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Addressing Concerns on
The Growing US Trade Deficit with China

Lijuan Zhang

COMMERCIAL DIPLOMACY

MASTER'S PROJECT

Advisor: Geza Feketekuty

March 5, 1999

ADDRESSING CONCERNS ON THE GROWING US TRADE DEFICIT WITH CHINA


 

TABLE OF CONTENTS

SECTION PAGE

  1. SCENARIO AND ISSUE
  2. OUTLINE OF THE PROJECT
  3. INTRODUCTION
  4. BACKGROUND
  5. ANALYSIS OF THE SUBSTANTIVE POLICY
  6. DOMESTIC STRATEGY
  7. NEGOTIATION STRATEGY
  8. MEDIA STRATEGY
  9. LEGISLATIVE STRATEGY
  10. WHITE PAPER
  11. EXHIBITS
  12. BIBLIOGRAPHY

SCENARIO AND ISSUE

PURPOSE

This is a project researched and prepared by Lijuan Zhang and required for the MA in Commercial Diplomacy (MACD) offered by the Monterey Institute of International Studies (MIIS). Lijuan Zhang is a Fulbright scholar from the People's Republic of China, and is a graduate of the MACD program. As a Chinese scholar, she has great interest in the study and research of US-China trade relations. This research project has been conducted as part of the program requirements for the MACD.

For purposes of this project, I will assume the role of Advisor working for the US-China Trade Promotion Council, with the responsibility to develop a comprehensive strategy to address US-China trade relations, focusing on concerns of US-China trade deficit issues.

The advisor on this project is Professor Geza Feketekuky, founder of the MACD program and a former senior trade official in the office of the United States Trade Representative (USTR).


ISSUE

The issue for the United States is how to resolve the growing trade deficit with China while maintaining and improving both the political and trade relationship between these two important nations.

China has clearly become a major participant in the world economy. It is virtually certain to become even more important in the future because of its size, dynamic economic growth, and continuing policy reforms. However, along with increasing US-China trade, there is growing concern regarding the trade deficit with China.

This project addresses the entire array of commercial, policy, and political issues now being discussed between the United States and China, and provides domestic, negotiation, media and legislative strategies regarding the US-China trade deficit issue.

 

RECOMMENDATIONS

This project conducts a comprehensive analysis of the US-China trade relations, and offers a range of recommendations for both the US and Chinese government as they undertake the always complex task of improving their relationship.

RECOMMENDATIONS FOR THE US GOVERNMENT:

The US government should take steps to improve public understanding of the US-China trade relationship and the evolving economic and political situation in China.

Specially, the US should take steps to:

1. Explain the progress that China has made regarding its trade policy practices.

2. Acknowledge China's progress towards a market economy.

3. Emphasize the importance of US-China trade in order to establish a more solid foundation for a constructive trade relationship with China.

RECOMMENDATIONS FOR THE CHINESE GOVERNMENT:

The Chinese government should accelerate its domestic reforms, consistent with its long-term economic development strategies.

Specially, the Chinese government should take steps to:

  1. Open its markets and improve economic efficiency by providing a more transparent policy regime.
  2. Accelerate its domestic reforms, such as state-owned enterprises (SOEs) reform, banking system, and social welfare system reform, consistent with its long-term development objectives.
  3. Establish a more open civil society and build a better understanding with the rest of the world.

 

OUTLINE OF THIS PROJECT

1. SCENARIO AND ISSUE

  • Issue
  • Recommendations

2. OUTLINE OF THE PROJECT

3. INTRODUCTION

  • Introduction
  • Recommendations to the US government
  • Recommendations to the Chinese government
  • Two views of the US-China trade imbalance

4. BACKGROUND

  • US-China trade
  • US Trade Deficit with China

          --Trade Deficit Background
          --Trade Structure
          --US Reactions

  • The Chinese Trade Performance

          --Chinese Trade Policy
          --Chinese Trade Pattern
          --China Reactions

5. ANALYSIS OF THE SUBSTANTIVE POLICY

  • The Commercial Issues
  • Substantive Policy Issues
  • The Political Landscape

6. DOMESTIC STRATEGY

  • Establishing the Consensus inside the US
  • Policy Strategy
  • Political Strategy

7. NEGOTIATION STRATEGY

  • US Negotiation Strategy
  • Chinese Negotiation Strategy
  • Negotiation Characteristics

8. MEDIA STRATEGY

  • Domestic Media Strategy
  • International Media Strategy
  • Memorandum
  • Press Release

9. LEGISLATIVE STRATEGY

  • Introduction
  • Goals and Objectives
  • Testimony before the House Subcommittee on Trade of the House Ways and Means

10. WHITE PAPER

  • Introduction
  • Causes of Trade Deficit
  • Actions Plan
  • China’s Response
  • Lessons for the Future

11. EXHIBITS

  1. Interests Analysis for Negotiation Strategy
  2. US Exports to Hong Kong and China by States
  3. US Trade with China (1998)
  4. Top Ten Countries with Which the US Trade (1998)
  5. Top Ten Countries with Which the US Has a Trade Deficit (1998)
  6. US Total Trade with China (1991-1997)
  7. Top US Imports from China (1991-1997)
  8. Top US exports from China (1991-1997)
  9. China’s Trade Balance with major Trading Partners (IMF)
  10. US Merchandize Trade Balances
  11. Two Views of US Trade Deficit with China
  12. China’s Trade Deficit with the World
  13. Post Congressional Votes on China’s Trade Status
  14. 1996 Poll on US-China Relations
  15. Sample Letter to House of Representative

12. BIBLIOGRAPHY


 

ADDRESSING CONCERNS ON THE GROWING US TRADE DEFICIT WITH CHINA

INTRODUCTION

As an advisor of a hypothetical organization—the US-China Trade Promotion Council, I will develop a comprehensive strategy to address the concerns of both the US and Chinese governments and industry regarding the growing US trade deficit with China.

