billion services trade surplus with China, which was the largest services
surplus of any US trading partner. 41
The enormous deficit has been accompanied by long-standing complaints
voiced by the major candidates in the 2016 US presidential election cam-
paign, many in Congress, the media, and interest groups in the United States
who focus on the massive trade gap as a key indicator that China’s economic
Economic and Environmental Issues in Contemporary US-China Relations
195
and trade policies are unfair and disadvantageous for the United States. Chi-
nese officials publicly and privately resent US attempts to “politicize” the
trade deficit, which Chinese trade figures show as significantly less than
shown by US trade figures, largely because of the way China counts its
exports to Hong Kong that are actually going to the United States. They tend
to see the American complaints as “protectionist” efforts by special interests
in the United States that have been disadvantaged by international economic
trends associated with economic globalization. They tend to find little fault in Chinese policies or practices, and view American criticisms of China as
unjustified. 42
US exports to China grew markedly in recent years albeit from a relative-
ly low base; they were small compared with massive US imports from China.
The US merchandise sold was wide-ranging, including leading goods catego-
ries of aircraft and parts, oil seeds and grains, motor vehicles, semiconduc-
tors and electronic components, and waste and scrap. Chinese merchandise
sold to the United States tended to move from low-value consumer products
of past years to more advanced technology products, like communications
equipment, computer equipment, miscellaneous manufactured commodities,
semiconductors and other electronic components, followed by apparel and
footwear. An important dimension of the recent increase in US imports of
Chinese manufactured goods is the movement in production facilities from
other Asian countries to China. Various manufactured products that used to
be made in Japan, Taiwan, Hong Kong, South Korea, and Southeast Asian
nations and then exported to the United States are now being made in China
(in many cases by foreign firms in China using components and materials
imported from foreign countries) and exported to the United States. Such
processing trade, noted earlier, often does not provide much overall value for
the ultimate exporter, China. 43
The diversity of Chinese products sold to the United States includes agri-
cultural exports. The United States long viewed China as a major market for
US agricultural goods, and US farmers sold $20 billion in products to China
in 2015. 44
Chinese “State-Capitalism” and Its Implications for the
United States
The practices of the state-directed Chinese economy include extensive net-
works of trade and investment barriers, financial support, and indigenous
innovation policies that seek to promote and protect domestic sectors and
firms deemed by the government to be critical to the country’s future eco-
nomic growth; widespread government-directed cyber theft of US trade,
technology, and other economic secrets; selective implementing of WTO
obligations; government-led financial policies that promote high savings and
196
Chapter 9
allow surpluses favoring state-guided industries; and a history of managing
exchange rate policy to the advantage of China and the disadvantage of the
United States, among others. 45
US government agencies and many others argue that the Chinese govern-
ment’s intervention in various sectors through industrial policies has in-
creased in recent years. The central and local Chinese governments promote
industries deemed crucial to the country’s future economic development by
using various means that critics judge to be grossly out of line with interna-
tional norms, such as subsidies, tax breaks, preferential loans, trade barriers, foreign investment restrictions, discriminatory regulations and standards, export restrictions, technology transfer requirements imposed on foreign firms,
public procurement rules that give preferences to domestic firms, and weak
enforcement of intellectual property rights. 46
China’s state sector centers on SOEs, which account for more than 40
percent of China’s nonagricultural GDP. A wide range of industries where
Beijing has decided that the state should dominate include autos, aviation,
banking, coal, construction, environmental technology, information technol-
ogy, insurance, media, steel and other metals, oil and gas, power, railways,
shipping, telecommunications, and tobacco. The state-controlled banks pro-
vide generous funding for SOEs in various sectors selected by the govern-
ment. 47
“Indigenous Innovation”
A major focus of the government’s attention since 2008 has been to trans-
form China from a global center for low-technology manufacturing into a
major center for innovation by the end of this decade and a global innovation
leader by 2050. Concurrently, Beijing seeks to reduce sharply the country’s
dependence on foreign technology, notably that sold by advanced US firms
that lead in these fields. This stress on so-called indigenous innovation means that China curbs foreign sales in the China market while Beijing acquires
advanced technology through coercing American and other foreign high-
