China-U.S. trade issues.
U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.-China trade rose from $2 billion in 1979 to $562 billion in 2013. China is currently the United States' second-largest trading partner, its third-largest export market, and its biggest source of imports. China is estimated to be a $300 billion market for U.S. firms (based on U.S. exports to China and sales by U.S.-invested firms in China). Many U.S. firms view participation in China's market as critical to staying globally competitive. General Motors (GM), for example, which has invested heavily in China, sold more cars in China than in the United States each year from 2010 to 2013. In addition, U.S. imports of low-cost goods from China greatly benefit U.S. consumers, and 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 the largest foreign holder of U.S. Treasury securities (nearly $1.3 trillion as of April 2014). China's purchases of U.S. government debt 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. policy makers and stakeholders include China's relatively poor record of intellectual property rights (IPR) enforcement and alleged widespread cyber economic espionage against U.S. firms by Chinese government entities; its mixed record on implementing its World Trade Organization (WTO) obligations; its extensive use of industrial policies (such as financial support of state-owned firms, trade and investment barriers, and pressure on foreign-invested firms in China to transfer technology in exchange for market access) in order to promote the development of industries favored by the government and protect them from foreign competition; and its policies to maintain an undervalued currency. Many U.S. policy makers argue that such policies negatively impact U.S. economic interests and have contributed to U.S. job losses. There are a number of views in the United States over how to more effectively address commercial disputes with China:
* Take a more aggressive stand against China, such as increasing the number of dispute settlement cases brought against China in the WTO, or threatening to impose trade sanctions against China unless it addresses policies (such as IPR infringement and cyber theft of trade secrets) that hurt U.S. economic interests.
* Intensify negotiations through existing high-level bilateral dialogues, such as the U.S.-China Strategic and Economic Dialogue (S&ED), which was established to discuss long-term challenges in the relationship. In addition, seek to complete ongoing U.S. negotiations with China to reach a high-standard bilateral investment treaty (BIT), as well as to finalize negotiations in the WTO toward achieving China's accession to the Government Procurement Agreement (GPA).
* Encourage China to join the Trans-Pacific Partnership (TPP) negotiations and/or seek to negotiate a bilateral a free trade agreement (FTA) with China, which would require it to significantly reduce trade reforms and investment barriers.
* Continue to press China to implement comprehensive economic reforms, such as diminishing the role of the state in the economy and implementing policies to boost domestic consumption, which, many economists contend, would benefit both the Chinese and U.S economies.
Contents Most Recent Developments U.S. Trade with China U.S. Merchandise Exports to China Major U.S. Imports from China China as a Major Center for Global Supply Chains U.S.-China Investment Ties China's Holdings of U.S. Public and Private Securities Bilateral Foreign Direct Investment Flows Issues Raised by Chinese FDI in the United States Chinese Restrictions on U.S. FDI in China Major U.S.-China Trade Issues Chinese "State Capitalism" China's Plan to Modernize the Economy and Promote Indigenous Innovation Intellectual Property Rights (IPR) Technology Transfer Issues Cyber Security Issues China's Obligations in the World Trade Organization WTO Implementation Issues China's Accession to the WTO Government Procurement Agreement (GPA) China's Currency Policy The U.S.-China Strategic and Economic Dialogue The July 2009 Economic Track Session May 2010 Economic Track Session The May 2011 Economic Track The May 2012 Economic Track The May 2013 Economic Track Concluding Observations Tables Table 1. U.S. Merchandise Trade with China: 1980-2013 and Protections for 2014 Table 2. Major U.S. Exports to China: 2009-2013 Table 3. Major U.S. Merchandise Export Markets: 2004-2013 Table 4. Major U.S. Merchandise Imports From China: 2009-2013 Table 5. China's Holdings of U.S. Treasury Securities: 2002-April 2014 Table 6. U.S. Data on Annual U.S.-China Bilateral FDI Flows: 2005-2012 and Cumulative Value of FDI at Year-End 2012 Contacts Author Contact Information
Economic and trade reforms begun in 1979 have helped transform China into one of the world's fastest-growing economies. China's economic growth and trade liberalization, including comprehensive trade commitments made upon entering 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 a large and growing U.S. trade deficit with China, resistance by China to appreciate its currency to market levels, China's mixed record on implementing its WTO obligations, infringement of U.S. intellectual property (including through cyber espionage), and numerous Chinese industrial policies that appear to impose new restrictions on foreign firms or provide unfair advantages to domestic Chinese firms (such as subsidies). Several Members of Congress have called on the Obama Administration to take a tougher stance against China to induce it to eliminate trade and economic policies deemed harmful to U.S. economic interests and/or inconsistent with WTO rules. This report provides an overview of U.S.-China commercial relations, including major trade disputes.
Most Recent Developments
On July 9-10, 2014, U.S. and Chinese officials held the 6th round of talks under the S&ED.
On May 23, 2014, a WTO dispute settlement panel ruled that duties (of up to 21.5%) imposed by China (beginning in 201) (1) on certain imported U.S-made vehicles (resulting from antidumping and countervailing procedures) were largely inconsistent with China's WTO obligations.