There are three reasons for both the US and China to reduce tensions surrounding the bilateral trade imbalance.

First, China and the US are two of the most important nations in the world. China is the largest developing country while the US is the largest developed country. Working together, they can shape a more effective global trading environment.

Second, the US and China have mutual economic and trade interests. Bilateral trade between the US and China has developed rapidly since 1979, but the tensions generated by a growing trade imbalance have become a concern to both governments.

Third, in the interest of global stability, the US must work to help build a civil society in China.

At present, the US is deeply concerned over the growing trade deficit with China. US trade with China produced a 1997 deficit of $49.7 billion, up from $39.5 billion in 1996. Further, the US deficit with China is closing in on the US’s largest bilateral deficit, the deficit with Japan. Analysts believe this trend will result in the deficit with China surpassing the imbalance with Japan as early as this year. The trade imbalance issue will be one of many issues raised by opponents of Normal Trade Relations (NTR, formerly MFN) renewal. As China is a potential pre-eminent economic power for the 21st century, it is crucial for the US government to make bilateral and multilateral efforts in every forum to open the Chinese markets, and to put an end to the growing US trade deficit with China.

However, China argues that the US-China trade imbalance is not as large as the US claims. China also argues that it has made significant progress in its domestic economic regime and trade policy reform during the past ten years and is in position to join the international trade system and have normal bilateral trade relations with the United States. Additionally, China is prepared to take some further trade liberalization measures. However, China does not believe it should be required to do anything or take any measures that would disrupt its economic reform strategy and domestic economic and political stability.

As achievements are being made in various areas of economic and trade cooperation, the US and China still hold different views on the true size of the trade deficit issue (See Exhibit #8). However, viewed as a whole, development and cooperation between these two nations stand out as the main theme. Therefore, the best way to resolve these differences is a thorough and constructive dialogue leading to mutually supportive economic and political steps. Confrontation should be avoided because it will not help solve the differences.

To achieve this goal, I will provide strategies for building a consensus inside the US, and inside China. I will also suggest practical steps the US government can take to improve US-China trade relations, as well as steps the Chinese government can take to strengthen its trade policy reform, to further open markets, and to provide a better policy environment for foreign trade. I will develop separate strategies to address each aspects of this research project.

RECOMMENDATIONS TO THE US GOVERNMENT

The US government should take steps to improve public understanding of the importance of the US-China trade relationship, and the evolving economic and political situation in China. The following steps would be very helpful:

1. Explaining the progress that China has made regarding its trade policy practices and their impact on the US-China trade

A clear understanding of the trade deficit has profound implications for the national debate regarding US trade policy with China. At present, there are some misunderstandings about US interests in this area. These misunderstandings have spawned a number of debates about trade policy towards China. In order to improve US-China trade relations, the US government must help to educate and ensure the public that China has made important commitments and established a legal foundation for economic and administrative reform. Even with these efforts, enforcement will not occur overnight.

Areas of substantial Chinese trade policy progress include:

  1. Transparency and judicial review: China has committed to publish all trade-related laws and regulations and provide procedures for comment prior to their implementation.
  2. Trading rights: China granted private manufacturing enterprises and research institutes direct import and export rights since January 1, 1999.
  3. State trading: China has ensured that all State trading activities will comply with WTO requirements--trade will be conducted on commercial terms and information on pricing mechanisms for exported goods will be made available.

Other areas in which significant commitments have been made include:

  • Improved rules regarding the administration of special economic areas;
  • Implementation of China's import and export licensing regime;
  • Reduction of taxes and levies on imports and exports;
  • The elimination of WTO-inconsistent import prohibitions;
  • Commitments not to apply export subsidies to agricultural goods.

2. Demonstrating China’s progress towards a market economy

The establishment of a market economy system is crucial to China’s future. All trade and economic issues are closely related to how globally integrated China allows its economy to become. The more open the Chinese market system, the more opportunities the US industries will have. Therefore, for the Chinese government, the first priority should be to establish a complete market economic system within its Ninth Five-Year Blue Plan. There is no doubt that China has made substantial progress in the last ten years to decentralize its economy and trade. For example, most prices are decided by the market rather than by the government; SOEs may determine production levels and in many cases the prices of their products. These have created growing trade opportunities for the US industries.

3. Emphasizing the importance of US-China trade

These two important nations will play key roles in the global economy, since China is the largest developing economy and the US is the largest developed economy. The most important thing the US government can do at this time is to build a more harmonized relationship with China to convince the American people that China will play a crucial role in major international issues which the US will face in the decades to come, and that a normal trade relations with China is in America’s commercial and strategic interest. The President must convince Congress to pass legislation to establish normal trade relations with China.

At present, China is the sixth largest importer of US agricultural products, and the biggest importer of civilian aircraft from the US. US technology is highly respected the world over and China is creating a bright future for the US to export its technology. The US is now China’s 2nd largest trade partner while China has grown into the 4th largest trade partner with the US. It is clear that the US has greatly benefited from China's open-door policy.

