement” of its laws and regulations against U S entities e g boosting health and safety inspections of imported U S commodities or delaying customs clearance Reduce its holdings of U S Treasury securities Urge Chinese firms to seek non-U S suppliers of goods as services such as buying more planes from Airbus and fewer from Boeing and Ban the export of certain critical minerals to the United States where China is a major producer and global supplier such as rare earth elements 227 Table 17 provides a listing of various U S firms with business ties to China in terms of sales in 2017 Apple Inc ’s sales in China totaled $44 8 billion or 19 6% of its global total sales U S firms that depended on China for more than half their total 2017 sales included Skyworks Solutions Inc at 82 7% Qualcomm Inc 65 4% Broadcom Ltd 53 7% and Micron Technology Inc 51 1% —all of which are semiconductor firms Table 17 Sales by Selective U S Firms to China in 2017 $millions and as a percentage of global total Company Sales to China $millions Sales to China as Share of Global Total Apple Inc 44 764 19 6% Intel Corp 14 796 23 6% Qualcomm Inc 14 579 65 4% Boeing Co 11 911 12 8% Micron Technology Inc 10 388 51 1% Broadcom Ltd 9 466 53 7% Cisco Systems Inc 7 650 15 9% Texas Instruments Inc 6 600 44 1% Procter Gamble Co 5 205 8 0% Starbucks Corp 4 512 20 2% Western Digital Corp 4 271 22 4% Nike Inc Class B 4 237 12 4% 3M Co 3 255 10 3% Skyworks Solutions Inc 3 018 82 7% Applied Materials Inc 2 746 18 9% 226 According to the U S Bureau of Economic Analysis sales by foreign affiliates of U S firms in 2015 totaled $481 billion in 2015 227 A 2018 report by the U S Department of the Interior found that China was the largest supplier of 13 out 35 minerals or mineral material groups deemed critical to the United States See report at https pubs usgs gov of 2018 1021 ofr20181021 pdf Congressional Research Service RL33536 · VERSION 155 · UPDATED 71 China-U S Trade Issues Company Sales to China $millions Sales to China as Share of Global Total TE Connectivity Ltd 2 414 18 4% Corning Inc 2 230 22 0% Abbott Laboratories 2 146 7 8% Cummins Inc 2 137 10 5% Amphenol Corp Class A 2 067 29 5% Source FactSet and Market Watch Notes Data represent a sampling of sales by U S firms to China Various studies have been released that attempt to quantify the impact that a set amount of increased tariffs could have on the U S economy For example an April 2018 report prepared by Trade Partnership Worldwide for the Consumer Technology Association and National Retail Federation estimated the economic and unemployment effects tariff increases stemming from U S Section 301 action could have based on three scenarios 1 the United States increases tariffs on $50 billion worth of Chinese imports and China does not respond 2 the United States increases tariffs on $50 worth of Chinese imports and China retaliates in kind and 3 both the United States and China impose tariffs on $150 billion worth of imports from each other 228 The report estimated that under the third scenario the U S economy could be impacted as follows      U S GDP could fall by 0 26% or $49 2 billion 2016 dollars farm property income could fall by 15 01% U S exports and imports could drop by $105 5 billion and $341 2 billion respectively 2016 dollars U S net employment could fall by 457 796 jobs including 123 362 higher skilled workers and 331 434 lower skilled workers and in terms of the distribution of job gains and losses the manufacturing sector would gain 132 475 jobs but net losses would occur in other sectors including energy at -13 305 jobs agriculture -180 904 jobs and services -393 063 jobs see Figure 18 229 228 The third scenario reflects the original U S threat to increase tariffs on $50 billion worth of Chinese products and President Trump’s threat on April 5 to impose additional tariffs against China on $100 billion worth of imports if China retaliated against the United States 229 Trade Partnership Worldwide LLC Tariffs on Imports from China The Estimated Impacts on the U S Economy April 30 2018 available at http tradepartnership com wp-content uploads 2018 04 China-301-Tariffs-FINAL pdf Congressional Research Service RL33536 · VERSION 155 · UPDATED 72 China-U S Trade Issues Figure 18 Estimated Sector Effect on U S Employment if Both U S and China Increased Tariffs by 25% on $150 Billion Worth of Imports from Each Other thousands of net jobs gained or lost Source Trade Partnership Worldwide LLC An analysis by the U S Chamber of Commerce of the possible trade effects from Chinese retaliation of U S Section 301 action based on the two lists China has issued estimated that total U S exports could fall by $30 6 billion The states estimated to experience the largest export decline include Louisiana at $5 7 billion Washington State $5 2 billion California $4 0 billion South Carolina $2 6 billion and Alabama $2 4 billion see Figure 19 230 230 U S Chamber of Commerce New Analysis Outlines State-by-State Impact of Tariffs July 2 2018 available at https www uschamber com press-release new-analysis-outlines-state-state-impact-of-tariffs Congressional Research Service RL33536 · VERSION 155 · UPDATED 73 China-U S Trade Issues Figure 19 Estimate of the Top 10 States that Could be Impact by Lost Exports if China Retaliated Against U S Section 301-Related Tariffs $ in millions Source U S Chamber of Commerce Notes Total state export losses were estimated at $30 6 billion Section 232 Tariffs on Steel and Aluminum On March 8 2018 the Trump Administration announced that it would impose additional imports tariffs on steel by 25% and aluminum 10% based on national security justifications under the 1962 Trade Act as amended China appears to have been a major target of the action since it accounts for half of global production of both commodities Yet in terms of import quantity China was the 10th-largest supplier of steel and 4th-largest for aluminum On March 26 China requested consultations with the United States over the Section 232 action on steel and aluminum arguing that they were safeguard