US-China Relations (3rd Ed)
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trade surpluses and large-scale foreign investment saw China accumulate the
world’s largest foreign exchange reserves. The value of the reserves reached
more than $3 trillion in the past six years. 17
In assessing China’s major trading partners, it is important to keep in
mind differences between Chinese trade data and those of some of its major
trading partners. The differences exist because a large share of China’s trade
(both exports and imports) passes through Hong Kong, which reverted back
to Chinese rule in July 1997 but is treated as a separate customs area by most
countries, including China and the United States. China treats a large share of its exports through Hong Kong as Chinese exports to Hong Kong for statistical purposes, while many countries, including the United States, that import
Chinese products through Hong Kong generally attribute their origin to Chi-
na for statistical purposes.
As a result, trade data from the United States showed that the importance
of the US market to China’s export sector was much higher than was re-
flected in Chinese trade data. Based on US data on Chinese exports to the
United States, and Chinese data on total Chinese exports, it was estimated
that Chinese exports to the United States as a share of total Chinese exports
grew from 15 percent in 1986 to 33 percent in 2004 and then declined in
following years, amounting to 18 percent of Chinese exports in 2015. 18
Reflecting the importance of foreign investment in the Chinese economy
and trading relationships, a high level of Chinese exports was from foreign-
funded enterprises in China. According to Chinese data, about half of its
trade was conducted by such enterprises. The largest share of these enter-
prises was owned by investors from Hong Kong and Taiwan, as well as
growing numbers of investors from South Korea, Japan, the United States,
and Southeast Asia. Some of the foreign entrepreneurs shifted their labor-
intensive, export-oriented firms to China to take advantage of low-cost labor
and other cost benefits. A significant share of the products made by such
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firms was exported to the United States. Chinese data indicated that the share
of China’s exports produced by foreign-invested enterprises in China rose
from 2 percent in 1986, to 41 percent in 1996, to 57 percent in 2004, and to
58.5 percent in 2005. In 2014 foreign-invested enterprises accounted for 46
percent of Chinese exports and 46 percent of China’s imports. Such foreign
firms dominated China’s high-technology exports. 19
China’s abundance of cheap labor made it internationally competitive in
many low-cost, labor-intensive manufactures. As a result, manufactured
products constituted an increasingly large share of China’s trade. Meanwhile,
a large share of China’s imports, such as raw materials, components, parts,
and production machinery, was used to manufacture products for export. For
example, China imported cotton- and textile-production machinery to pro-
duce textile and apparel items. A substantial amount of China’s imports
comprised parts and components that were assembled in Chinese factories
and then exported. Major products in these efforts included consumer elec-
tronics and computers. 20
Viewed in comparison to the United States, the world’s top economy, the
recent growth of Chinese trade was impressive. 21 In 1995, US total trade was $1.39 trillion or five times that of China’s $281 billion. In 2007 US total
trade of $3.116 trillion was 1.4 times that of China’s $2.175 trillion. China
became a major trading nation and an increasingly competitive rival to the
United States in more industries. Given the rise of international supply
chains, China’s economy also complemented that of the United States in
certain areas. US companies joined many other foreign firms in relying on
China to manufacture products designed, advertised, and distributed by the
home (American-based) part of the multinational corporation; or they manu-
factured in the United States using Chinese components; or they produced
components in the United States for assembly in China.