With respect to jobs and growth, China has become the 6th largest agricultural market for US growers, with exports to China and Hong Kong now supporting over 400, 000 American jobs. Meanwhile, China is a crucial part of the recovery process from the Asian financial crisis, which already affects the US economy. However, the debate now within the administration is whether to initiate retaliatory actions against China or to give China some breathing room in view of the suffocating economic conditions in the region. The US should base its China policy on its long-term interests and be fully aware the US interest can only be served by a secure, stable and open China.

  1. Change the basis for calculating the bilateral balance by including Hong Kong in China. Also develop an analytical way for value-added trade balance.

The US import statistics has ignored entrepot trade and value added from entrepot trade, and this lead to over-estimate its imports from China. According to the US information, 20% of Chinese goods are directly shipped to the US, while the remaining 80% get into the US through a third place, mainly through Hong Kong. Therefore, the added value created at the third place after the goods have left China should not be calculated as exports from China. While only about a quarter of the US re-exports to China via Hong Kong was included in the US statistics of its exports to China.

Since Hong Kong is a part of China now, the US should change its statistical method, and include Hong Kong in its statistics regarding the US-China trade balance.

RECOMMENDATIONS TO THE CHINESE GOVERNMENT

The Chinese government should accelerate its domestic reforms and comply with its long-term economic development strategies already made. For these purposes, the following strategies need to be considered:

1. Explain to the public the necessity and benefits of further market access

China must explain to its own public that open markets are the trend of the world economy. Free trade, characterized by market access and fairness, accelerates economic growth and investment, raises real wages, and enhances productivity growth. Most businesses benefit from open markets because alternative sources of supply enhance competitive pressures on domestic firms, forcing them to improve their products and their methods of production to keep pace with the competition. By contrast, protection makes domestic industries lose opportunities and provides no pressure to improve competitiveness.

Currently, China’s main concern for further market opening is its domestic and infant industries. It is understandable to protect the domestic industry during a development period, but this protection must be eliminated in the end. In fact, China has benefited from its open door policy. Therefore, further opening of markets must be put on the trade policy agenda as soon as possible.

2. Inform the US public of China’s progress to improve free trade and promote the US's benefits from these efforts

One of the most important strategies the Chinese government can implement is to better educate the world about China. China has been pursuing a more open market for twenty years. However, the great achievements that China has made are not that well known to the US public. Therefore, China must inform the US public what has been accomplished and what can still be done towards free trade.

3. Continue the progress of establishing a civil society

China’s economic development has helped to make great improvements in human rights in recent years. People enjoy more democratic rights, and benefit from the fast growing economy. However, China still has more work in building a civil society, providing private interaction by individuals, associations, religious organizations, and businesses. With development of a good civil society and respect of individual citizens by government authorities, people can then enjoy their own lives by making individual choices. Meanwhile, China needs to work towards building an understanding with the rest of the world. By increasing opportunities for dialogues at all

levels of society, particularly with its main trading partners, China is moving towards a more open society.

4. Maintain momentum of domestic economic reforms

China must keep its domestic reform on schedule in order to build a solid foundation for a long-term economic growth and trade development. The Chinese government should be aware of the importance of its success and continue its current domestic reform, such as SOEs reform, banking system reform, and social welfare system reform.

5. Take some further trade liberalization measures consistent with the domestic reform strategy

The Chinese government should making use of the new opportunity created by its domestic reform to further liberalize its trade. The Chinese economy and trade are becoming an important part of the global economy. China must take some further trade liberalization measures, consistent with its domestic economic reform.

TWO VIEWS OF THE US-CHINA TRADE IMBALANCE

 

US VIEW

CHINA VIEW

IMBALANCE STATUS

Large Deficit

 

Small Deficit

 

 

 

 

INSIDE ARGUMENTS

The US argues that its trade deficit with China is caused by:

  • China’s lack of market access
  • Lack of policy transparency
  • Human rights violation
  • Non-predictability

China argues that the bilateral trade deficit is not as serious as the US described, because:

  • Statistical difference
  • Statistics based on Rules of Origin cannot reflect the situation of Sino-US trade balance
  • US export control against China is a major obstacle for bilateral trade balance

 

 

POLICY TOOLS UNDER DISCUSSION

  • Restrict imports from China
  • Revoke China’s normal trade relations
  • Block China’s WTO entrance
  • Trade sanctions
  • Try to explain the reasons of imbalance
  • Improve trade with other countries in case of the possible US trade sanctions
  • Trade retaliation

 

 

 

 

 

MY RECOMMENDATIONS TO BOTH GOVERNMENTS

To improve public understanding

  • Explain the progress that China has made regarding its trade policy practices and their impact on US-China trade
  • Demonstrate China’s progress towards a market economy
  • Emphasize the importance of US-China trade

To accelerate domestic reforms and comply with its long-term economic development strategies

  • Take steps to expand and keep on schedule with economic and administrative reform, including promote transparency and predictability
  • Expand market access
  • Continue the progress of establishing a civil society

 

BACKGROUND

US-China trade

China is one of the most important trading partners of the United States. According to Department of Commerce (DOC) statistics for 1998, total US-China trade measured $85.41 billion, a 13.4% increase over 1997, making China America's fifth-largest trading partner. In 1998, US exports to China climbed 11.3% from 1997 to $14.25 billion, while imports grew 13.8% to $71.15 billion. This created a new trade deficit with China of 56.9 billion at the end of 1998, causing the US trade deficit with China to expand by 18.6% to $11.5 billion, second only to Japan. This is one of the largest trade deficits.

