US-China Trade Issues After the WTO and the PNTR
Total Page:16
File Type:pdf, Size:1020Kb
Hoover Press : EPP 103 DP5 HPEP03FM01 08-01-9900 16:30:43 rev1 page i U.S.-CHINA TRADE ISSUES AFTER THE WTO AND THE PNTR DEAL A Chinese Perspective Jialin Zhang HOOVER INSTITUTION on War, Revolution and Peace Stanford University 2000 Hoover Press : EPP 103 DP5 HPEP03FM01 08-01-9900 16:30:43 rev1 page ii The Hoover Institution on War, Revolution and Peace, founded at Stanford University in 1919 by Herbert Hoover, who went on to become the thirty-first president of the United States, is an interdisciplinary research center for advanced study on domestic and international affairs. The views expressed in its publications are entirely those of the authors and do not necessarily reflect the views of the staff, officers, or Board of Overseers of the Hoover Institution. www.hoover.org Essays in Public Policy No. 103 Copyright 2000 by the Board of Trustees of the Leland Stanford Junior University Material contained in this essay may be quoted with appropriate citation. First printing, 2000 Manufactured in the United States of America 050403020100987654321 Library of Congress Cataloging-in-Publication Data Chang, Chia-lin. U.S.-China trade issues after the WTO and PNTR deal : a Chinese perspective / Jialin Zhang. p. cm. — (Hoover essays in public policy; no. 103) Includes bibliographical references. ISBN 0-8179-4382-X (alk. paper) 1. United States—Foreign economic relations—China. 2. China—Foreign economic relations—United States. 3. Balance of trade—United States. 4. Export controls—United States. 5. Capital movements—China. 6. United States—Commerce—China. 7. China—Commerce—United States. I. Title: US-China trade issues after the WTO and PNTR deal : a Chinese perspective. II. Title. III. Essays in public policy ; no. 103. HF1456.5.C6 C48 2000 337.51073—dc21 00-058067 Hoover Press : EPP 103 DP5 HPEP03FM01 08-01-9900 16:30:43 rev1 page iii Executive Summary The U.S.-China trade agreement reached in November 1999 and the recent granting to China of permanent normal trade relations status by the U.S. Congress would pave the way for China’s entry into the World Trade Organization. Since the United States has long complained about the huge trade deficit with China, this accord should improve the bilateral trade balance in favor of the United States. Nevertheless, many long-standing trade issues between the United States and China remain unresolved. The major issue is the totally different estimates of the bilateral trade imbalance by the two countries. According to U.S. data, the United States runs a staggering merchandise deficit with China, whereas China puts this figure much lower. The main reason for the big discrep- ancy is how to treat Chinese exports to the United States and U.S. exports to China via Hong Kong. Many American and Chinese econ- omists argue that the U.S. estimates grossly understate the real value of U.S. exports to China, distort the bilateral trade balance, and swell the U.S. trade deficit with China. Another factor is the influence of capital flow. Most Chinese export goods to the United States are produced by outward-processing firms. Most returns accrue to the United States and other foreign owners of these firms, whereas China earns only a negli- gible processing fee. Taking into account these fctors, the U.S. trade imbalance with China is significantly smaller than the U.S. official data suggest. There is no reason to make this issue a hostage in the U.S. domestic partisan struggle and thus poison U.S.-China political rela- tions. Other trade issues include U.S. export control and sanctions against China, China’s alleged currency manipulation, and linking human rights to trade. If both countries can settle them through negotiations on an equal footing, U.S.-China economic cooperation will have a bright future. American capital, technology, and managerial skills com- bined with China’s huge market, low-cost labor, and resources will bring tremendous benefits to both countries. Hoover Press : EPP 103 DP5 HPEP030100 08-01-9900 16:31:25 rev1 page 1 U.S.-CHINA TRADE ISSUES AFTER THE WTO AND THE PNTR DEAL A Chinese Perspective After thirteen years of hard bargains and dashed hopes, China and the United States finally reached a trade agreement in mid-November 1999. American companies would not get the full benefits, however, until the U.S. Congress agreed to make China’s normal trade relations perma- nent. Half a year later, on May 24, 2000, the U.S. House of Represen- tatives approved historic legislation granting China permanent normal trade relations (PNTR), which is a prerequisite for implementing the U.S.-China trade deal of last November. Both measures would pave the way for China’s entry into the World Trade Organization (WTO). The new U.S.