measures and not justifiable on national security grounds On April 1 2018 China announced that it had raised duties by 15% to 25% on 128 tariff lines covering imports from the United States including pork products aluminum waste and scrap and fruits and nuts which together totaled about $3 billion in 2017 On April 9 China initiated a WTO dispute settlement case against the U S use of Section 232 tariffs arguing that the measure were in fact safeguards measures Table 18 lists the top 10 U S commodities impacted by the increased tariffs These include pork aluminum waste and scrap and various fruits and nuts Congressional Research Service RL33536 · VERSION 155 · UPDATED 74 China-U S Trade Issues Table 18 China’s Retaliatory Tariffs Against the U S for Increased Steel and Aluminum Tariffs top 10 imports in 2017 HTS Commodity HTS Description 2017 Imports from U S $ millions Tariff increase 02064900 Edible Offal Of Swine Frozen Excl Livers 874 25% 76020000 Waste And Scrap Aluminum 832 25% 08025100 Fresh Or Dried Pistachios In Shell 175 15% 08092900 Fresh Cherries Excl Sour Cherries 170 15% 02032900 Other Frozen Swine Meat 168 25% 02032200 Hams Shoulders And Cuts Thereof Of Swine Bone In Frozen 118 25% 08051000 Oranges Fresh Or Dried 87 15% 73045910 Tubes Pipes And Hollow Profiles 76 25% 22042100 Other Wine Grape Must With Fermentation Prvntd By Alcohol Containers≤2L 76 15% 08021200 Almonds Fresh Or Dried Shelled Or Peeled 68 15% Total Top 10 2 644 Source Chinese Ministry of Commerce and Global Trade Atlas Implications of Recent Trade Action against China China’s economic rise has had both positive and negative effects on the United States On the one hand China’s past economic and trade reforms have made China an increasingly significant market for U S exporters a central factor in U S global supply chains and a major source of low-cost goods for U S consumers On the other hand China has not fully transitioned to a freemarket economy The Chinese government continues to intervene in many parts of the economy such as through the use of subsidies and trade and investment barriers which often distort markets prices domestically and globally China accounts for 37% of U S antidumping and countervailing orders currently in place as of June 2018 Many analysts argue that China has been the largest factor in global overcapacity in a number of industries including steel and aluminum China has indicated a number of objectives and plans to boost innovation and the competitiveness of a number of Chinese industries in order to maintain relatively healthy economic growth Yet a number of those initiatives appear to include industrial policies that subsidize and protect domestic Chinese firms aimed in part to reduce China’s reliance of foreign technology such as the Made in China 2025 initiative Some see China as a free rider in the global trading system While China made significant concessions to enter the WTO in 2001 it was allowed to continue to maintain significant barriers on various sectors of the economy especially in regard to FDI and services Many U S policymakers charge that China’s implementation of its WTO commitments has been fair at best and has failed to meet the expectations of significantly expanded market access in China This has increasingly led U S policymakers to seek options to press China to move away from distortive economic policies and to liberalize its trade and investment regimes The Obama Administration sought to negotiate a high standard BIT with China to address many of its concerns over China’s Congressional Research Service RL33536 · VERSION 155 · UPDATED 75 China-U S Trade Issues FDI restrictions although an agreement was not reached by the end of President Obama’s term The Trump Administration has not expressed interest in resuming the BIT talks even though China has President Trump’s January 2017 decision to withdraw the United States from the Trans-Pacific Partnership TPP free trade agreement FTA has been viewed by many analysts as a blow to U S efforts to induce economic and trade liberalization in China 231 Prior to the U S pull-out of TPP Chinese officials had expressed interest in eventually joining the agreement in part to avoid being economically marginalized by an FTA of countries constituting 40% global GDP The TPP agreement signed by the United States was described as a “high standard agreement ” It included enhanced IPR protection liberalized provisions on digital trade and new rules governing SOEs The remaining 11 TPP members on March 8 2018 concluded the Comprehensive and Progressive Agreement for Trans-Pacific Partnership CPTPP 232 Many analysts contend that the U S withdrawal from TPP weakened U S economic leverage with China and damaged U S credibility in Asia The Trump Administration and some Members of Congress have advocated taking a harder line against China in regard to its economic and trade policies A number of goals and justifications have been offered Some argue that greater efforts should be made to require China to afford U S firms the same market access Chinese companies enjoy in the United States Others contend that WTO agreements do not cover or adequately cover many of the policies and practices that China employs to protect and support its industries and therefore argue that the United States should act unilaterally including the threat of sanctions when U S economic interests are at stake Others argue that U S trade remedy laws should be more aggressively used to stop imports of Chinese products that have been dumped in the United States or subsidized by the Chinese government in order to afford greater protection to U S firms and workers from China’s unfair trade practices Finally some policymakers have advocated for a more forceful response to Chinese industrial policies that seek to force foreign firms to transfer technology or lock U S technology firms out of China’s markets through domestic content requirements A number of congressional Members have expressed concerns over the efforts of Chinese to acquire U S high technology firms or assets