Growing concern over the US trade deficit with China has plagued the bilateral relationship in recent years. Fueled in part by consistently strong US imports of toys, footwear, small electronic items, and apparel, the US deficit with China also has worsened due to Chinese market access restrictions, including both barriers at the border and restrictive regulations at all level of government. The deficit is the focus of discussions at the highest levels of both governments, and is one of the crucial issues on the 1998 US trade agenda.

US Trade Deficit with China

1. Trade Deficit Background

In 1997, the US merchandise trade deficit with China was $49.7 billion, an increase of $10.2 billion from 1996, and an approximate 50% increase since 1995, when the merchandise trade deficit with China stood at $33.8 billion. China marked the 11th straight annual increase in the deficit with the US.

Following the 1997 record deficit, the US merchandise trade deficit for 1998 was $56.9 billion. The deficit with China increased from $49.7 billion in 1997 to $56.9 billion in 1998. As the full impact of the Asian financial crisis is felt, the US trade performance will show a sharp deterioration. Steep devaluation of Asian currencies will make these products cheaper in the American market while making it harder for US exporters to sell into Asian markets. The widening trade gap is likely to add to the US government’s headaches. Within one year, the US trade gap with China will likely be worse than with Japan.

2. Trade Structure

The US Department of Commerce reported that the flood of Chinese clothing, shoes, and toys are main contributors to this growing trade gap.

In terms of trade in services for 1996, the US exported $3.1 billion to China and imported $2.0 billion from China, resulting in a positive services trade balance with China of $1.1 billion.

In terms of Foreign Direct Investment (FDI) in 1996, the stock of US FDI in China was $2.9 billion, an increase of 36% from the level of US FDI in 1995. At present, the US FDI flows to China continue to increase. US FDI in China is concentrated largely in the manufacturing and petroleum sectors.

3. Trade balance accountings

The US import statistics does not calculate value added from entrepot trade, and its export statistics does not calculate the US re-exports to China. Therefore, the size of US trade deficit with China has been largely exaggerated. For example, the average rate of value-adding of Chinese exports to the US via Hong Kong was 40.7% in 1996 and 1997, which was calculated as imports from China, and thus greatly over-calculated the US’s real import value from China.

4. US Reactions

The growing trade deficit with China is unacceptable to the US and it is becoming an increasingly important issue for both nations.

US industry continues to express concerns over China’s significant trade barriers. US parties assert that China is seeking to build international competitiveness by protecting various sectors.

The US government has complained that China’s lack of market access and transparency hurts the US and is doing very little to change the situation. For these reasons, the United States continues to block China’s entry into the WTO, and to impose trade sanctions on some Chinese products.

Chinese Trade Performance

  1. Chinese Trade Policy

China has increasingly strengthened the protection of foreign business under its legal system, and steadily improved its trade and investment policy environment.

In the past few years, China has taken a series of important measures in improving its trade regime and policies:

  1. In order to improve transparency, China has publicized all management documents that used to be deemed confidential.
  2. China lowered its import tariffs and brought down the average tariff from 35.3% to 23% in 1996, and pledged to further lower overall tariff rates to 15% by the year 2000.
  3. China has taken steps to phase out non-tariff measures and also set forth a timetable to further lift these barriers
  4. China has begun to open its market to foreign investors in such service sectors as domestic retailing, finance, and insurance.

However, China is not an open and free market. For example, China still maintains restrictive import policies, such as high tariffs and taxes. Although China reduced tariffs several times in 1996 and 1997, most of the tariff reductions have been on low volume imports. The Chinese government determines the level of import flows through licenses, quotas, and other non-tariff measures, such as the "automatic" registration requirements, electromechanical product import control measures, regulations on the administration of medical equipment, and camera import control measures.

  1. Chinese Trade Patterns
  1. Foreign direct investment (FDI) has been a key factor contributing to China’s large trade surplus. This trend has existed for a considerable period, due to the implementation of preferential policies by the Chinese government to attract foreign investments since 1979. In 1996, the utilized amount of FDI was $ 41.725 billion, and the US FDI in China was $3.44 billion. (Source: China’s General Administration of Customs).
  2. In 1997, mechanical and electrical products were the number one trading goods in both exports and imports. Other principal export goods include clothing and accessories, textile yarn, fabrics and their products, shoes and toys. Other principal import goods include primary plastics, steel, crude oil and refined oil, and integrated circuit and micro electronic components (Source: China’s General Administration of Customs).
  3. Chinese service trade moves slowly. Service trade opportunities, particularly in the financial services, telecommunications, distribution, and professional services, have been affected by a variety of limitations on foreign participation throughout China’s economy.

3. China Reactions

China is aware of US concerns regarding the trade imbalance. This has been highlighted through commercial and diplomatic channels especially through the long-lasting negotiation process of its WTO entry. However, China is focusing on further reforms in several fields, such as state-owned enterprises (SOEs), and banking system reform. Because of political and economic constraints, China cannot finish all of these reforms overnight. Therefore, the process of more fully opening the Chinese economy will take a relatively long period. The Chinese government still has a long way to go to build the domestic economic and political basis for major liberalization of its trade regime.

