Updated January 29 2020 U S -China Trade and Economic Relations Overview As U S -China economic ties have grown so have U S concerns about China’s trade and investment practices including the state’s increasingly direct and powerful role in the economy and policies requiring many U S firms to disclose sensitive proprietary information to operate in China Beijing’s slowness to acknowledge and address priority U S concerns while Chinese firms expand offshore has highlighted uneven levels of market openness divergent approaches to global rules and significant differences in the operating conditions and tenets of the U S and Chinese economic systems including clear separation of government and business interests protections of freedom of information and expression privacy and intellectual property IP and the impartial rule of law Feeding U S concerns are an uptick in reports of Chinese corporate espionage Beijing’s tightening of information controls and pressure on U S firms to abide by these controls tit-for-tat retaliation and industrial policies incentivizing the transfer of U S IP to the government and military To address these issues the Trump Administration has undertaken policy actions that include invoking Section 301 of the Trade Act of 1974 19 U S C §2411 to target Chinese industrial policies and IP abuses strengthening U S investment and export control authorities and stepping up efforts to stem Chinese espionage The Administration has sanctioned Chinese firms for violations of U S sanctions theft of U S IP ties to the Chinese military in dual-use sectors and provision of surveillance technology to the authorities in the western Chinese region of Xinjiang Supporters of the Administration’s stance assess these actions will better position U S firms and advance U S economic interests Others warn that frictions could reduce commercial flows and threaten U S growth Some Members seek additional action to address China’s coercion of U S firms use of a “social credit system” to influence corporate behavior and adoption of military-civil fusion policies that blur commercial and military distinctions Section 301 In March 2018 the U S Trade Representative USTR issued its investigation findings of Chinese policies related to technology transfer IP and innovation under Section 301 of the Trade Act of 1974 USTR concluded that four practices justified U S action forced technology transfer requirements cyber-enabled theft of U S IP and trade secrets discriminatory and nonmarket licensing practices and state-funded strategic acquisition of U S assets The United States and China signed a phase one trade agreement on January 15 2020 to resolve some issues raised through Section 301 China committed to strengthen IP enforcement and improve access in agriculture and financial services—sectors important to the U S economy but outside the 301 investigation’s scope—leaving most U S concerns on IP technology transfer industrial policies and state subsidies to phase two Most Members assess the deal to be only a first step U S businesses are warning that China is doubling down on industrial policies China committed to purchase at least $200 billion above a 2017 baseline amount of U S agriculture $32 billion energy $52 billion goods $77 7 billion and services $37 9 billion between January 2020 and December 2021 but stated that purchases will be market-based suggesting amounts could be lower Official Chinese and U S trade data will be used and the deal is silent on valuing purchases opening potential disagreement on implementation Both sides delayed proposed December 15 tariffs For U S tariffs enacted on September 1 2019 the United States is to on February 14 2020 cut the rate from 15% to 7 5% China extended September tariff exemptions for autos auto parts pork and soybeans and may selectively exempt rather than cut tariffs Other U S and Chinese tariffs enacted since March 2018 remain in effect The United States has imposed increased 25% tariffs on three tranches of imports from China worth approximately $250 billion China in turn raised tariffs at rates ranging from 5% to 25% on $110 billion worth of U S products Figure 1 U S -China Trade in 2018 Source CRS data from U S Bureau of Economic Analysis BEA Bilateral Trade and Investment U S -China commercial ties expanded greatly over three decades In 2018 China was in terms of goods the largest U S trading partner with total trade at $660 billion the third-largest U S export market at $120 billion and the largest source of U S imports at $540 billion Figure 1 China is the second-largest foreign holder of U S Treasury securities at $1 11 trillion as of June 2019 As the United States and China have increased tariffs since 2018 year-todate YTD bilateral trade flows decreased in the first three quarters of 2019 with U S goods exports to China falling by 16% while U S imports from China fell by 13% according to official U S data Figure 2 https crsreports congress gov U S -China Trade and Economic Relations Overview Figure 2 U S -China Trade in 2018 and 2019 Source CRS data from U S Bureau of Economic Analysis BEA Foreign direct investment FDI flows in both directions have