On May 19, 2014, the U.S. Department of Justice issued a 31-count indictment against five members of the Chinese PLA for cyber economic espionage and other offenses that allegedly targeted five U.S. firms and a labor union for commercial advantage.
On March 23, 2014, a WTO panel ruled that China's restrictions on rare earth elements and two other metals were inconsistent with its WTO obligations. China appealed the decision on April 8.
On January 23, 2014, Lenovo, a Chinese technology company, announced that it would purchase IBM's x86 server business for $2.3 billion. On January 29, 2014, Lenovo announced that it would acquire Motorola Mobility from Google for $2.9 billion.
From November 9 to 12, 2013, the Communist Party of China held the 3rd Plenum of its 18th Party Congress, a meeting that many analysts anticipated would result in the initiation of extensive new economic reforms. Following the meeting, the Communist Party issued a communique with a number of broad policy statements. One highlighted by the Chinese media was that the market would now play a "decisive" role in allocating resources in the economy.
U.S. Trade with China (1)
U.S.-China trade rose rapidly after the two nations reestablished diplomatic relations (in January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation (MFN) treatment beginning in 1980.2 In 1979 (when China's economic reforms began), total U.S.-China trade (exports plus imports) was $2 billion; China ranked as the United States' 23rd-largest export market and its 45th-largest source of imports. In 2013, total bilateral trade (exports plus imports) reached $562 billion. China is currently the second-largest U.S. trading partner (after Canada), the third-largest U.S. export market (after Canada and Mexico), and the largest source of U.S. imports. In recent years, China has been one of the fastest-growing U.S. export markets, and the importance of this market is expected to grow even further, given the pace of China's economic growth, and as Chinese living standards continue to improve and a sizable Chinese middle class emerges. According to one estimate, China is currently a $300 billion market for U.S. firms if U.S. exports to China and sales by U.S.-invested firms in China are counted. (3)
A major concern among some U.S. policy makers has been the size of the U.S. trade deficit with China. That deficit rose from $10 billion in 1990 to $266 billion in 2008; it fell to $227 billion in 2009 (due largely to the effects of the global economic downturn), then rose over each of the next three years, reaching $318 billion in 2013 (see Table 1 and Figure 1). For the past several years, the U.S. trade deficit with China has been significantly larger than that with any other U.S. trading partner and several trading groups. Some analysts contend that the large U.S. trade deficit is an indicator that the trade relationship is unbalanced, unfair, and damaging to the U.S. economy. Others argue the large trade deficit with China is more of a reflection of global supply chains, where China is often the final point of assembly for export-oriented multinational firms (discussed more fully later in the report). A joint study by the Organization for Economic Cooperation and Development (OECD) and the WTO estimated that the U.S trade deficit in China would be reduced by 25% (in 2009) if bilateral trade flows were measured according to the value-added that occurred in each country before it was exported. (4)
U.S. Merchandise Exports to China
U.S. merchandise exports to China in 2013 were $121.7 billion, up 10.3% over 2012 levels. In 2013, China was the third largest U.S. merchandise export after Canada and Mexico (see Figure 2). From 2000 to 2013, the share of total U.S. exports going to China rose from 2.1% to 7.7%. As indicated in Table 2, the top five merchandise U.S. exports to China in 2013 were oilseeds and grains; aircraft and parts; waste and scrap; motor vehicles; and navigational, measuring, electro-medical, and control instruments. As indicated in Table 3, from 2004 to 2013, U.S. exports to China increased by 349%, which was the fastest growth rate for U.S. exports among its top 10 export markets. U.S. merchandise exports to China during the first five months of 2014 were up 7.8% over the same period in 2013 (compared with a 3.0% rise in total U.S. exports to the world).