technology firms seeking access to the China market to share their advanced
technology with favored Chinese companies. Beijing also seeks such ad-
vanced technology through cyber and human industrial espionage, and the
acquisition of generally smaller high-technology foreign firms to gain access
to their advanced techniques for the benefit of the protected Chinese enter-
prise, while allowing no such acquisition of Chinese firms by foreign compa-
nies. 48
Economic and Environmental Issues in Contemporary US-China Relations
197
Technology Transfer Issues
Related to the broader US concerns with China’s “indigenous innovation”
comes concern about coerced technology transfer. When China entered the
WTO in 2001, it agreed that foreign firms would not be pressured by govern-
ment entities to transfer technology to a Chinese partner as part of the cost of doing business in China. However, many US firms argue that this is a common Chinese practice, although this is difficult to quantify because US busi-
ness representatives often appear to try to avoid negative publicity regarding
the difficulties they encounter doing business in China out of concern over
retaliation by the Chinese government. In addition, Chinese officials report-
edly pressure foreign firms through oral communications to transfer technol-
ogy (e.g., as a condition to invest in China), but they avoid putting such
requirements in writing to evade being accused of violating WTO rules. In
2011 then US Treasury Secretary Timothy Geithner charged that “we're see-
ing China continue to be very, very aggressive in a strategy they started
several decades ago, which goes like this: you want to sell to our cou
ntry, we
want you to come produce here. If you want to come produce here, you need
to transfer your technology to us.” Thirty-three percent of the respondents to
a 2012 AmCham China survey reported that technology transfer require-
ments were negatively affecting their businesses. 49
Restrictions on Information and Communications Technology
For the past ten years, many US and other foreign business groups have
registered increasing concerns over a continuing stream of Chinese laws and
regulations on information and communications technology products and
services that have the effect of limiting foreign companies’ access to this
important Chinese market. Several proposals say that critical information
infrastructure should be “secure and controllable,” an ambiguous term that
has not been precisely defined by Chinese authorities. Other proposals lay
out policies to promote indigenous information and communications technol-
ogy industries or require foreign firms to hand over proprietary information.
Overall, such requirements could have a significant impact on US firms,
which exported $12 billion of these kinds of services to China in 2015.
Summarizing US concerns, the Commerce Department said the Chinese re-
quirements would cause long-term damage in American efforts to participate
in China’s information and communications market valued at $465 billion in
2015. 50
Intellectual Property Rights (IPR)
For more than two decades, the United States, along with Japan and other
developed countries, has been pressing China to abide by internationally
198
Chapter 9
accepted IPR guidelines. Episodic progress was repeatedly upset by new
developments of Chinese infringements that disadvantaged US firms and
angered senior US officials. Most recently and discussed in more detail be-
low, China’s use of cyber attacks to steal American commercial technology
and other know-how prompted usually reticent President Obama and his
advisers to sharply criticize China and to publicly sanction a few of those
responsible. The US administration pressed hard for China to engage in
senior-level talks and seek agreements on how to curb the offensive Chinese
practice.
Steps to protect IPR go back to the early 1990s. In 1991 the United States
threatened to impose $1.5 billion in trade sanctions against China if it failed to strengthen its IPR laws. Although China later implemented a number of
new IPR laws, it often failed to enforce them, which led the United States to
threaten China once again with trade sanctions. The two sides reached a trade
agreement in 1995, which pledged China to take immediate steps to stem IPR
piracy by cracking down on large-scale producers and distributors of pirated
materials and prohibiting the export of pirated products; to establish mecha-
nisms to ensure long-term enforcement of IPR laws; and to provide greater
market access to US IPR-related products. 51
Under the terms of China’s WTO accession, China agreed to immediately
bring its IPR laws into compliance with the WTO agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS). Chinese officials
repeatedly highlighted advances in improved IPR protection in China and the
Office of the United States Trade Representative (USTR) stated on a number
of occasions that China made great strides in improving its IPR protection
regime, noting that it passed several new IPR-related laws, closed or fined
several assembly operations for illegal production lines, seized millions of
illegal products, curtailed exports of pirated products, expanded training for
judges and law enforcement officials on IPR protections, and expanded legit-
imate licensing of film and music production in China. 52
However, the USTR continued to indicate that much work needed to be