and many have called for reforms to the CFIUS review process to flag Chinese mergers that may impact the global competitiveness of U S economic sectors Others support a more balanced approach to dealing with China that seeks to use the multilateral process in the WTO to resolve major trade disputes high-level forums to address complex and long-term economic and trade issues and negotiated trade agreements to boost market access in China Supporters of this view contend that the imposition of unilateral trade sanctions by the United States outside the WTO process against China could result in rounds of economically damaging retaliation and counter-retaliation Some critics of the Trump Administration’s approach to trade policy contend that focusing too much on bilateral trade imbalances to judge the benefits or fairness of U S trade relations with various countries contradicts basic economic theory that only the overall trade balance matters and is the result of macroeconomic forces not unfair trade policies In addition U S trade data is a poor measurement of who benefits from trade because it fails to reflect the value that was added in each country before it was shipped to its final destination Many U S products imported from China such as iPhones contain inputs Others saw the TPP as a “high standard” agreement that would be used as the framework for more comprehensive FTA’s such as the proposed Free Trade Area of the Asia-Pacific FTAAP Some analysts view the U S withdrawal from TPP as a blow to U S credibility in Asia-Pacific and an opportunity for China to advance its economic goals in the region including the negotiation of regional FTAs where China is the chief architect 232 For additional information on the CPTPP see CRS Insight IN10822 TPP Countries Sign New CPTPP Agreement without U S Participation by Ian F Fergusson and Brock R Williams 231 Congressional Research Service RL33536 · VERSION 155 · UPDATED 76 China-U S Trade Issues from numerous countries which are not reflected in U S trade data Therefore some contend it makes little sense to make reducing trade imbalances the top priority in trade negotiations with China and other countries Rather the central focus of trade negotiations they argue should be the reduction of trade and investment barriers that are deemed by the United States as having the most significant impact in limiting U S trade flows measuring the impact from a reduction of those barriers but refraining from using trade balance data to measure the success or failure of such actions President Trump’s comments about his request to President Xi to reduce the U S trade deficit with China while announcing Section 301 action against China’s IPR policies made it appear to some observers that deficit reduction not improvements to China’s IPR regime was the Administration’s real motive for using Section 301 The Trump Administration’s demand that tariff levels between China and the United States be reciprocal is also puzzling to some observers While China’s average tariff levels are about three times higher than U S tariffs they are largely what China agreed to when it joined the WTO in 2001 233 Observers contend that China’s tariff levels are rarely cited as a major trade barrier by U S firms doing business in China especially compared to the numerous nontariff barriers and FDI restrictions they face there Many analysts have raised concern that unilateral trade action by the United States against China and other countries under Section 232 could undermine the multilateral trading system and negatively impact global economic growth For example on March 23 2018 WTO DirectorGeneral Roberto Azevêdo stated the following I encourage members to continue working through the WTO’s many forums and mechanisms to deal with their concerns and explore potential solutions Actions taken outside these collective processes greatly increase the risk of escalation in a confrontation that will have no winners and which could quickly lead to a less stable trading system Disrupting trade flows will jeopardize the global economy at a time when economic recovery though fragile has been increasingly evident around the world I again call for restraint and urgent dialogue as the best path forward to resolve these problems 234 233 China has reduced or eliminated tariffs on various products under agreements with its FTA partners or through plurilateral agreements in the WTO such as the Informational Technology Agreement 234 World Trade Organization Statement by Director-General Azevêdo in relation to the Council on Trade in Goods March 23 2018 available at https www wto org english news_e news18_e dgra_23mar18_e htm Congressional Research Service RL33536 · VERSION 155 · UPDATED 77 China-U S Trade Issues Appendix Chinese Policies to Boost Innovation235 Made in China 2025 On May 19 2015 the Leading Group for Creating a Strong Manufacturing Country a task force created by China’s State Council released the Made in China 2025 initiative Made in China 2025 is a comprehensive plan to upgrade the Chinese manufacturing sector focused largely on making intelligent information and communications technology ICT -based machines systems and networks manage the industrial process otherwise known as “smart production ”236 China’s slowing economy and the unsustainability of its “growth at any costs” model have led the government to focus on new sources of growth such as promoting innovation Although it is the largest manufacturing sector in the world China is still a relatively weak manufacturer when it comes to core technology and innovation 237 The innovation gap desire to avoid the middle-income trap 238 and the slowing economy have all reportedly pushed the Chinese government to pursue the Made in China 2025 plan to move the manufacturing sector up the value chain shifting from “Made in China” to “Made by China ”239 Priorities The Made in China 2025 plan was the first of a “three step” strategy involving 10-year national plans to transform China into a leading high-value manufacturing economy by 2049 which will