In addition, China was the second-largest U.S. agricultural export market in 2013 at $27.9 billion. China is also a significant market for U.S. exports of private services. These totaled $30 billion in 2012, making China the fourth-largest export market for U.S. private services. (5)
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 rapid economic growth is likely to continue in the near future, provided that economic reforms are continued. (6) China's goals of modernizing its infrastructure, upgrading its industries, and improving rural living standards could generate substantial demand for foreign goods and services. Finally, economic growth has substantially improved the purchasing power of Chinese citizens, especially those living in urban areas along the east coast of China. China's growing economy, large foreign exchange reserves (at nearly $3.95 trillion through March 2014), and large population of over 1.35 billion people (19.2% of the world's population) make it a potentially enormous market. To illustrate:
* According to a report by the Boston Consulting Group, in 2009, China had 148 million "middle class and affluent" consumers, defined as those whose annual household income was 60,000 RMB ($9,160) or higher, and that level is projected to rise to 415 million by 2020.7 Another Boston Consulting Group study estimated that China had the world's second largest number of household millionaires (after the United States) in 2013 at (at nearly 2.4 million). It was further estimated that China had 983 households with private financial wealth at over $100 million. (8)
* Although Chinese private consumption as a percent of GDP is much lower than that of most other major economies, the rate of growth of Chinese private consumption has been rising rapidly. For example, private consumption as a percent of GDP in China in 2013 was 36. 8%, compared to 68.5% in the United States. However, the annual rate of growth in Chinese private consumption from 2002 to 2013 averaged 10.3% compared to 2.5% for the United States. (9)
* China's government has indicated that it plans to step up efforts to boost domestic spending to help lessen its dependence on exports as the major contributor to China's economic growth. In 2008, China began the implementation of a $586 billion economic stimulus package, largely focused on infrastructure projects. China's goals of developing its western regions, expanding and modernizing its infrastructure, boosting its social safety net (such as health care and pensions), modernizing and developing key industries, reducing pollution, and raising incomes of the rural poor will likely result in large-scale government spending levels. China's 12th Five-Year Plan (2011-2015) reportedly will allocate $1 trillion to infrastructure spending. (10)
* China currently has the world's largest mobile phone network and one of the fastest-growing markets, with an estimated 1.3 billion mobile phone subscribers as of April 2014. (11)
* Boeing Corporation predicts that over the next 20 years (2013-2032), China will buy 5,580 new commercial airplanes valued at $780 billion and will be Boeing's largest commercial airplane customer outside the United States. (12)
* China replaced the United States as the world's largest Internet user in 2008. At the end of 2013, China had an estimated 618 million users versus 262 million in the United States. Yet, the percentage of the Chinese population using the Internet is small relative to the United States: 45% versus 82%, respectively. (13)
* In 2009, China became the world's largest producer of motor vehicles as well as the largest market for new vehicles, and has remained the largest for each through 2013. China's motor vehicle production in 2013 was 22.1 million vehicles versus 11.0 million for the United States, while Chinese motor vehicle sales in that year were 22.0 million compared to 15.9 million in the United States. (14)
* General Motors (GM) reported that it sold more cars and trucks in China than in the United States each year from 2010 to 2013. (15)
Major U.S. Imports from China
China was the largest source of U.S. merchandise imports in 2013, at $440 billion, up 3.5% over the previous year. During the first five months of 2014, U.S. imports from China rose by 4.5% year-on-year. China's share of total U.S. merchandise imports rose from 8.2% in 2000 to 19.1% in 2010, dropped to 18.1% in 2011, but rose to 18.7% in 2012 and to 19.4% in 2013. 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, to first in 2007-2014. The top five U.S. imports from China in 2013 were computer equipment, communications equipment, miscellaneous manufactured products (such as toys and games), apparel, and semiconductors and other electronic parts (see Table 4). China was also the third-largest source of U.S. agricultural imports at $4.6 billion. China was the 10th-largest source of U.S. imports of private services at $13.0 billion in 2012. (16)
Throughout the 1980s and 1990s, nearly all U.S. imports from China were low-value, labor-intensive 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 have been comprised of 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 2013 totaled $145.9 billion. ATP products accounted for 33.1% of total U.S. imports from China, compared with 19.2% ($29.3 billion) in 2003. In addition, ATP imports from China accounted for 36.4% of total U.S ATP imports (compared with 14.1% in 2003). U.S. ATP exports to China in 2013 were $29.1 billion; these accounted for 23.9% of total U.S. exports to China and 9.1% 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. The United States ran a $116.8 billion deficit in its ATP trade with China in 2013, 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.
China as a Major Center for Global Supply Chains
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 (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 being made in China (in many cases, by foreign firms in China). To illustrate, in 1990, 47.1% of the value of U.S. manufactured imports came from Pacific Rim countries (including China); this figure declined to 46.2% in 2013. (17) Over this period, the share of total U.S. manufactured imports that came from China increased rose from 3.6% to 25.9%. In other words, while China was becoming an increasingly important source for U.S. manufactured imports, the relative importance of the rest of the Pacific Rim (excluding China) as a source of U.S. imports was declining, in part because many multinational firms were shifting their export-oriented manufacturing facilities to China (see Figure 3). In 1990, China accounted for 7.7% of U.S. manufactured imports from all Pacific Rim countries, but by 2013, this figure grew to 55.9%.
Another illustration of the shift in production can be seen in the case of U.S. computer equipment imports, which constitute the largest category of U.S. imports from China (on an NAIC basis, 4-digit level). In 2000, Japan was the largest foreign supplier of U.S. computer equipment (with a 19.6% share of total U.S. imports), while China ranked fourth (with a 12.1% share). By 2013, Japan's ranking had fallen to fourth; the value of its shipments dropped by 70.2% over 2000 levels, and its share of U.S. computer imports declined to 3.8% (2013). China was by far the largest foreign supplier of computer equipment in 2013 with a 64.0% share of total U.S. computer equipment imports, compared to 12.0% in 2000 (see Figure 4). While U.S. imports of computer equipment from China from 2000 to 2013 rose by 725.1%, the total value of U.S. computer imports worldwide rose by only 55.1%.18 A study by the U.S. International Trade Commission (USITC) estimated that in 2002 over 99% of computer exports in China were from foreign-invested firms in China. (19) Taiwan, one of the world's leaders in sales of information technology, produces over 90% of its information hardware equipment (such as computers) in China. Computer equipment, like many other globally traded products, often involves many stages of production, using parts and other inputs made by numerous multinational firms throughout the world, a significant share of which is assembled in China. The globalization of supply chains makes it increasingly difficult to interpret conventional U.S. trade statistics (see text box below).