done to improve China’s IPR protection regime. Business groups in the
United States continued to complain about significant IPR problems in Chi-
na, especially in terms of illegal reproduction of software, retail piracy, and trademark counterfeiting. According to a US International Trade Commission report in 2011, US intellectual property–intensive firms that conducted
business in China in 2009 lost $48.2 billion in sales, royalties, and license
fees because of IPR violations in China. The Congressional Research Service
estimated in 2009 that counterfeits accounted for 15 to 20 percent of all
products made in China and accounted for 8 percent of China’s GDP. Chi-
na’s enforcement agencies and judicial system often lacked the resources or
the will needed to vigorously enforce IPR laws; convicted IPR offenders
generally faced minor penalties. In addition, while market access for US and
Economic and Environmental Issues in Contemporary US-China Relations
199
other foreign IPR-related products improved, high tariffs, quotas, and other
barriers continued to hamper US exports; such trade barriers were believed
by US analysts to be partly responsible for illegal IPR-related smuggling and
counterfeiting in China. In addition, China accounted for a significant share
of imported counterfeit products seized by US Customs and Border Protec-
tion officers ($110 million, or 62 percent of total goods seized, in FY-2011
and $1.1 billion, or 88 percent of total goods seized, in 2015). 53
Following a long list of US government measures to prompt the Chinese
government and Chinese businesses to respect American IPR and to adhere
to obligations undertaken in bilateral agreements and multilateral commit-
ments, the USTR in 2008 stated in a report that its top IPR protection and
enforcement priorities involved China and Russia. Among other charges, the
USTR meshed its complaint with an ongoing controversy over the safety of
products imported from China by stating that Chinese counterfeit products,
such as pharmaceuticals, electronics, batteries, auto parts, industrial equip-
ment, and toys “pose a direct threat to the health and safety of consumers in
the United States, China, and elsewhere.” 54
US firms contend that IPR piracy in China has worsened despite Chinese
government agreements to strengthen IPR enforcement and stamp out major
piracy concerns. American and other foreign businesses charge that poor IPR
protection is one of the most significant obstacles for doing business in
China. Some of their senior representatives have maintained that China’s lax
enforcement of IPR regulations is part of a deliberate Chinese government
effort to use IPR theft as part of broader efforts to advance China’s ambitions to become a major producer of capital-intensive and high-technology products.
In government testimony in 2010, a representative of the US Chamber of
Commerce offered a graphic indictment in charging that Chinese IPR poli-
cies were part of a coherent and government-directed, or at least government-
motivated, strategy to lessen China’s perceived reliance on foreign innova-
tions and IP. He charged, “China is actively working to create a legal envi-
ronment that enables it to intervene in the markets for IP, help its own
companies ‘reinnovate’ competing IPR as a substitute to
American and other
foreign technologies and potentially misappropriate US and other foreign IP
as components of its industrial policies and internal market regulations. . . .
The common themes throughout these policies are: (1) undermine and dis-
place foreign IP; (2) leverage China’s large domestic market to develop
national champions and promote its own IP, displacing foreign competitors
in China; and (3) building on China’s domestic successes by displacing com-
petitors in world markets.” 55
200
Chapter 9
Cybersecurity Issues
Leaders of the US Intelligence Community and their congressional overseers
warned for several years that China’s use of human agents for industrial,
economic, and national security espionage was complemented by a massive
Chinese use of cyber espionage targeting information, held by American
companies, that would be useful in advancing China’s goal of innovation and
leadership in key economic areas. This issue eventually prompted substantial
US action. On May 19, 2014, the US Department of Justice issued a thirty-
one-count indictment against five members of the Chinese People’s Libera-
tion Army (PLA) for cyber espionage for commercial advantage against five
US firms and a labor union. This marked the first time the federal govern-
ment initiated such action against state actors. On April 1, 2015, President
Obama issued an executive order authorizing certain sanctions reportedly
targeting Chinese cyber thieves. Shortly before Chinese President Xi’s state
visit to the United States in September 2015, press reports indicated that the
Obama administration was considering the imposition of sanctions against
Chinese entities over cyber theft, possibly doing so even before the arrival of President Xi in Washington later that month. China sent a high-level delegation to Washington, DC. It held four days of talks with US officials over
cyber issues. The result of the talks allowed President Xi and President
Obama to announce at their summit that they had reached an agreement on
US-China Relations (3rd Ed) Page 35