With respect to the trade deficit issue, China argues that the US exaggerated the deficit figure and the US statistics are faulty. China says the 1997 deficit was actually $16.4 billion rather than $47.9 billion (US statistics), and it attributes the discrepancy to US accounting methods. Meanwhile, China argues that US export controls against China are a major obstacle for US exports. For these reasons, China has tried to improve trade relations with other countries in the event of possible US trade sanctions.

 

ANALYSIS OF THE SUBSTANTIVE POLICY

1. THE COMMERCIAL ISSUES

To the US, the most important commercial issue is how the US firms’ commercial interests in China can be pursued.

(1) Constructive relations and balanced trade with China directly affect US firms’ business expansion in China

US firms' success in China is critical in order for them to maintain global competitiveness. China is the US's fifth largest trading partner. Since 1990, US exports to China have doubled, outpacing the growth of US exports to any other major export market. US manufactured goods, services, and farm exports to Hong Kong and China (a substantial portion of US exports to Hong Kong are re-exported to China) totaled roughly $35 billion in 1997 (See Exhibit # 2), and support close to 400,000 American jobs. As a large growing market, China can only provide great opportunities to US businesses on the basis of normal trade relations.

(2) Openness of the Chinese market and Chinese trade barriers affect US trade growth

China is one of the most important trading partners of the US, and it is going to play more crucial role in the global economy. Therefore, Chinese trade policies and practices have a substantive impact on the development of US trade.

(3) Only under the same market rule, can US products ensure its competitive advantages

The US has a strong commercial interest in ensuring that Chinese goods entering the US market are produced on the basis of market principles, since China is becoming one of the largest sources of imported goods. Otherwise, such a large amount of Chinese imported goods would distort the US domestic market system.

To China, the most important issue is that the US market is its largest market, and Chinese trade and economic development relies more on the US market.

 

2. SUBSTANTIVE POLICY ISSUES

For the US government, the most substantive policy issue is how to develop better public support for establishing normal US-China trade relations.

Basic public misunderstanding has put pressure on government and Congress to restrict trade with China. The US government needs to do more to develop better public understanding of the situation in China to ease some of that pressure. The US also needs to revise the basis for calculating the US-China trade and then develop a new value-added balance.

Since the existing misunderstanding of the economic and trade developments in China has affected the public confidence in building normal trade relations with China, the first issue for the US government is to develop an effective strategy for increasing public understanding. US influences could push the Chinese government to further liberalize its trade policies more quickly. However, to wield US influence effectively requires sustained domestic support. The public must grow accustomed to the idea that China may well be America’s main foreign policy focus for the foreseeable future. As China grows stronger economically and militarily, the US government needs to conduct constructive US-China trade relations more sensitively.

The second policy issue is how to improve China's trade policy reforms in order to create more opportunities for US industries

The focus of this issue is how to manage China’s emergence as a major global power. This will profoundly impact the shape of the global order and the future prosperity of US industries. China has a huge growing market for advanced technologies, equipment and other production materials and certain commodities in which the American aircraft, sophisticated machinery, electronics, chemicals, grain, timber and fertilizer are taking a remarkable share. The Chinese market is now more important to US industries than at any period in history.

The third policy issue is how to ensure that the Chinese government complies with commitments already made, and takes practical steps to further open its markets

Further reform of China’s trade policies could provide enormous benefits not only to the US and China, but to the whole world. However China will define its own destiny. The question is, what exactly will China agree to do? It is important for China to understand the seriousness with which the US views the US-China trade relations. Only then can the US push China to take practical steps, such as:

  • Further opening its markets and ensuring compliance with commitments already made. Implementation of the 1992 Market Access Agreement, for example, has been uneven.
  • Coordinating central government and local government efforts to implement reforms
  • Maintaining stability of the Chinese currency
  • Improving conditions of building a civil society

For the Chinese government, the first substantive policy issue is what steps China can take to solve the trade deficit issue and to improve the climate for foreigners doing business in China.

At present, the trade imbalance has become a crucial issue for US-China relations. Increasing concerns inside the US seriously affect public and policy-makers' confidence on China trade policy. China must take this issue seriously. Meanwhile, the Chinese government must be aware of the importance of providing a transparent and rule-based trade climate for foreigners doing business in China.

The second key policy issue is how to accelerate its domestic reforms and remain consistent with its long-term economic development objectives.

The Chinese government has correctly identified three linked objectives—the reform of the SOEs, the banking system and the social welfare system—as top priorities. However, during the trade liberalization process, the Chinese government sometimes stopped just short of further reform in order to wait for changes in international and domestic situations. China will not be able to build a solid foundation for long-term economic growth without keeping domestic reform. The Chinese government must be aware of the effectiveness and need of continuous strategic reforms.

The third policy issue is how to further liberalize and reform its domestic regulations in order to provide a more transparent and predictable policy regime

If China wants to take advantage of the opportunities created by the new economic era, it must seek to reform its domestic regulations. The most immediate challenge is to establish transparency and predictability in its regulations. Further more, China needs to move from a system of entry and licensing controls to a regulatory system based on transparent, objective and measurable performance criteria. Such a system will increasingly determine its economic growth and prosperity.

