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Balancing Trade with the US

Jan 23 , 2018
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center


(STR/AFP/Getty Images)

The economic relations between China and the United States were full of twists and turns in 2017. From the Mar-a-Lago summit between Xi Jinping and Donald Trump at the beginning of the year to the establishment of the four high-level dialogues including the US-China comprehensive economic dialogue, and from the launch of the 100-day action plan to improve trade ties to Trump’s state visit to China, it is safe to say that frequent contact has generated noticeable results in bilateral economic and trade cooperation.

However, friction is still a factor that could destabilize or disrupt the development of China-US economic and trade ties. In its first year, the Trump administration launched 79 anti-dumping and countervailing investigations against China. Frequent trade frictions, including unilateral sanctions such as Section 301 investigations, run counter to and harm the common interests of both sides. And in his first national security strategy report, Trump labeled China as the US’ strategic competitor.

According to China’s Ministry of Commerce, of China’s importers and exporters in 2016, 32 of the top 50 were foreign-funded companies. Import and export value by foreign-funded companies in the first half of 2016 accounted for 45.5% of the country’s total foreign trade. This showed that foreign companies and multinationals have “deeply integrated into and become an inseparable part of the Chinese market.”

China and the US, the two largest economies in the world, are at the heart of global growth. According to the International Monetary Fund, strong growth in China and new measures by the Trump administration helped boost global economic growth last year and will continue to play this role this year. The IMF forecasted that global economic growth would be 3.5% for 2017 while the growth rates for China and the US would be 6.7% and 2.1%, respectively. China and the US are important partners, and would jointly contribute more than 40% of global GDP growth.

The key factor that led to trade frictions between the two nations is the trade imbalance, but this has been overestimated and misunderstood. The US is the country with the biggest trade deficit in the world, but its trade deficit was not the consequence of dumping by China or any other countries, but the result of its long-unbalanced economic structure. Such a structural imbalance is not only related to its industrial policy, but is also closely related to the global division of labor in the industrial chains (the chains of consumption, production, and resources) and global value chains.

With the deepening of economic globalization, traditional statistical methods have limitations and are no longer able to paint a true picture of the global trade. The formation and development of the global industrial chains and the fast growth of international direct investment means that multinational corporations have an increasingly important role in the global economic system. For instance, with the industrial chains of many US multinationals being globalized, if they are not calculated and analyzed according to the rules of origin and the approaches of global industrial chains or value chains, it would be impossible to compile statistics on international trade.

According to United Nations Conference on Trade and Development data, the global value chain dominated by multinationals accounts for 80% of the global trade. Since China’s accession to the World Trade Organization, US multinationals are major beneficiaries of China’s processing trade. Statistics show that if associated transactions by multinationals are excluded, the US trade deficit will drop by two-thirds, and its trade deficit with China will decline by 30%. Furthermore, amid fast development of the global service trade, it has become extremely difficult to accurately measure the trade imbalance between China and the US. Trade, conducted by multinationals in the form of commercial presence, is not included in traditional trade statistics, and the huge difference so arising is, intentionally or not, ignored.

In fact, a trade policy oriented towards rectifying trade deficit may not necessarily meet the fundamental interests of the US. The essence of China-US economic and trade relations is win-win cooperation. At present, they are both at an important stage of transition and are each other’s market and partner, so they compete against and cooperate with each other, and there is still big potential for further cooperation. China is still the investment destination market with the greatest potential. It has the biggest consumer group and is poised to become the biggest consumption market in the world. China will have huge demand for high-quality products and services from the US, and this will help stimulate trade between the two nations.

China now opens wider to the world. The government has established 11 pilot free-trade zones to test and apply innovative systems and measures. During Trump’s state visit to China in November, the two countries signed commercial contracts and investment agreements valued at more than $250 billion, covering such industries as energy, manufacturing, agriculture, aviation, and automobiles. China, in accordance with its own timetable and road map, will gradually open its financial, education, and medical service industries.

After the 19th National Congress of the Communist Party of China, China has become more active in promoting the construction of an open global economy, and embraces globalization, trade liberalization, and facilitation of trade and investment with an open mind. China will improve its financial policies to expand imports, improve liberalization and facilitation of trade and investment, improve the business environment, and implement a system of pre-establishment national treatment plus a negative list across the board, and work to build an open domestic and global market. The 2017 version of the Catalogue for the Guidance of Industries for Foreign Investment further eased restrictions on foreign investment, with sectors restricted for foreign investment reduced from 93 to 63 in 2011.

China and the US are at different stages of economic development and have different regulatory approaches. The two countries need to vigorously negotiate a bilateral investment treaty. They need to gradually eliminate investment barriers and discriminatory investment policies, and provide all investors with open policies and fair treatment. They need to work together to improve the investment environment, national security reviews, and the protection of intellectual property rights, and improve the transparency and impartiality of their rules and policies.

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