slowed since 2017 RhG estimates China FDI into the U S went from $45 5 billion in 2016 to $29 4 billion in 2017 and $4 8 billion in 2018 but announced deals show China’s sustained interest in U S biotech health and technology sectors through commercial ties not captured in FDI data e g venture capital private equity research and development and open source technology platforms Figure 3 U S -China FDI Flows in 2018 Source CRS with data from BEA and the Rhodium Group RhG Notes VC Venture capital BEA records net flows and may undercount FDI by not capturing all FDI via other countries territories or tax havens or acquisitions made by U S affiliates of foreign firms RhG records gross flows and attempts to identify FDI by Chinese firms regardless of where firms are based or sources of money for investment Trade Deficit President Trump has raised concerns about U S trade imbalances with China Some view the bilateral trade deficit as an indicator of Chinese trade barriers— including currency manipulation and Chinese policies and practices that discourage direct U S exports and incentivize manufacturing in China Others view conventional data on the trade deficit as misleading because China’s role as a point of assembly in global supply chains means Chinese export data includes the value of imported inputs from other markets In August 2019 the United States formally labeled China a currency manipulator under the terms of the 1988 Trade Act the first such designation in 25 years and lifted the designation in January 2020 in response to China’s currency commitments in the phase one trade deal Industrial Policies Technology and IP To further its national development goals China’s government employs interrelated industrial policies that seek the transfer of foreign IP and knowhow to China in sectors in which the United States has strong comparative advantages These policies such as Made in China 2025 feature a heavy government role in directing and supporting Chinese business and include government-set targets governmentguided funds subsidies tax breaks low-cost loans trade and investment barriers and discriminatory IP procurement and standards practices U S companies are also concerned about China’s cyber and data policies that require the disclosure of sensitive information In 2018 the U S National Counterintelligence and Security Center warned that China’s “expansive efforts in place to acquire U S technology to include sensitive trade secrets and proprietary information ” if not addressed “could erode America’s long-term competitive economic advantage ” National Security Congress and the Administration have responded to national security concerns about China’s industrial policies and role in technology supply chains Citing a “national emergency ” the President in May 2019 issued Executive Order 13873 stating that U S purchases of information and communications technology ICT goods and services from “foreign adversaries” pose a national security risk and authorizing the federal government to ban ICT transactions deemed to pose an “undue risk ” The U S Department of Commerce responded by adding Chinese firm Huawei and 68 of its non-U S affiliates to the Bureau of Industry and Security’s Entity List generally requiring an export license for the sale or transfer of U S technology but has issued waivers Efforts to tighten gaps in these policies are exposing U S interagency debates about the potential impact on U S technology firms Legislation enacted in 2018 P L 115232 reforms U S foreign investment review and export control authorities Some Members are concerned about the delay in establishing new controls on certain emerging and foundational technologies that are required to implement both the investment review and export control reforms Industrial Overcapacity China is a top global steel and aluminum producer In 2009 it issued 13 industry support plans allowing its firms to expand steel and aluminum capacity while much of the world dialed back Assessing persistent global overcapacity the United States in March 2018 announced tariffs on all aluminum 10% and steel 25% imports citing national security concerns Section 232 Trade Expansion Act of 1962 PL 87-794 China responded by raising tariffs by 15% to 25% on $3 billion of U S exports and filing a World Trade Organization case Financial Markets Some Members are concerned about China’s access to U S capital markets Responding to warnings by the Securities and Exchange Commission and the Public Company Accounting Oversight Board that they cannot inspect the work of auditing firms in China that examine U S listed firms S 1731 and H R 3124 would require Chinese firms that fail to meet U S auditing requirements to delist from U S exchanges H R 2903 would bar the U S government’s Thrift Savings Plan TSP from investing “in any entity in peer or near-peer competitor nations ” a category that would include China Karen M Sutter Specialist in Asian Trade and Finance https crsreports congress gov IF11284 U S -China Trade and Economic Relations Overview 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 https crsreports congress gov IF11284 · VERSION 10 · UPDATED