mark the 100th anniversary of the founding of the People’s Republic of China PRC According to the Minister of Industry and Information Technology Miao Wei “By 2025 China will basically realize industrialization nearly equal to the manufacturing abilities of Germany and Japan at their early stages of industrialization ”240 The goals of Made in China 2025 are split into four key categories innovation quality efficiency smart manufacturing and green development There are 9 priority tasks 10 sectors and 5 definitive projects with timelines that can be sorted into those four categories The nine priority tasks laid out in Made in China 2025 include improving manufacturing innovation integrating technology and industry strengthening green manufacturing promoting breakthroughs in 10 key sectors advancing restructuring of the manufacturing sector promoting manufacturing-related service industries and internationalizing manufacturing The 10 key sectors identified include new information technology numerical control tools and robotics aerospace equipment ocean engineering equipment and high-end vessels high-end rail transportation equipment energy 235 Written by Ashley Feng Research Associate Foreign Affairs Defense and Trade Division Germany Trade Invest Industrie 4 0 Smart Manufacturing for the Future Berlin Germany July 2014 http www gtai de GTAI Content EN Invest _SharedDocs Downloads GTAI Brochures Industries industrie4 0-smartmanufacturing-for-the-future-en pdf 237 Li Hui “Made in China 2025 How Beijing is revamping its manufacturing sector ” South China Morning Post June 9 2015 238 The middle-income trap is a theoretical “trap” in which a country has attained a certain level of per capita income but is unable to keep up with fully developed countries 239 “Still made in China ” The Economist September 12 2015 print edition 240 Yamei Wang “Made in China 2025” plan unveiled to boost manufacturing ” Xinhua May 19 2015 236 Congressional Research Service RL33536 · VERSION 155 · UPDATED 78 China-U S Trade Issues saving and new energy vehicles electrical equipment and agricultural machinery 241 Within Made in China 2025 there are also five projects with definitive goals and timelines 242      Construction of 15 manufacturing innovation centers by 2020 with 40 by 2025 Creation of 1 000 green demonstration factories and 100 green demonstration zones by 2020 and reduced primary pollution emissions by 20% Decreased operating costs for smart manufacturing pilot projects by 30% shortened production timelines by 30% and lower rates of defective products by 30% with decreased costs timelines and defects by another 20% by 2025 Increased self-sufficiency in development infrastructure by 40% of infrastructure components and key infrastructure materials by Chinese sources by 2020 with an increase to 80% by 2025 New indigenous research and development R D in key sectors by 2020 with the goal of achieving significant market share growth in indigenous IP for highvalue equipment by 2025 Made in China 2025 also references strengthened security reviews for investment mergers and acquisitions and procurement in manufacturing sectors that are related to national economy and national security promoting indigenous or domestic innovation enlarging tax policies for smart manufacturing and enhancing cooperation with foreign companies in areas such as health care aviation and basic manufacturing The plan calls for Chinese firms to invest abroad become familiar with overseas cultures and markets and strengthen investment and operation risk management before investing According to a report by CSIS if China genuinely decides to embrace intelligent manufacturing it could become easier for Chinese companies and multinational corporations MNCs to collaborate both in China and abroad and possibly “reduce the zero-sum elements of the business relationship ”243 In addition if China successfully upgrades its manufacturing capacities there is also a likely chance of improved overall economic governance including financial and fiscal systems a strengthened educational system and increased access to varied sources of information The Made in China 2025 is one component of China’s plan to become a center and leader of innovation Deputy Head of the Ministry of Industry and Information Technology Li Beiguang said that the key to a country becoming a manufacturing power is innovation and “to promote manufacturing and national competitiveness it is important to mobilize every conceivable element to stimulate innovation rather than simply support a single industry ”244 Issues Made in China 2025 has faced criticisms on its viability Some analysts say that China will succeed with its more modest goals such as the immediate aims to improve the quality productivity digitization and expansion of numerically controlled machines which are all already used by manufacturers in developed countries However they contend that other goals State Council of the People’s Republic of China “ ‘Made in China 2025’ plan issued ” press release May 19 2015 http english gov cn policies latest_releases 2015 05 19 content_281475110703534 htm 242 Dan Markus and Nick Marro “‘Made in China’ Now ‘Made by China’ Update ” The U S -China Business Council May 27 2015 243 Scott Kennedy Made in China 2025 Center for Strategic and International Studies June 1 2015 https www csis org analysis made-china-2025 244 Yamei Wang “‘Made in China 2025’ plan unveiled to boost manufacturing ” Xinhua May 19 2015 241 Congressional Research Service RL33536 · VERSION 155 · UPDATED 79 China-U S Trade Issues such as encouraging companies to use 3D printing and adopting robotics are or may be unrealistic Trade Implications The ambiguity surrounding the language of Made in China 2025 objectives may impact foreign MNCs that operate within China and interact with Chinese companies globally Made in China 2025 mentions “strengthened security reviews” for investments mergers and acquisitions and procurement in manufacturing areas related to the national economy and national security which are not clearly