-China trade deal, described by government officials of both countries as mutually beneficial, should resolve many of China’s market access and other bilateral economic issues from the past in a positive way. In terms of bilateral trade relations, however, this accord has not resolved all problems. Because of the differences of both countries in social system, ideology, culture, and, particularly, worsening bilateral political relations, Sino-U.S. trade relations have been fraught with frictions and disputes in the past decade. Even after China’s formal entry The views expressed in this essay are those of the author. It reflects views neither of the Chinese government nor of the Hoover Institution. Hoover Press : EPP 103 DP5 HPEP030100 08-01-9900 16:31:25 rev1 page 2 2 Jialin Zhang into the World Trade Organization and the United States’ granting PNTR status to China, these problems will remain. From the Chinese perspective, there are four major issues: dispute over the trade imbalance derived from different methods of calculating trade figures; U.S. eco- nomic sanctions against China and U.S. technology export control; alleged “currency manipulation”; and human rights linked to trade re- lations. Thus, China-U.S. trade could remain a hot political issue in the United States and continue to strain bilateral relations. This essay intends to provide a Chinese perspective on these issues to the Amer- ican public. Hopefully, this would facilitate mutual understanding, en- couraging both countries to settle them at the working level, and finally defusing the trade issues and taking them out of the overall China-U.S. relationship. Benefit Distribution Although China’s entry into the WTO signifies that “a historic door has been opened,” as Mike Moore, director-general of the WTO, put it, no one expects immediate economic consequences from the deal. But the long-term benefits for both China and the United States are indisputable. For China, as many observers noted, this accord will in- tegrate China with the world marketplace, give new impetus to its current sluggish domestic demand, restructure its economy toward be- coming market oriented, and reinforce the rule of law. For the United States, it has achieved the long-sought goal of entering the last huge market in the world. In the beginning, the economic benefits might be unevenly distrib- uted among different industries of both countries. Since the United States has long complained about the alleged huge trade deficit with China, this accord should improve the bilateral trade balance in favor of the United States. The major gains for the United States involve market access and tariff reduction. Overall, the Chinese tariff level will decline from an Hoover Press : EPP 103 DP5 HPEP030100 08-01-9900 16:31:25 rev1 page 3 U.S.-China Trade Issues 3 average of 24.6 percent to 9.4 percent. As a result, U.S. exports to China are likely to grow faster, in percentage terms, than imports. The U.S. International Trade Commission estimated that reducing the Chinese tariff would boost U.S. exports by about 10 percent and its imports from China by about 6.9 percent. It would also create more U.S. high-paying export-related jobs in such fields as aerospace and the automobile in- dustry. More favorable terms in the deal are in the U.S. agriculture sector, where the Chinese tariff will drop from 22 percent to 14.5–15 percent, or even lower, by 2004. Thus U.S. cotton, wheat, corn, and soybeans will see a big surge in exports to China. In the meantime, China has committed to eliminate all quantitative restriction and adopt tariff-rate quotas (TRQ, i.e., a system in which imports up to the quota level are charged a minimal tariff—usually 1–3 percent—and above that level a high tariff). This system provides a strong incentive for state enterprises to purchase bulk commodities at world market rates. In addition, China will end export subsidies of agriculture commodities. This should be regarded as a major concession from the Chinese side given that total elimination of agricultural export subsidies will not be discussed until the next WTO round after 2000. Overall, the U.S. Department of Agriculture estimated that American farm exports to China would rise by $2 billion within five years. Another important beneficiary is the U.S. automobile sector. In a separate package, China agreed to phase down its tariff from 80–100 percent to 25 percent on cars, from 50 percent to 10 percent on parts by 2006 and to grant foreign car manufacturers the authority to provide financing for car purchases from the date of China’s WTO accession. In addition, foreign auto companies are given full distribution rights and trading rights, which means that foreign companies will be able to import and export without Chinese middlemen and provide after-sale repair and maintenance.