After releasing a report based on a top-to-bottom review of U.S. trade policy with China, U.S. Trade Representative (USTR) Rob Portman said, “we are entering a new phase of our trade relationship with China.” This change of policy is consistent with how the U.S. has treated other trade partners, but China remains unique in its influence on the U.S. and the world.
The February 14 release of the report occurred just four days after the Commerce Department released statistics on U.S. trade in goods and services for 2005. The trade deficit of $725 billion in 2005 is a major political problem for the Administration, and China played a key role in the numbers. The U.S. had a $56 billion trade surplus in services for all countries with exports of $378 billion and imports of $322 billion. For trade in goods, U.S. businesses exported $42 billion of goods to China and imported $243 billion of goods from China for a difference of $201 billion, over 25 percent of the total deficit in trade in goods. U.S. exports to China have been growing by over 20 percent per year recently, but started from a small base. The next largest deficit in trade in goods was with Japan at $83 billion, followed by Canada, our largest trading partner, with a deficit of $77 billion.
The report, “U.S. China Trade Relations: Entering a New Phase of Greater Accountability and Enforcement,” notes that 30 years ago China was mostly closed to international commerce; now it is the third largest country in total trade. Portman said that the first phase of our trade relationship occurred from 1986 to 2001 when the U.S. worked with China to join the WTO so it would be subject to the same rules as other trade partners. The second phase was 2002 to 2005 when China was making the transition under the WTO rules. This new phase is “one in which China is recognized as a ‘mature’ and successful member of the global trading system.”
This focus on phases of trade relationships is consistent with past experiences. Japan’s domestic and trade policies were not major issues for the U.S. government when Japan joined the General Agreement on Tariffs & Trade in 1955, but became important in the 1970s when Japan became competitive in both goods and services. The same was true for Korea when it joined in 1967. Brazil and Malaysia are now internationally competitive in some industries, and their policies face increased scrutiny.
Portman outlined five action areas. The first is rigorous enforcement of existing rules. A China Enforcement Task Force has been created at USTR led by a Chief Counsel for China. The second area is increased information collection on China’s economy and trade to anticipate challenges in the years ahead. The third step is to place a trade negotiator in China to work with U.S. businesses and Chinese officials. The only other location where the U.S. has such a position is with the EU in Brussels, Belgium. The fourth action area is to enhance cooperation with our other trading partners. The U.S. is the only country to have brought a case against China to the WTO, but is not alone in its concerns with issues like intellectual property rights and following through on WTO commitments. The last area of action is to strengthen U.S. economic and trade relationships in Asia and the Pacific area.
It is easy to forget the years of good trade and political relations the U.S. has had with much of Asia. The report explains that the trade deficit increased with China while the share of the total U.S. trade deficit represented by the Asian Pacific rim, which includes China, has fallen from 57 percent in 1999 to 43 percent in 2005. In some industries Chinese companies have become the final assemblers of products using some parts made elsewhere in Asia.
There are solid reasons to believe that this new trade policy effort with China will be meaningful and successful. Chinese trade is a political problem too big to be ignored. The uncertainties of the first few years of Chinese participation in the WTO are now behind us. Other developed countries have expressed similar concerns as the U.S.
The biggest challenge is to avoid letting trade rule enforcement morph into trade protectionism. As the third largest trader in the world, China has become too big in trade to allow a slash and burn mentality to pervade trade policy. The report notes that, “Together, the U.S. and China have accounted for roughly half of the economic growth globally in the past four years.” With most countries in the EU continuing to pursue economic policies that retard economic growth and developing countries like India and Brazil not quite strong enough economically to propel the world economy, the U.S. and China will continue to be economic leaders over the next few years.
This increased focus on China should be good for U.S. agriculture with total exports to China in 2005 of $5.2 billion and imports from China of $1.9 billion. The biggest export products in 2005 were soybeans at $2.3 billion, cotton at $1.4 billion and hides and skins at $0.6 billion. U.S. imports of Chinese processed fruits and vegetables, $453 million in 2005, fruit and vegetable juices, $187 million, and fresh fruit ,$70 million, have increased in recent years, and complaints about subsidies and dumping have been raised. U.S. corn exporters have also complained about the impact of Chinese corn export subsidies in third country markets. Increased enforcement should allow a more thorough investigation of these issues.
Transitions in international trade are normal. If the USTR can provide leadership in this time of transition in Chinese-U.S. trade policy, economic disruptions can be avoided, rights of U.S. businesses protected and a template established for treating other countries as increased international trade empowers countries to climb the ladder of economic growth.