Global Supply Chains, China, and the Apple iPod: Who Benefits? Many U.S. companies sign contracts with Taiwanese firms to have their products manufactured (mainly in China), and then shipped to the United States where they are sold by U.S. firms under their own brand name. In many instances, the level of value-added that occurs in China (often it simply involves assemblage) can be quite small relative to the overall cost/price of the final product. One study by researchers at the University of California looked at the production of a 2005 Apple 30 gigabyte video iPod, which is made in China by Foxconn, a Taiwanese company, using parts produced globally (mainly in Asia). The study estimated that it cost about $144 to make each iPod unit. Of this amount, only about $4, or 2.8% of the total cost, was attributable to the Chinese workers who assembled it; the rest of the costs were attributable to the numerous firms involved in making the parts (for example, Japanese firms provided the highest-value components--the hard drive and the display). (20) From a trade aspect, U.S. trade data would have recorded the full value of each iPod unit imported from China at $144 (excluding shipping costs) as originating from China, even though the value added in China was quite small. The retail price of the iPod sold in the United States was $299, meaning that there was a mark-up of about $155 per unit, which was attributable to transportation costs, retail and distributor margins, and Apple's profits. The study estimated that Apple earned at least $80 on each unit it sold in its stores, making it the single largest beneficiary (in terms of gross profit) of the sale of the iPod. The study 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, has helped enable it to become a highly competitive and profitable firm (as well as a source for high-paying jobs in the United States). The iPod example illustrates that the rapidly changing nature of global supply chains has made it increasing difficult to interpret the implications of U.S. trade data. Such data may show where products are being imported from, but they often fail to reflect who benefits from that trade. Thus, in many instances, U.S. imports from China are really imports from many countries.
U.S.-China Investment Ties (21)
Investment plays a large and growing role in U.S.-China commercial ties. (22) 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. A significant share of China's investment in the United States is comprised of U.S. securities, while FDI constitutes the bulk of U.S. investment in China. The Treasury Department 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." 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." (23) BEA reports data on FDI flows to and from the United States. (24) China has also invested in a number of U.S. companies, projects, and various ventures which do meet the U.S. definition of FDI, and thus, are not reflected in BEA's data.
China's Holdings of U.S. Public and Private Securities (25)
China's holdings of U.S. public and private securities are significant. (26) These 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 large holdings of U.S. securities can be largely attributed to its policy of intervening in exchange rate markets to limit the appreciation of its currency to the U.S. dollar (discussed in more detail below). For example, the Chinese government requires Chinese exporters (who are often paid in dollars) to turn over their dollars in exchange for Chinese currency. As a result, the Chinese government has accumulated a significant amount of dollars. (27) Rather than holding onto U.S. dollars, which earn no interest, the Chinese government has chosen to invest many of them into U.S. Treasury securities because they are seen as a relatively safe investment. (28) China's investment in public and private U.S. securities totaled $1.7 trillion as of June 2013. (29)
U.S. Treasury securities, which help the federal government finance its budget deficit, are the largest category of U.S. securities held by China. (30) As indicated in Table 5 and Figure 5, China's holdings of U.S. Treasury securities increased from $118 billion in 2002 to $1.3 trillion as of April 2014, making China the largest foreign holder of U.S. Treasury securities (it overtook Japan as the largest holder in 2008). China's holdings of U.S. Treasury securities as a share of total foreign holdings rose from 9.6% in 2002 to 26.1% in 2010 (year-end), but then declined to 21.9% in December 2013 and to 21.2% as of April 2014.
Some analysts have raised concerns that China's large holdings of U.S. debt securities could give China leverage over U.S. foreign policy, including trade policy. They argue, for example, China might attempt to sell (or threaten to sell) a large share of its U.S. debt securities as punishment 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. Such a move 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. Analysts also note that, while China is the largest foreign owner of U.S. Treasury securities, those holdings are equal to only 7.3% of total U.S. public debt (as of December 2013). Finally, it is argued that, as long as China continues to largely peg the RMB to the U.S. dollar, it has little choice but to purchase U.S. dollar assets in order to maintain that peg.
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. (31)
Bilateral Foreign Direct Investment Flows
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 could greatly expand commercial ties.
The U.S. Bureau of Economic Analysis (BEA) is the main federal agency that collects data on FDI flows to and from the United States. (32) Its data indicate that U.S. FDI in China is significantly higher than China's FDI in the United States. (33) BEA reports that the stock of U.S. FDI in China through 2012 was $51.4 billion, down from $59.0 billion in 2010, reflecting an outflow of funds (divestment) from China back to the United States. (34) BEA estimates that U.S. majority-owned affiliates in China employed 1.4 million workers in China in 2011, of which 690,000 were in manufacturing. (35)
BEA's main FDI data measurement puts the stock of Chinese FDI in the United States through the end of 2012 at $5.2 billion on a historical-cost (or book value) basis. In 2012, Chinese FDI flows to the United States were $1.4 billion. However, these data do not reflect FDI that Chinese investors may have made through offshore locations (such as Hong Kong) to invest in the United States. To reflect this, the BEA attempts to measure the level of FDI inflows according to the country of "ultimate beneficial owner" (UBO). These measurements nearly double the estimated level of Chinese FDI in the United States. On a UBO basis, cumulative Chinese FDI in the United States rose from $2 billion in 2009 to $10.5 billion in 2012 (see Table 6 and Figure 6).