3. THE POLITICAL LANDSCAPE

At present, inside the US and China, almost every issue has a political as well as an economic component. Political disputes heavily shape the US-China trade relationship. Inside the US, the most prominent issues are the following:

The US-China Deficit

American politicians are deeply concerned regarding the increasing US trade deficit with China, but they also should realize the following facts:

  • US data on bilateral trade with China are seriously flawed. The Department of Commerce counts US exports to China via Hong Kong as US exports to Hong Kong, but counts as imports from China all Chinese products re-exported from Hong Kong to the US. This process overstates US imports from China. In 1997, this number was 7 billion, and the real trade imbalance with China was 1/3 less than the US government data.
  • Compared to the shrinking US-Japan trade deficit, the US deficit with China is likely to continue growing dramatically. This makes the deficit appear to be more than it really is.
  • The trade deficit with China primarily reflects its openness to foreign investment, not unfair trading practices. As a result of the liberalization of its domestic economy, in recent years China has attracted about 40% of all foreign direct investment flowing to emerging markets. Foreign investors have moved facilities that produce footwear, garments, toys, sporting goods and other labor-intensive products to China to take advantage of cheap labor. These products also account for a large share of US imports from China.
  • The growing deficit the United States has experienced in its trade with China, not surprisingly, has been accompanied by sharply declining deficits with Hong Kong, Taiwan, and Korea. Thus, the argument that the growing deficit with China has caused a large loss of manufacturing jobs in the United States is inaccurate.

China’s WTO Accession and Normal Trade Relations (NTR) Renewal

China’s WTO accession is important in several respects. While China and the US both want to reach an agreement on the terms of China’s entry, China will not gain membership over US objections.

Inside China, remaining import barriers are primarily protecting state-owned industries in order to avoid international competition. Because these state-owned industries still employ almost two-thirds of all urban workers, China’s political leadership appears unwilling to risk the high levels of urban unemployment that could result if restructuring was too rapid. Thus, the costs of conforming immediately to expectations of the West on openness to trade are relatively high for China while the gains from membership in the WTO are relatively small. The single most important economic benefit associated with China’s membership in the WTO is the permanent most-favored-nation (MFN), now the normal trade relations (NTR) status in the markets of member countries. However, permanent MFN is bestowed by all WTO member countries, except the US. The US has provided MFN status for China one year at a time for more than fifteen years.

  1. Serious negotiations on a number of critical issues are only now commencing. A commercially and politically viable agreement must address US industry concerns for opening China's domestic market to US industrial and agricultural goods. Likewise, US service industries deserve access to the Chinese market. Whether China accedes to the WTO in this millennium hinges upon China's willingness to make firm commitments in these areas. Provided the Chinese make these commitments, the United State executive and congressional branches must be prepared to conclude bilateral negotiations and lay the legal groundwork for the United States to apply the WTO to China. Thus, permanent NTR trading status must be extended to China. Failure to do so at the appropriate time would demonstrate bad faith, and damage the United States' economic interests.
  2. The US is now facing how to promote reform and liberalization of China’s economic, trade, and investment regimes and then bring them into compliance with WTO standards. More importantly, the procedure would require that further reform steps be taken on a specific schedule. Thus the United States should take the lead in drafting a protocol that provides long phase-in periods to mitigate the costs China will face in restructuring its domestic industries to meet the full force of international competition. However, this agenda must be tied to Chinese conditions. This would make the US strategy more realistic and reasonable.
  3. China’s WTO entry issue has existed for more than ten years. China's membership in the WTO will influence global trade relations in the coming era. All of the trade issues addressed in the WTO constitute a single package of rights and responsibilities that all of its members have accepted. Therefore, China must come to terms with the legal and commercial commitments required of all WTO members. At the same time, the US should be practical and pragmatic, and where possible, flexible. China is a great nation and a great power. The US could speed-up China’s WTO entry by negotiating a constructive accession agreement with China.

US policy tools will be limited to less-effective unilateral levels if China remains outside the WTO. Therefore, the best way to resolve these concerns is with greater communication and increased dialogues, rather than with confrontation.

There is no doubt that healthy US-China trade relations will require ongoing attention to the political as well as the economic challenges for a long time to come. As for China, it still has a long way to go before it has a well-functioning market economy. And it is apparent that China's internal politics will remain unsettled for many years.

DOMESTIC STRATEGY

Establishing A Consensus inside the US

In light of the US-China trade imbalance issue, the US government and business must fully realize the importance of addressing this crucial area.

  • The US government, industry and public should work together to build a broad national consensus on the US-China trade relation issue.
  • The most important step for US policymakers is to rebuild a bipartisan policy toward China. Doing so will require leadership from the White House and close cooperation with Congress.
  • Basic materials should be distributed including a letter from the US-China Trade Promotion Council to the President, as well as industry associations that addresses major concerns of this issue.
  • Persuade the Chinese government to take steps through official and industrial organization channels to demonstrate their commitment to improving the trade deficit.