defined Language in the Made in China 2025 plan also seeks to boost indigenous innovation For example it lists the goal of ensuring that domestic Chinese firms will handle the majority of local infrastructure development with specific timetables For example the plan states that 40% of core infrastructure components and key infrastructure materials should come from Chinese sources by 2020 and to increase further to 80% by 2025 245 This has led to concerns that such goals will discriminate against foreign firms Internet Plus The Internet Plus plan was announced to the National People’s Congress on March 5 2015 by Premier Li Keqiang as part of the Report on the Work of the Government 2015 with a followup implementation plan issued by the State Council on July 4 2015 246 With 721 million users as of 2016 China has the largest absolute number of people in the world using the internet 247 The plan reportedly came out of an effort to push for more innovation as many Chinese leaders view innovation as the key to avoiding the middle-income trap Additionally there is still the prevailing idea in China especially in the rural regions that enterprises in the traditional sectors do not know how to link their businesses to the internet 248 According to the United States Information Technology Office launched in cooperation with the Department of Commerce’s International Trade Administration China’s Internet Plus seeks to “drive economic growth by integration of internet technologies with manufacturing and business ”249 Goals In his speech on the Internet Plus plan during the 2015 Report on the Work of the Government Premier Li Keqiang described the plan as such “We will develop the ‘Internet Plus’ action plan to integrate the mobile internet cloud computing big data and the Internet of Things with modern manufacturing to encourage the healthy development of e-commerce industrial networks and internet banking as well as guide internet-based companies to increase their presence in the international market In addition to the 40 billion yuan government fund already in place for investment in China’s emerging industries more funds need to be raised for promoting business development and innovation ”250 Premier Li reiterated these points in the Dan Markus and Nick Marro “‘Made in China’ Now ‘Made by China’ Update ” The U S -China Business Council May 27 2015 245 “国务院关于积极推进“互联网 ”行动的指导意见” “Guiding Opinions on Actively Promoting the “Internet Plus Action Plan” in Chinese July 4 2015 http www gov cn zhengce content 2015-07 04 content_10002 htm 247 “Internet Users by Country 2016 ” Internet Live Stats 2016 248 Gao Yuan “Internet Plus plan a real wake-up call for Chinese companies ” China Daily March 10 2016 249 United States Information Technology Office “China Pursues “Internet Plus” Strategy ” press release 2015 http www usito org news china-pursues-internet-plus-strategy 250 State Council of the People’s Republic of China “Full Text Report on the Work of the Government 2015 ” press 246 Congressional Research Service RL33536 · VERSION 155 · UPDATED 80 China-U S Trade Issues 2016 Report on the Work of the Government but also highlighted the need to improve the efficiency of communication between governmental departments to cut down on “red tape ”251 Internet Plus has four primary goals 1 upgrade and strengthen the security of the internet infrastructure 2 expand access to the internet and related technologies 3 make social services more convenient and effective and 4 increase both the quality and effectiveness of economic development 252 The plan also maps development targets and supportive measures for key sectors such as mass entrepreneurship and innovation manufacturing agriculture energy finance public services logistics e-commerce traffic biology and artificial intelligence 253 In order to achieve these goals the Chinese government will reportedly clear barriers and lower limits for the market entry of Internet Plus-related products optimize the credit system and draft a big data strategy and promote legal services for companies that pursue the Internet Plus system The government has also expressed interest in training and making better use of local and foreign talent providing financial support and tax preferences to key projects launching more pilot zones as well as encouraging innovation demonstration zones and local governments to come up with their own plans aligned to Internet Plus Chinese authorities have also promised that families in large cities will have access to 100 megabyte-per-second internet and that broadband services will reach 98% of the population living in incorporated villages According to the Seconded European Standardization Expert in China SESEC a project co-financed by the European Union the Chinese government has created a new investment fund worth 40 billion RMB or approximately $6 billion to further promote new industry innovation and entrepreneurship under Internet Plus 254 Internet Plus is intertwined with other economic plans outlined by the Chinese government For example a goal of Internet Plus which is restated in the 13th Five-Year Plan is to increase the percentage of research and development spending as part of GDP from 2 1 to 2 5 255 The Chinese government has also tied Internet Plus to the “One Belt One Road” Initiative an effort to boost development and economic connectivity across three continents encouraging Chinese internet companies to increase their efforts in the global market Issues The release of Internet Plus and Made in China 2025 and the notable mention of both plans in the 13th Five-Year Plan are all efforts by the Chinese government to increase the growth rate of the economy Within Internet Plus there is an emphasis on innovation that the government believes will result from the integration of the internet with economic and social sectors and that an increasing trend of innovation will benefit from government intervention Some experts raise concerns about a “helping hand ” contending that government intervention could slow the release March 16 2015 http