Some analysts contend that the BEA's data on China's FDI in the United States do not fully capture all investments. For example, the Rhodium Group (a private research consultancy and advisory company) estimates that annual Chinese FDI in the United States rose from $3.4 billion in 2009 to $14.1 billion in 2013. They estimate cumulative Chinese FDI in the United States from 2000 to 2013 at $36.5 billion (see Figure 7). (36) They further maintain that in 2013, Chinese FDI flows to the United States (for the first time) were larger than U.S. FDI flows to China. (37) Rhodium Group's estimates total Chinese FDI in the United States differ than BEA's data. (38)
Chinese Companies in the United States Although the level of Chinese FDI in the United States is relatively small, many Chinese firms view the United States as a key part of their efforts to become more globally competitive companies, move closer to their U.S. customers, circumvent perceived trade and investment barriers (such as the Buy American Act), and avoid U.S. trade remedy measures (such as antidumping duties). Some examples of Chinese FDI in the United States include the following: The Dalian Wanda Group Corporation Ltd. on May 21, 2011, announced that it had signed a merger and acquisition agreement to acquire AMC Entertainment (the world's second-largest theater chain) for $2.6 billion. Suntech Power Holdings Co., Ltd., the world's largest producer of solar panels, opened a solar plant in Goodyear, Arizona, in October 2010, employing 100 workers. However, in March 2013, the company announced it planned to close the plant, citing higher production costs exacerbated by U.S. anti-dumping import duties imposed on solar cells and aluminum, as well as global solar module oversupply. (39) Sany Group, a global producer of construction equipment, founded Sany America Inc. in 2006, headquartered in Peachtree City, Georgia. In 2007, it announced it would invest $100 million to create and establish a manufacturing facility for constructing and engineering Sany products, with expected employment of 300 workers by the time the project is completed. (40) Wanxiang Group, an automotive parts manufacturer, established Wanxiang America Corporation in 1994, based in Illinois. Over the past decade, Wanxiang America reportedly has purchased or invested in more than 20 U.S. firms and employs 5,000 U.S. workers--more than any other Chinese company. (41) In January 2013, Wanxiang America acquired nearly all of AI23 Systems, a manufacturer of advanced lithium-ion batteries, for $256.6 million. Pacific Centuries Motor (now a subsidiary of AVIC Automobile Industry Co., Ltd, a state-owned firm) purchased Nexteer Automotive, a Michigan-based firm that producers steering and driveline systems, for an estimated $450 million. (42) Tianjin Pipe Corporation, China's largest steel pipe-maker, announced in 2009 that it planned to spend $ I billion to construct a mini-mill facility in Gregory, Texas, that will manufacture steel products from recycled scrap steel. Over the first 10 years of operation, the project is projected to boost the local economy by $2.7 billion and generate $327 million in direct employee salaries. (43) Haier Group, a major global appliance and electronics firm, maintains its corporate headquarters for Haier America in New York City, has sales offices in 13 U.S. states, and operates a $40 million refrigerator plant in Camden, South Carolina (employing 120 people), reportedly the first U.S. manufacturing facility built by a Chinese firm (2000). ZTE Corporation, one of China's largest telecommunications manufacturers, established a U.S. presence in 1995. ZTE USA is headquartered in Dallas, Texas, and maintains R&D facilities in five U.S. states. Huawei Technologies is a leading global information and communications technology solutions provider. Since gaining a U.S. presence in 2011, Huawei has reportedly partnered with 280 U.S. technology providers, with total procurement contracts exceeding $30 billion, covering such items as software, components, chipsets, and services. In February 2012, Huawei announced procurement contracts with U.S. firms worth $6 billion. (44) Golden Dragon Precise Copper T ube Group Inc., one of the world's largest precise copper tube manufacturers, announced in February 2012 that it planned to build a $100 million manufacturing facility in Alabama.
In addition to China's FDI in the United States and its holdings in U.S. Treasury securities, China (as of June 2012) held $221 billion in U.S. equities (such as stocks), up from $3 billion in June 2005. It also held $202 billion in U.S. agency securities, many of which are asset-backed (such as Fannie Mae and Freddie Mac securities), (45) and $22 billion in corporate bonds. The China Investment Corporation (CIC), a sovereign wealth fund established by the Chinese government in 2007 with $200 billion in registered capital to help better manage China's foreign exchange reserves, had financial assets totaling $482 billion at the end of 2011. CIC has been one of the largest Chinese purchasers of U.S. equities and other U.S. assets; it has stakes in such firms as Morgan Stanley, the Blackstone Group, and J.C. Flowers & Co. (46) It appears that many of the investments by the CIC and other Chinese entities have attempted to avoid political controversy in the United States by limiting their ownership shares to less than 10%.