Policy Strategy

The US should adopt a strategy that would:

  • Persuade the Chinese government to further open its markets and reform its import policies, such as lower tariffs and avoid using non-tariff measures.
  • Treat China as a strategic partner rather than a backlash state. The US government should fully realize that US demands can only be satisfied through China’s internal reform.
  • Provide export credits to American firms seeking to sell in China that are comparable to those provided to European and Japanese firms by their government
  • Work for China’s early entry into the WTO, since it is not only in China's interest, but very much in the US national interest
  • Seek to provide China permanent NTR status conditional upon evidence that China is in compliance with the protocol governing its participation in the WTO
  • Continue to expand US cabinet-level contacts with Chinese ministerial counterparts and enhance the role of formal; bilateral commissions such as the Joint Economic Commission and US-China Joint Commission on Commerce and Trade (JCCT)
  • Exchanges between senior officials from various agencies should be regularized.
  • Coordinate more effectively with other US trading partners that share analogous concerns about the Chinese market

China should adopt a strategy that would:

  • Maintain the stability of the Chinese currency
  • Improve conditions for a civil society
  • Expand ongoing reform of SOEs, banking system, employment, and insurance system.
  • Strengthen the competitive ability of domestic industry in order to create the basis for trade liberalization
  • Establish a social welfare system in order to take the social burden from the SOEs and cut the extra product cost with the goal of setting up an efficient and competitive business system
  • Embark on an aggressive worker re-training program to help deal with lay-offs of SOEs affected by increased global competition
  • Accelerate economic reform according to the Ninth five-year Blue Plan.


Political Strategy

The US political strategy should:

  • Make efforts to develop a bipartisan China policy within the US.
  • Request the Chinese government to consider the importance of the present trade deficit issue and build consensus with the Chinese government.
  • Press the Chinese government to open markets through WTO accession negotiations.
  • Press the US Congress to consider the importance of the US-China relation and the achievements of China’s open market practices on the annual NTR renewal issue.
  • Isolate opponents.
  • Deal with China as a more equal partner and maximize reliance on multilateral rather than unilateral sanctions where China’s trade practices fall short of internationally accepted norms.
  • Abandon use of the bilateral trade imbalance as an indicator of the degree of openness of the Chinese economy or the state of Sino-US relations.
  • Provide meaningful multilateral sanctions in the event of violations, and eliminate US unilateral sanctions.

The Chinese political strategy should:

  • Make efforts to develop a constructive policy towards the US.
  • Build consensus on the benefits of the Chinese economy under a more open markets.
  • Build consensus on the importance of continuing domestic economic and administrative reforms.
  • Try to persuade industries to improve their competitive ability towards the more open market system.
  • Explain to the public that further reform could cause new social problems, such as higher unemployment rate, but the government is trying to minimize the disruption of further reform and trade liberalization.


NEGOTIATION STRATEGY

The development of a negotiation strategy for US negotiators identifies the different parties, their interests and options surrounding the trade relations between the US and China. The negotiation strategy examines US and China preferred outcomes, options, and Best Alternatives to a Negotiated Agreement (BATNA). This project provides:

  1. The US strategy
  2. The Chinese strategy
  3. Negotiating characteristics
  4. An analysis of stakeholders' interests (See Exhibit #1)


THE US STRATEGY

KEY FACTORS

The key factors that contribute to the increasing US trade deficit with China are:

  • Market access
  • Transparency
  • Predictability


PREFERRED OUTCOME OF THE US GOVERNMENT

The preferred outcome would be the establishment of a transparent trade policy and more liberalized market access to be provided to the US exporters in China.


NEGOTIATION TACTICS

Acknowledge China’s trade liberalization progress, but confirm that China needs to do more in terms of further trade reform. Otherwise, the slow-down of trade liberalization will affect not only the US-China bilateral trade relations, but also China’s entrance to the multilateral trading system the WTO.


GOALS TO ACHIEVE

  • Fair and balanced trade
  • Free market access
  • Transparency
  • Predictability


BATNA

If the bilateral negotiation cannot achieve the preferred outcome, the US trade policy should consider:

  • Do nothing
  • Make use of the multilateral negotiations on China’s WTO entrance to apply pressure on achieving greater Chinese market access
  • Trade sanctions
  • Revoke NTR

 

CHINESE STRATEGY

KEY FACTORS

On the Chinese side, the key factors that contribute to the US-China trade deficit are:

  • The differences between the US and Chinese statistical systems
  • Concerns that further trade liberalization will affect the stability of trade and economic development
  • Internal pressure from the state-owned enterprises and financial system reforms
  • Internal disputes on the schedule and steps for further trade reform
  • Cross-cultural and political differences


PREFERRED OUTCOME FOR THE CHINESE GOVERNMENT

  • Draw out the negotiations to allow more time for further trade liberalization
  • To protect the Chinese industry, particularly those who lack competitiveness
  • Continue the WTO entrance negotiation but try to win more time to address domestic concerns and build consensus inside China
  • Build mutual understanding within the US and other key WTO members
  • Persuade US to revise basis for calculating bilateral trade


POSSIBLE ARGUMENTS

  • The US trade deficit with China is not as large as the US concerns
  • China has liberalized its trade system
  • China is a developing country with large regional differences in its development
  • Normal US-China trade relations will benefit both sides
  • China has a huge potential market, so China needs the WTO and WTO needs China.
  • A completely opened market will hurt not only the Chinese economy but also the world economy
  • A truly global trading system must include China


NEGOTIATION TACTICS

  • Present Chinese trade statistics on China-US trade
  • Show data on increasing imports from the US
  • Help foreigners comply with import procedures
  • Negotiate with the US in good faith to prove the Chinese government has solid trade reform plans but needs time to implement them
  • In terms of specific products, discuss market access and timing

 

BATNA

  • Do nothing. Wait for progress of the WTO entrance.
  • If bilateral negotiation fail, the Chinese government should consider:

          --Deepen state-owned enterprises reform
          --Strengthen stronger competitiveness of the domestic industry
          --Keep the stability of macro-economy
          --Continue bilateral efforts, even if the US does not support China’s WTO entrance


NEGOTIATING CHARACTERISTICS

American and Chinese negotiators have significantly different negotiation and problem solving characteristics, which must be considered before and during the formal negotiation process. The following chart provides a better understanding to the cultural background faced during the implementation of the negotiation and different strategies for the US and China.