english gov cn archive publications 2015 03 05 content_281475066179954 htm 251 State Council of the People’s Republic of China “Full Text Report on the Work of the Government 2016 ” press release March 17 2016 http english gov cn premier news 2016 03 17 content_281475309417987 htm 252 Lincoln E Davidson “'Internet Plus and the Salvation of China’s Rural Economy ” July 17 2015 253 State Council of the People’s Republic of China “China unveils Internet Plus action plan to fuel growth ” press release July 4 2015 http english gov cn policies latest_releases 2015 07 04 content_281475140165588 htm 254 Betty Xu China Internet Plus Strategy Seconded European Standardization Expert in China February 5 2015 http sesec eu app uploads 2015 06 2015_05_SESECIII_Newsletter_April_2015_Annex02_China_Internet_Plus_Strat pdf “中华人民共和国国民经济和社会发展第十三个五年规划网要 第三章 主要目标” “People’s Republic of China 13th Five-Year Plan for National Economic and Social Development Chapter 3 Main Targets” in Chinese March 17 2016 http www sdpc gov cn fzgggz fzgh ghwb gjjh 201603 P020160318564052484043 pdf 255 Congressional Research Service RL33536 · VERSION 155 · UPDATED 81 China-U S Trade Issues beneficial effect start-ups have on the economy Gordon Chang in a Forbes Magazine article for example contends that “perhaps the worst thing for tech companies is direct government support which means meddling by central provincial and local officials ”256 Chang also pointed out that new e-commerce companies like the ones that Internet Plus aims to create may be net jobdestroyers by contributing to the closing of “brick-and-mortar” shops and that many of these new companies may be “zombie shops ” Press reports point out the lack of reference to “freedom of the Internet” in Internet Plus leading them to question how strict internet censorship would be especially with the trend of increased censorship since Xi Jinping became president in 2012 257 They also mention that if Beijing continues to censor access to information Internet Plus may increase consumer shopping instead of having any significant and long-term impact on the economy Analysts have also criticized the implementation of Internet Plus Internet Plus places a large emphasis on modernizing the agricultural sector of the economy but agencies tasked with overseeing the implementation of Internet Plus for agriculture include the Ministry of Agriculture National Development and Reform Commission Ministry of Science and Technology Ministry of Commerce General Administration of Quality Supervision Inspection and Quarantine China Food and Drug Administration and the State Forestry Administration A lack of coordination could lead to problems with Internet Plus including the misallocation of state resources redundant or contradictory policies and opportunities for local officials to exploit policy overlaps for their own profits 258 Implications There are both positive and negative implications for the United States if Internet Plus is implemented as the Chinese government intends it Seconded European Standardization Expert in China SESEC notes that transforming and upgrading key sectors could open up new sectors highlighting the example of how mobile internet reforms promoted the development of taxihailing apps in a previously closed vehicle transportation and operation market If Internet Plus is successful an example of a possible sector that could open up is the agricultural industry as there has been some emphasis on modernizing the sector specifically moving from network sale sectors like e-commerce to the production sector 259 Some analysts speculate that Internet Plus could increase censorship further closing off high-tech sectors from China and halting innovation During the announcement of Internet Plus Premier Li Keqiang mentioned more precise web management to “clean up illegal and bad information” to “strengthen the struggle against enemies in online sovereign space and increase control of online public sentiment ”260 In its 2016 U S -China Business Council USCBC Recommendations for the U S -Joint Commission on Commerce and Trade JCCT USCBC recommended ensuring “that regulations calling for ‘secure and controllable ’ ‘secure and reliable ’ and similarly worded standards included in existing policy documents do not discriminate against foreign companies or Gordon G Chang “China’s ‘Internet Plus’ Strategy A Net Minus ” Forbes April 19 2015 George Chen “Can Li Keqiang’s Internet Plus strategy really save China ” South China Morning Post March 8 2015 258 Lincoln E Davidson “ ‘Internet Plus’ and the Salvation of China’s Rural Economy ” The Diplomat July 17 2015 259 Betty Xu China Internet Plus Strategy Seconded European Standardization Expert in China February 5 2015 http sesec eu app uploads 2015 06 2015_05_SESECIII_Newsletter_April_2015_Annex02_China_Internet_Plus_Strat pdf 260 Lulu Chang “China Outlines its Latest Five Year Plan Called Internet Plus ” Digital Trends March 6 2016 256 257 Congressional Research Service RL33536 · VERSION 155 · UPDATED 82 China-U S Trade Issues procurement of foreign IT equipment and do not create unnecessary requirements that will not enhance the security of networks ”261 National Informatization Development Strategy On August 31 2015 China released its “National Informatization Development Strategy ”262 or big data development plan 263 In July 2016 China released its Outline of the National Informatization Development Strategy a guiding document that explains the regulations and direction of information-based development in China over the next 10 years 264 According to the United States Information Technology Office the outline calls for core information technology such as integrated circuits and basic software to create a core technology system strengthened IPR and standards improved protection regulations for IPR implementation of a multi-level classification information management system accelerated lawmaking process for relevant policies emphasis on the importance of international cyberspace development and administration cooperation implementation of