Issues Raised by Chinese FDI in the United States
Many U.S. analysts contend that greater Chinese FDI in the United States, especially in "greenfield" projects (new ventures) that manufacture products or provide services in the United States and create new jobs for U.S. workers,47 could help improve bilateral economic relations and might lessen perceptions among some critics in the United States that growing U.S.-China trade undermines U.S. employment and harms U.S. economic interests.48 A number of analysts note that China's outward FDI has been growing rapidly since 2004 and is likely to continue in the years ahead. (49)
Such analysts contend that greater efforts should be made by U.S. policy makers to encourage Chinese firms to invest in the United States rather than block them for political reasons. In June 2011, President Obama issued an executive order establishing the "SelectUSA Initiative" to coordinate federal efforts to promote and retain investment in the United States. According to a White House factsheet issued during the U.S. visit of Chinese Vice President Xi Jinping in February 2012, China was already one of SelectUSA top 10 focus markets, and the Administration was planning a significant expansion of the initiative, including with resources dedicated to attracting Chinese investors and facilitating their investment. The two sides further pledged to deepen cooperation on infrastructure financing. (50) At the July 2013 session of the U.S.-China S&ED, the United States pledged to welcome investment from China, including those made by Chinese state-owned enterprises (SOEs).
Some critics of China's current FDI policies and practices contend that they are largely focused on mergers and acquisitions that are geared toward boosting the competitive position of Chinese firms and enterprises favored by the Chinese government for development (some of which also may be receiving government subsidies). Some argue that such investments are often made largely to obtain technology and know-how for Chinese firms, but do little to boost the U.S. economy by, for example, building new factories and hiring workers. Another major issue relating to Chinese FDI in the United States is the relative lack of transparency of Chinese firms, especially in terms of their connections to the central government. When Chinese SOEs attempt to purchase U.S. company assets, some U.S. analysts ask what role government officials in Beijing played in that decision. Chinese officials contend that investment decisions by Chinese companies, including SOEs and publicly held firms (where the government is the largest shareholder), are solely based on commercial considerations, and have criticized U.S. investment policies as "protectionist."
According to the Foreign Investment and National Security Act (FINSA) of 2007 (P.L. 110-149), the Committee on Foreign Investment in the United States (CFIUS) may conduct an investigation on the effect of an investment transaction on national security if the covered transaction is a foreign government-controlled transaction (in addition to if the transaction threatens to impair national security, or results in the control of a critical piece of U.S. infrastructure by a foreign person). (51) The House report on the bill (H.Rept. 110-24, H.R. 556) noted: "The Committee believes that acquisitions by certain government-owned companies do create heightened national security concerns, particularly where government-owned companies make decisions for inherently governmental--as opposed to commercial--reasons."
There have been several instances in which efforts by Chinese firms (oftentimes these have been SOEs or state-favored firms) have raised concerns of some U.S. policy makers and/or U.S. stakeholders:
* On January 23, 2014, Lenovo, a Chinese technology company, announced that it would purchase IBM's x86 server business for $2.3 billion.
* On January 29, 2014, Lenovo announced that it would acquire Motorola Mobility from Google for $2.9 billion.
* On May 29, 2013, Shuanghui International Holdings, the majority owner of China's largest meat processing enterprise (Henan Shuanghui Investment &
Development Company), announced it was seeking to purchase Smithfield Foods, the largest U.S. pork producer, for $7.1 billion (including the assumption of Smithfield's debt). If the merger goes through, it would represent the largest acquisition of a U.S. firm by a Chinese company to date. The proposed acquisition has raised a number of concerns among some U.S. policy makers. (52) On June 20, 2013, 15 members of the Senate Committee on Agricultural,
Nutrition, and Forestry sent a letter to the U.S. Secretary of the Treasury contending that the U.S. food supply is "critical infrastructure" and should be regarded as a national security issue during the CFIUS review process, urging that the Department of Agriculture and the Food and Drug Administration be represented in any CFIUS review of the transaction, and stating that review look to broader issues, including food security, food safety, and biosecurity. (53) The Senate Agriculture Committee also announced plans to hold a hearing on the transaction and to "more broadly examine how the government review process of foreign acquisitions of U.S. companies addresses American food safety, protection of American technologies, and intellectual property, and the effects of increased foreign ownership of the U.S. food supply." (54) In a June 21, 2013, letter to Administration officials, Senators Max Baucus and Orrin Hatch stated that the planned acquisition "has thrown a spotlight on China's unjustified trade barriers to U.S. meat exports." (55) A letter sent to Administration officials by Representative Rosa DeLauro and Senator Elizabeth Warren about the planned acquisition on June 26, 2013, raised a number of issues relating to food security, food safety, intellectual property rights protection, unfair Chinese trade practices, and U.S. global economic competitiveness and requested the Obama Administration to publicly respond to eight major concerns. (56) On July 10, 2013, the Senate Committee on Agricultural, Nutrition, and Forestry held a hearing on the proposed transaction. On September 26, 2013, Shuanghui International Holdings completed its purchase of Smithfield.