In 2011 US merchandise trade was $3.745 trillion and the merchandise
trade of China (not including Hong Kong or Macau) was $3.641 trillion. In
2012 China’s merchandise trade valued at $3.87 trillion surpassed that of the
United States valued at $3.82 trillion, making China the world’s largest trad-
ing nation. 22 As this trend developed, Chinese trading partners were seen as possibly inclined to rely more on China than on the United States both as a
market for exports and a source of imports. However, such a shift was offset
by the fact—well illustrated in the international economic crisis beginning in
2008–9—that Chinese trade and the trade of Asian and other countries linked
with production chains focused on China—depended very heavily on exports
to the United States and the European Union. 23
The scope of Chinese trade grew commensurate with its rapidly increas-
ing size. China for several years surpassed the United States in overall trade
with Northeast Asia, Southeast Asia, Australia/Oceania, Africa, and Brazil. 24
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191
China’s rising trade prominence in international markets went hand in
hand with the rise in China’s importance as a destination for and source of
FDI. As much of Chinese trade was done by foreign-invested enterprises in
China, China was in the lead among developing countries in receiving
foreign investment. Annual utilized FDI in China reached $116 billion in
2011; the figure was $118 billion in 2016. 25
At the same time, Chinese companies beginning in recent years have been
urged by the Chinese government to increase what had been more limited
Chinese investment abroad. It remained difficult to measure the extent and
importance of these investments and their significance for data on foreign
investment into China. In recent years, more than half of Chinese overseas
investment was shown in Chinese data to go to Hong Kong, the Cayman
Islands, and the British Virgin Islands. The accounting rules in these locales
were such that they were seen to provide tax havens and to allow Chinese
firms to seek advantage by investing there, and from those locations to send
investment back into China. 26
With government support came strong growth in outbound Chinese in-
vestment. China was the world’s fifth-largest foreign investor in 2010, with
outbound Chinese investment valued at $59 billion. 27 According to UN data, China provided $101 billion in investment in 2013; it ranked as the third-largest source of global FDI that year. The stock of China’s outward FDI
through 2013 was estimated at $512 billion. In 2016 China’s outbound in-
vestment was valued at $161 billion. 28 How much of these flows were to tax havens, how much they involved finance and nonfinance investment, and
other uncertainties remained to be determined, though the rise of China’s
importance as an international investor was clearly growing rapidly. 29
China’s foreign aid remains difficult to assess, given a lack of official and
reliable
data. The China Statistical Yearbook 2003–2006 released an annual aid figure of $970 million, but specialists judged that this did not include
loans, a main form of Chinese aid. A 2007 US study judged that China’s
annual aid ranged in value between $1.5 billion and $2 billion. 30 Studies that inventoried various reports of loans, state-sponsored investment, and other
official Chinese financing came up with much larger figures, though aid
specialists judged that much of these efforts would not qualify as aid and that it was difficult to determine when and whether reported aid and loan pledges
were ever actually made and disbursed. The wide range of Chinese financing
at times involved interest-free or concessional loans, but it also involved
trade and investment agreements, including arrangements whereby Chinese
loans were to be repaid by commodities (e.g., oil) produced as a result of the
development financed with China’s help. 31
The Chinese government’s first white paper on foreign aid was released
in April 2011; it provided an overall figure of China’s cumulative foreign
assistance and data on other trends, but not enough information to determine
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the cost of Chinese assistance to specific countries or during specific times.
The second Chinese white paper on foreign assistance was issued in 2014; it
offered better information focused on the three-year period 2010–12. China
provided $14.4 billion in grants, interest-free loans, and concessional loans in that period. 32
China also was important as a recipient of considerable foreign assis-
tance. Because of the difficulties in assessing the costs and scope of Chinese
assistance efforts and the varied and complicated channels of foreign assis-
tance to China, there remained considerable uncertainty as to what degree
China was a net provider of foreign assistance. Some estimates saw China
receiving each year international assistance valued at more than $6 billion. 33
The Economist in January 2015 reported that “as recently as 2010 it [China]
was still a net recipient of foreign assistance.” 34
GLOBAL ECONOMIC CRISIS AND RECESSION:
IMPLICATIONS AND ISSUES
Although Chinese financial institutions were not believed to have heavily
invested in US subprime securities, the global economic crisis that began in
the US financial sector in 2008 had a major impact on China’s economy.
China’s leading trading partners, the United States, the European Union, and
Japan, were pushed into a deep recession exacerbated by a major crisis in
world credit markets that markedly slowed lending needed for growth. Chi-
nese trade and foreign investment coming to China declined; the overall rate
of growth of the Chinese economy also declined. The Chinese government
implemented a two-year, $586 billion stimulus package, mainly dedicated to
infrastructure projects. Interest rates were cut repeatedly as were real estate taxes. The government increased export tax rebates for textiles, garments,
toys, and other export products hard hit by the decline in foreign demand for
Chinese products. It endeavored to revise tax policies and provide financial
support to domestic firms. 35
China’s international role in the crisis developed cautiously. Some Chi-
nese and Asian commentators at first asserted that China and its neighbors
could confidently ride out the economic crisis in US and Western markets.