network identity administration regulations and tightened control over all internet news services and platforms 265 The outline also emphasizes the leadership of the Central Network Security and Informatization Leading Group led by President Xi Jinping The outline sets targeted goals for the next 10 years that will be reached by both 2020 and 2025 By 2020 China wants to strengthen its domestic industry by specifically focusing on certain core technologies 266 providing internet access to an additional 350 million people by expanding 3G and 4G services and achieving breakthroughs in 5G technology By 2025 China wants to further improve household fixed-broadband connectivity rates build a leading mobile telecommunications network and increase information consumption values to 12 trillion RMB U S $1 79 trillion and e-commerce trading values to 67 trillion RMB U S $10 trillion 267 Implications The National Informatization Development Strategy builds upon the ICT and big data goals set in the 13th Five-Year Plan Internet Plus and Made in China 2025 However as some have noted the outline differentiates itself from the other goals set in these other plans in that it is bolder with a nationalistic frame 268 The strategy further emphasizes the need for China to strengthen its domestic industry easing its dependence off of foreign sectors 261 The US-China Business Council 2016 US-China Business Council Recommendations for the US-China Joint Commission on Commerce and Trade JCCT 2016 https www uschina org sites default files 2016%20USCBC%20JCCT%20Recommendations pdf “促进大数据发展行动纲要” “National Informatization Development Strategy” in Chinese http www gov cn zhengce content 2015-09 05 content_10137 htm 263 Office of the United States Trade Representative 2015 USTR Report to Congress on China’s WTO Compliance December 2015 https ustr gov sites default files 2015-Report-to-Congress-China-WTO-Compliance pdf 264 United States Information Technology Office “State Council Released an Outline of the National Informatization Development Strategy ” press release 2016 http www usito org news state-council-released-outline-nationalinformatization-development-strategy 265 Ibid 266 Core technologies include products such as integrated circuits and broadband networks 267 “Outline of the National Informatization Development Strategy ” China Copyright and Media July 27 2016 268 Frank Zhao and Jesse Heatley “China’s Master Plan for IT Dominance ” The Diplomat August 11 2016 262 Congressional Research Service RL33536 · VERSION 155 · UPDATED 83 China-U S Trade Issues Efforts to Promote an Indigenous Semiconductor Industry In June 2014 the Chinese government released a plan called “Guidelines to Promote National Integrated Circuit Industry Development ” A year later the government announced an investment of 1 trillion RMB or 161 billion USD in the domestic semiconductor industry to be developed over the next 10 years 269 The guidelines to improve the semiconductor industry are split into three main strategies mergers and acquisitions M A market power and regulation According to the U S International Trade Administration “the Chinese government appears to be driven by a desire to acquire know-how in all segments of the semiconductor supply chain ” resulting in heavy recruitment of foreign talent by the Chinese government 270 China wants to “catch up technologically” with other leading semiconductor firms by 2030 and produce 70% of the chips consumed by the Chinese industry 271 China purchases over half of all semiconductors produced each year globally but lacks the capabilities in its domestic semiconductor industry to back up its consumption In 2014 China accounted for 56 6% of the global consumption of semiconductors and its demand grew at an 18 8% compounded annual growth rate between 2003 and 2014 272 In order to build up domestic industries and promote indigenous innovation China wants to lessen its dependency on U S technology especially in the semiconductor industry Chinese consumption of semiconductors in 2015 was 9% domestically produced and 91% foreign of which 56 2% was made in the United States while domestic Chinese chips accounted for less than one-tenth of local demand 273 Globally China makes up 4% of global semiconductor sales and views its reliance on foreign companies as a national security concern Issues Analysts have compared the Chinese ambitions to the rise of the Taiwanese semiconductor industry but point out differences between the two situations According to The Economist Taiwan was able to succeed because they entered the market during an industry shift to a model that separated the design and fabrication of the chip However when Taiwan tried to enter the market for memory chips it failed due to the lack of a transitional period in the industry Currently the global semiconductor industry is facing a period of relatively slow growth This in combination with the maturing of the global semiconductor industry or the increased complexity of semiconductor chips and their associated software could some argue make it more difficult for Chinese firms to succeed 274 Other criticisms include the methods and goals that China has undertaken to develop its semiconductor industry As of March 2016 China through its Integrated Circuit IC Industry Investment Fund has invested 43 billion RMB 6 61 billion USD to expand its semiconductor industry with much of the money going toward mergers and acquisitions 275 Analysts note that Ma Xiaochun and Zhang Qian “The chips are up ” People’s Daily August 5 2015 International Trade Administration China 2016 Top Markets Report Semiconductors and Semiconductor Manufacturing Equipment Country Case Study 2016 http trade gov topmarkets pdf Semiconductors_China pdf 271 “Chips on their shoulders ” The Economist January 23 2016 Print edition 272 Dezan Shira Associates Chips All In Investing in China’s Semiconductor Industry March 2 2016 http www china-briefing com news 2016 03 02 chips-all-in-investing-in-chinas-semiconductor-industry html 273 Ian King “China Has Big Plans for Homegrown