CATEGORY

AMERICAN

CHINESE

 

Basic cultural values

  • Competition
  • Individual decision-making power
  • Horizontal business and government relations
  • Independence
  • Respect for rich people
  • Cooperation
  • Group decision-making power
  • Vertical business and government relations
  • Interdependence
  • Respect for people in power

Negotiation skill

 

1. Pre-negotiation

  • Define preferred outcome
  • Prefer start formal negotiation directly
  • Be clear about the commercial objectives
  • Set guiding principles
  • Prefer exchange views before formal negotiation
  • Be clear about commercial objectives and concern power and prestige

 

 

 

 

 

 

2. Negotiation process

  • Start with a reasonable position and a clear-cut stand
  • Available information
  • Take control and guide the process
  • Hold the bottom line till the last minute
  • Use time line to press on counterpart
  • No go-betweens
  • Use coercion
  • Have decision-making power and some room for possible maneuver
  • Haggling tradition and bureaucratic delay
  • Step-by-step trade-offs
  • Anti-foreign attitudes
  • Limited and hidden information
  • Pushing to find the bottom line
  • Lack of time pressure
  • Used to making use of go-betweens
  • Careless of coercion and censure
  • Standing on fixed position and have very little room for maneuver

 

 

3. Re-negotiation

  • Rarely change negotiator
  • Change negotiation location
  • Focus on non-negotiating items
  • Do not like re-opening closed issues
  • Change levels of the negotiator if necessary
  • Change the negotiation location
  • Avoid non-negotiating item
  • Raise a closed issue already agreed

 

MEDIA STRATEGY

Media can be a powerful tool to reach a broad audience.

US MEDIA STRATEGY

The us media strategy provides a plan for using the media to:

  • Build public consensus to push the US government to address the US-China deficit issue in a constructive way
  • Organize a constructive debate about the US strategy on key US-China trade relation issues, such as the annual MFN renewal, and WTO accession
  • Use the Chinese media to convince the Chinese public of the benefits of trade liberalization, such as efficiency, competitiveness and greater product selections

Domestic Media Strategy

  • The first step is to reshape public perception about US-China trade relations and address the US-China trade deficit issue at a national level. To accomplish this, a series of press conference will be organized.
  • The second step is to make sure that the right information is provided through the press. Editorial, speeches, hearings and debates will be covered by national newspapers, TVs and broadcast programs.
  • International trade experts should be used at domestic press conferences, and newspapers to explain the reason and the benefits of the China trade strategy
  • Advertising could be used to highlight the need for a constructive China trade policy and to educate public and private sectors
  • Newspaper editorials are necessary to analyze the importance of normal US-China trade relations
  • Op-ed pieces could be used to stimulate and educate public debate

International Media Strategy

  • Open a special item under the US-China Trade Promotion Council home page to address and discuss the US-China trade relation issues
  • Organize a press conference in China with a focus on the US-China trade relation issues
  • Newspaper articles could be provided to China Daily to explain US companies’ concerns
  • Documentary programs can be provided to CCTV international channel in order to educate the Chinese public of the benefits of free trade and normal US-China trade relations


CHINA MEDIA STRATEGY

It will be necessary to implement a domestic and international media strategy that promotes China’s market economy and further reform. The government should use the domestic media to educate the public about the benefits of a more open market as well as the necessity of further domestic economic and administrative reform, and use international media strategy to convince the world about China's achievements in building a market economy and further steps towards a more open market.

Domestic Media Strategy

The goals of the domestic strategy are to build a new consensus on US-China trade relations, to explain the benefits of open trade for Chinese companies and workers, as well as acknowledge the challenges of the global trading systems and be prepared to respond to those challenges. Therefore, the domestic strategy needs to reach out to all Chinese.

  • Organize a series of press conferences to promote the economic benefits to public, especially all Chinese businesses
  • Design a special TV program about the development of normal Sino-US relations and the importance of a balanced trade between these two important nations
  • Encourage trade associations and professional organizations to develop and circulate opinion pieces regarding the benefits of more open market and further trade liberalization
  • Professional articles should be used in trade magazines and in trade specific press release regarding the increasing trade between China and the US
  • International trade and economic experts should be used at press conferences, TV and radio advertising to explain the reasons and the benefits of the continue of economic and trade reform
  • Newspaper editors should be encouraged to write editorial pieces analyzing the government’s decisions and to stimulate public debate and support
  • Schedule interviews with key government and business figures
  • Organize a discussion to find more common ground with labor groups, and try to make them understand that they have a stake in the market economy and lay-off workers will be supported by special government programs

International Media Strategy

  • Organize a press conference in China regarding the US-China trade relations
  • Making use of China Daily to have some articles focusing on the achievements China has made towards market economy and further strategy for a more open market
  • Making use of CCTV international Channel to educate the world the progress China has made

Organize an international conference at the time of the Twenty Anniversary of China's Open-door Policy. This can provide a good opportunity to let the world know more about China.

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