They appeared in retreat by the end of 2008 as the impact of the financial
turmoil and recession in America and Europe began to have a major effect on
China and the region’s trade, manufacturing, currency values, and broader
economic stability. 36
Like its Asian neighbors, the Chinese government also was cautious in
taking the lead in international financial arrangements and commitments that
could involve significant risks for the Chinese economy in what increasingly
appeared to be a period of prolonged adverse international economic condi-
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193
tions. 37 On the whole, Chinese leaders stuck to the position that China’s top priority in the crisis was to sustain growth at home. Despite China’s continued large cumulative trade and current account surpluses, the Chinese
government took steps to keep the value of its currency low relative to the
US dollar and some other currencies, and to stimulate export growth through
tax changes and other measures. These steps helped Chinese export manufac-
turers, but they seemed to work to the disadvantage of China’s international
trade competitors in Asia and elsewhere. Meanwhile, despite sometimes
prominent Chinese criticisms of the existing international economic order in
the World Bank, the International Monetary Fund (IMF), and the WTO—the
existing order was said to have disadvantaged developing countries and sup-
ported the primacy of the US dollar—Chinese government investors, for the
time being at least, continued to see their interests best served by heavy
investment of their foreign exchange reserves in US Treasury securities.
Over time, world leaders including American and Chinese leaders ac-
knowledged a strong need for fundamental restructuring in the global econo-
my. The US and Chinese economies were the world’s largest, with China’s
rapidly growing GDP valued in nominal terms in 2011 at $7 trillion and the
US economy valued at $15 trillion. In terms of purchasing power parity
(PPP), China’s GDP was valued at $11.3 trillion and the US GDP at $15.1
trillion. There was broad recognition that the United States needed more
disciplined economic policies that would curb its massive current account
deficit, and China needed to reduce its dependence on exports and infrastruc-
ture and move toward more domestic consumption. Acrimonious US debate
on how to deal with US government budget deficits as well as economic and
trade policies continued with mixed and uncertain results through the 2012
election campaign and into the second term of the Barack Obama administra-
tion. China signaled its shift toward greater domestic consumption in a five-
year economic plan begun in 2011. The IMF reported some advance in
domestic consumption in China in 2011, though consumption as a percentage
of GDP remained low. Official and media commentary on both sides fea-
tured criticism of the other for not doing enough in dealing with perceived
dangerous and unsustainable global economic imbalances. 38
As discussed in chapter 7, a significant longer-term implication of the
crisis was related to Chinese views of American leadership and power. Chi-
nese officials and commentators had long debated the resiliency and decline
of American international leadership. The US economic crisis came from
gross negligence and mismanagement by American firms with weak govern-
ment oversight. In the eyes of Chinese observers, the previously admired US
economic model was discredited. And the economic crisis along with a pro-
longed gridlock in American governance and protracted wars in Southwest
Asia added to a Chinese perception of overall US weakness and decline.
Against that background, Beijing’s reliance of its state-directed e
lements in
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China’s hybrid capitalist economic policies was reinforced, despite US criti-
cism. And China’s willingness to challenge a weakened and preoccupied
United States on long-standing disputes and more recent disagreements in
US-China relations appeared stronger. As seen in chapter 7, that new willing-
ness to challenge the United States showed in early Chinese testing of the
incoming Obama government with regard to Taiwan, Tibet, and various
other economic and political issues. Such challenges would emerge with
considerable fanfare under the strong-man rule of party leader and President
Xi Jinping beginning in 2012.
TRADE AND RELATED ECONOMIC ISSUES
The context of controversy in US-China economic relations in the second
decade of this century rests heavily on growing American perception of
China as a “state capitalist” economy employing government-directed
means, seen as egregiously unfair by critics, in order to manipulate and
outmaneuver American firms as China seeks global leadership in key inter-
national industries. Earlier US engagement with China, premised on the ex-
pectation that increased trade and investment would lead China to liberalize
its economy along lines favored by the United States, has been seen as
failing. What has emerged is a determined economic competitor using a wide
variety of state-led industrial development and trade policies and practices
that come at the direct expense of the United States and other economies. 39
US Trade Deficit with China
The US trade deficit with China has continued to grow in recent years; it
leveled off in 2008, declined somewhat in 2009, but then rose again, reaching
record levels of $273 billion in 2010, $296 billion in 2011, and $315 billion
in 2012. The merchandise trade deficit with China was $367 billion in 2015
and $347 billion in 2016. It was the largest with any country or group of
countries. 40
Offsetting to a small degree the negative implications of the merchandise
trade deficit is a surplus in US service trade with China. In 2016 China was
the United States’ fourth-largest services trading partner at $69.6 billion, the third-largest services export market at $53.5 billion, and the eleventh-largest source of services imports at $16.1 billion. The United States ran a $37.3