* In January 2013, Wanxiang America Corporation completed its acquisition of substantially all nongovernment business assets of A123 Systems, a manufacturer of lithium battery products. The acquisition included A123's automotive, grid, and commercial business assets, including technology, products, customer contracts, and U.S. facilities in Michigan, Massachusetts, and Missouri; its manufacturing operations in China; and its equity interest in Shanghai Advanced Traction Battery Systems Company (A123's joint venture with Shanghai Automotive). (57) Several Members of Congress expressed concerns over the national security implications of Wanxiang's acquisition of A123 Systems, as well as concerns that U.S. government grants that had been given to A123 Systems in the past might end up benefiting a Chinese company.
* On October 8, 2012, the chairman and ranking Member of the House Intelligence Committee (Representatives Mike Rogers and C.A. Dutch Ruppersberger) released a report recommending that U.S. companies considering doing business with Chinese telecommunications companies Huawei and ZTE to find another vendor, and that the CFIUS should block acquisitions, takeovers, or mergers involving Huawei and ZTE given "the threat to U.S. national security interests." The report went on to state that "we have serious concerns about Huawei and ZTE, and their connection to the communist government of China. China is known to be the major perpetrator of cyber espionage, and Huawei and ZTE failed to alleviate serious concerns throughout this important investigation." (58)
* On September 28, 2012, President Obama issued an executive order requiring Ralls Corporation, a Chinese-owned firm, to divest its interest in four wind farm project companies in Oregon that it acquired earlier in the year, due to national security concerns, reportedly because of their proximity to a naval test facility. (59) China's government-controlled media called the action "protectionist."
* On May 9, 2012, the Federal Reserve announced that it had approved (1) the application by Industrial and Commercial Bank of China Limited, China Investment Corporation, and Central Huijin Investment Ltd., to become bank holding companies by acquiring up to 80% of the voting shares of the Bank of East Asia (USA) National Association; (2) the Bank of China's application to establish a branch in Chicago, IL; and (3) the application by the Agricultural Bank of China Limited to establish a state-licensed branch in New York City. (60) In a letter to Federal Reserve Chairman Ben Bernanke, Senator Robert Casey noted that each of the entities approved by the Federal Reserve was state-owned, and he expressed concern that "these banks and their U.S. subsidiaries will use their state-support as a way to underprice U.S. banks that abide by U.S. law and do not have the support of a sovereign country behind them." (61)
* In May 2010, Huawei bought certain intellectual property assets of 3Leaf Systems (an insolvent U.S. technology firm) for $2 million. A February 2011 letter issued by Senators Jim Webb and Jon Kyl to then-Commerce Secretary Gary Locke and then-Treasury Secretary Tim Geithner stated: "We are convinced that any attempt Huawei makes to expand its presence in the U.S. or acquire U.S. companies warrants thorough scrutiny. Moreover, the 3Leaf acquisition appears certain to generate transfer to China by Huawei of advanced U.S. computing technology. Allowing Huawei and, by extension, communist China to have access to this core technology could pose a serious risk as U.S. computer networks come to further rely on and integrate this technology." (62) In February 2011, Huawei stated that it been formally notified by CFIUS that it should withdraw its application to acquire 3Leaf's assets, which it later did. (63) In an "Open Letter," Huawei invited the U.S. government to carry out a formal investigation on any concerns it may have about Huawei. (64)
* In May 2010, Anshan Iron and Steel Group Corporation (Ansteel), a major Chinese state-owned steel producer, announced plans to form a joint venture with Steel Development Company, a U.S. firm in Mississippi, to build and operate four mills to produce reinforcing bar and other bar products used in infrastructure applications, and one mill that would be capable of producing electrical and silicon grades of steel used in energy applications. (65) In July 2010, the Congressional Steel Caucus sent a letter signed by 50 Members to Secretary of the Treasury Tim Geithner, expressing concerns over the effect the investment would have "on American jobs and our national security." (66) At a February 2012 hearing on China's SOEs, Representative Visclosky, chairman of the Congressional Steel Caucus stated: "As a Caucus, we were concerned that the investment would allow a Chinese state-owned enterprise to pursue the government of China's aims, and not the aims of the employer, the American worker, or the market. We were concerned that this investment would allow the full force and financing of the Chinese government to exploit the American steel market from American soil. We also were concerned that China would have access to new steel production technologies and information regarding American national security infrastructure projects." (67)
* In February 2010, Emcore Corporation, a provider of compound semiconductor-based components, subsystems, and systems for the fiber optics and solar power markets, announced it had agreed to sell 60% interest in its fiber optics business (excluding its satellite communications and specialty photonics fiber optics businesses) to China's Tangshan Caofeidian Investment Corporation (TCIC) for $27.8 million. However, Emcore announced in June 2010 that the deal had been ended because of concerns by CFIUS. (68)
* In July 2009, China's Northwest Nonferrous International Investment Company, a Chinese SOE, made a $26 million offer to purchase a 51% stake in the Firstgold Corporation, a U.S. exploration-stage company. However, the deal reportedly raised national concerns within CFUIS because some of the mines controlled by Firstgold were near U.S. military installations. As a result, the Chinese firm withdrew its bid in December 2009.69
* In September 2007, Huawei announced plans, along with its partner, Bain Capital Partners, to buy the U.S. firm 3Com Corporation, a provider of data networking equipment, for $2.2 billion. However, the proposed merger was withdrawn in February 2008 following a review of the deal by CFIUS when Huawei and its partner failed to adequately address U.S. national security concerns raised by CFIUS members. (70)