Chips ” Bloomberg Businessweek June 25 2015 274 “Chips on their shoulders ” The Economist January 23 2016 Print edition 275 Bien Perez “China’s chip industry bolstered by acquisitions worth US$6 61 billion by government-backed fund ” 269 270 Congressional Research Service RL33536 · VERSION 155 · UPDATED 84 China-U S Trade Issues simply acquiring the technology will not help improve China’s competitiveness in the long run but will only increase the profit margin for China temporarily Intel alone spends four times as much on research and development on its semiconductors as the entire Chinese chip industry 276 The emphasis on increasing domestic demand for domestically made chips is also a concern Some analysts note that the emphasis on domestically made chips assumes that Chinese firms will buy Chinese-produced microchips because they are made in China disregarding the idea that the same firms might buy foreign microchips because they are of better quality 277 If Chineseproduced microchips are of lesser quality but the Chinese government guides companies toward buying domestically made products China could end up with a domestic industry that lacks global competitiveness A government mandate for Chinese high tech firms to use Chinese-made chips could also undermine their global competitiveness as well Implications The United States is a leading actor in the global semiconductor industry and has great interest in Asia with U S semiconductor exports to the broader Asia-Pacific region representing 85% of total U S semiconductor goods exported in 2014 at $36 5 billion Between 2014 and 2015 semiconductor exports grew from $8 03 billion to $8 45 billion a growth of 5 2% 82% of all semiconductor products produced in the United States are sold to customers overseas supporting 250 000 U S jobs and an additional 1 million jobs in related sectors In 2015 U S companies accounted for 50% of total semiconductor sales 278 The Department of Commerce’s International Trade Administration views policies promoting Chinese domestic industries as “potentially discriminatory” and posing “real long-term threats to not only U S firms but the entire semiconductor ecosystem ”279 In the short term some note that there will be larger investment in both U S and foreign companies that develop semiconductors but in the long term it is possible that once Chinese companies have the intellectual property there could be less reliance on U S companies In January 2016 the Chinese provincial government of Guizhou and U S firm Qualcomm signed an agreement to form a new joint venture with an initial registered capital of $280 million focusing on the “design development and sale of advanced server chipset technology in China ” The Guizhou provincial government investment arm will have a 55% controlling share 280 Qualcomm will provide investment capital license its server technology to the joint venture and assist with R D process and implementation expertise If China successfully develops its semiconductor industry it may enjoy a bigger share of the global electronics industry’s profits as profit margins for successful semiconductor firms are around 40% or more Analysts say that there will be a continuation of strong but slowing growth South China Morning Post March 30 2016 276 “Chips on their shoulders ” The Economist January 23 2016 Print edition 277 Ibid 278 Semiconductor Industry Association U S Semiconductor Industry Supports the Trans-Pacific Partnership http www semiconductors org clientuploads directory DocumentSIA International%20Trade%20and%20IP TPP%20Benefits%20to%20the%20Semiconductor%20Industry-%20March%202016 pdf 279 International Trade Administration China 2016 Top Markets Report Semiconductors and Semiconductor Manufacturing Equipment Country Case Study 2016 http trade gov topmarkets pdf Semiconductors_China pdf 280Qualcomm Press Release January 17 2016 available at https www qualcomm com news releases 2016 01 16 qualcomm-and-guizhou-province-sign-strategic-cooperation-agreement-and-form Congressional Research Service RL33536 · VERSION 155 · UPDATED 85 China-U S Trade Issues in demand for semiconductors by China and a large increase in their demand for semiconductor manufacturing equipment in the short term as China continues to develop their industry 281 On January 2017 the President’s Council of Advisors on Science and Technology issued a issued a report on U S semiconductor innovation competitiveness and security which warned that a “concerted push by China to reshape the market in its favor using industrial policies backed by over one hundred billion dollars in government-directed funds threatens the competitiveness of U S industry and the national and global benefits it brings ” and that such policies “put U S national security at risk ”282 Author Information Wayne M Morrison Specialist in Asian Trade and Finance Acknowledgments This report greatly benefitted from the assistance of Ashley Feng Research Associate Foreign Affairs Defense and Trade Division Disclaimer This document was prepared by the Congressional Research Service CRS CRS serves as nonpartisan shared staff to congressional committees and Members of Congress It operates solely at the behest of and under the direction of Congress Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role CRS Reports as a work of the United States Government are not subject to copyright protection in the United States Any CRS Report may be reproduced and distributed in its entirety without permission from CRS However as a CRS Report may include copyrighted images or material from a third party you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material The Economist “Chips on their shoulders ” January 23 2016 The White House Office of Science and Technology Policy Report on Ensuring Long-Term U S Leadership in Semiconductors January 6 2017 available at https obamawhitehouse archives gov sites default files microsites ostp PCAST pcast_ensuring_long-term_us_leadership_in_semiconductors pdf 281 282 Congressional Research Service RL33536 · VERSION 155 · UPDATED 86