In 2005, the China National Offshore Oil Corporation (CNOOC), a Chinese SOE, made a bid to buy UNOCAL, a U.S. energy company, for $18.5 billion, but widespread opposition in Congress led CNOOC to withdraw its bid. Some Members argued at the time that the proposed takeover represented a clear threat to the energy and national security of the United States, would put vital oil assets in the Gulf of Mexico and Alaska into the hands of a Chinese state-controlled company, could transfer a host of highly advanced technologies to China, and that CNOOC's bid to take over UNOCAL would be heavily subsidized by the Chinese government. Some Members argued that "vital" U.S. energy assets should never sold to the Chinese government. CNOOC officials referred to U.S. political opposition to the sale as "regrettable and unjustified." (71)
* In 2004, Lenovo Group Limited, a computer company primarily owned by the Chinese government, signed an agreement with IBM Corporation to purchase IBM's personal computer division for $1.75 billion. Some U.S. officials raised national security concerns over potential espionage activities that could occur in the United States at IBM research facilities by Lenovo employees if the deal went through. A review of the agreement by CFIUS took place in which IBM and Lenovo were able to address certain national security concerns and, as a result, the acquisition was completed in April 2005. (72)
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 of types of FDI allowed in China. According to the U.S.-China Business Council, China imposes ownership barriers on nearly 100 industries. (73) The OECD's 2012 FDI Regulatory Restrictiveness Index, which measures statutory restrictions on foreign direct investment in 57 countries (including all OECD and G20 countries, and covering 22 sectors), ranked China's FDI regime as the most restrictive, based on foreign equity limitations, screening or approval mechanisms, restrictions on the employment of foreigners as key personnel, and operational restrictions (such as restrictions on branching, capital repatriation, and land ownership). (74)
To a great extent, China's investment policies appear to be linked to industrial policies that seek to promote the development of sectors identified by the government as critical to future economic development. For example, since the early 1980s, the Chinese government has encouraged foreign auto companies to invest in China, but has limited FDI in that sector to 50-50 joint ventures with domestic Chinese partners. (75) In addition, the central government maintains a "Guideline Catalogue for Foreign Investment" (the latest revision was issued in January 2012), which lists FDI categories that are encouraged, restricted, or prohibited. (76) Many of the sectors under the "encouraged" category include high technology, green technology, and energy conservation, and pollution control. (77) Several of the sectors under the "restricted" category limit FDI to joint ventures (such as for rare earth smelting) or where the Chinese parties are the controlling shareholders (such as railway passenger transport companies). "Prohibited" sectors are those that fall under "national security" concerns (such as manufacturing of ammunition and weapons) or are categories where the government seeks to preserve state monopolies (such as postal companies) or protect Chinese firms from foreign competition (such as mining of rare earth elements).
The Chinese government also sets restrictions on FDI inflows during the investment screening process, or through its mergers and acquisition regulations, especially when seeking to protect pillar or strategic industries that the central government (as well as many provincial and local governments) seeks to promote. Many critics of China's investment policies contend that the Chinese government often requires foreign firms to transfer technology to their China partners, and sometimes to set up research and development facilities in China, in exchange for access to China's markets. (78) Foreign-invested firms in China face a number of challenges, including local protectionism, lack of regulatory transparency, IPR theft, and discriminatory license practices. A 2013 business survey by the American Chamber of Commerce in China (AmCham China) found that 35% of respondents stated that they were at a competitive disadvantage as a result of Chinese industrial policies that favored state-owned enterprises. (79) Some U.S. policy makers have suggested that Chinese investment in certain U.S. sectors should be restricted in response to Chinese policies that limit U.S. FDI in China in similar sectors. (80)
The United States and China have held negotiations on reaching a bilateral investment treaty (BIT) with the goal of expanding bilateral investment opportunities. U.S. negotiators hope such a treaty 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. However, some groups have argued that a BIT with China could hurt U.S. workers by encouraging more U.S. firms to relocate to China. (81)
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. (82) The new BIT model establishes mechanisms to promote greater transparency, labor and environment requirements, disciplines to prevent parties from imposing domestic technology requirements, and measures to boost the ability of investors to participate in the development of standards and technical regulations on a nondiscriminatory basis.
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 move that U.S. officials described as "a significant breakthrough, and the first time China has agreed to do so with another country." (83) A press release by the Chinese Ministry of Commerce stated that China was willing to negotiate a BIT on the basis of non-discrimination and a negative list, meaning the agreement would identify only those sectors not open to foreign investment on a non-discriminatory basis (as opposed to a BIT with a positive list which would only list sectors open to foreign investment).
At the Communist Party of China's 3rd Plenum meeting in November 2013, the government stated that it would reduce regulations on FDI in China and create a number of free trade zones that may open up certain sectors to foreign investment.
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|Title Annotation:||p. 1-26|
|Author:||Morrison, Wayne M.|
|Publication:||Congressional Research Service (CRS) Reports and Issue Briefs|
|Date:||Jul 1, 2014|
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