China-U.S. Trade Issues

Prepared for Members and Committees of Congress

U.S.-China economic ties have expanded substantially over the past several years. Total U.S.-
China trade, which totaled only $5 billion in 1980, rose to $387 billion in 2007; China overtook
Japan to become the third largest U.S. export market, and passed Canada to become the largest
source of U.S. imports.
With a huge population and a rapidly expanding economy, China is a potentially huge market for
U.S. exporters. However, bilateral economic relations have become strained over a number of
issues, including large and growing U.S. trade deficits with China ($256 billion in 2007 and
projected to hit $267 billion in 2008), China’s failure to fully implement its World Trade
Organization (WTO) commitments (especially in regards to protection of intellectual property
rights), its refusal to adopt a floating currency system, its use of industrial policies and other
practices deemed unfair and/or harmful to various U.S. economic sectors, and failure to ensure
that its exports to the United States meet U.S. health and safety standards.
The Bush Administration has come under increasing pressure from Congress to take a more
aggressive stance against various Chinese economic and trade practices. In response, it filed a
number of trade dispute resolution cases against China in the WTO, including China’s failure to
protect IPR and afford market access for IPR-related products, discriminatory regulations on
imported auto parts, and import and export subsidies to various industries in China. In addition,
the Administration reversed a long-standing policy that countervailing cases (dealing with
government subsidies) could not be brought against non-market economies, and has initiated
several countervailing cases against China. In response to growing concerns over the health,
safety, and quality of certain Chinese products, the United States has attempted to boost
cooperation with Chinese health and safety agencies to improve China’s regulatory and
enforcement regime.
Further complicating the economic relationship is China’s large holdings of U.S. debt, such as
Treasury securities. In September 2008, China surpassed Japan to become the largest foreign
holder of such securities. On the one hand, some analysts welcome China’s purchases of U.S.
debt securities (needed to help fund U.S. budget deficits), while others have expressed concerns
that growing Chinese holdings of U.S. debt may increase China’s leverage over the United States.
In December 2006, the Bush Administration began a “Strategic Economic Dialogue” (SED) with
China to discuss major long-term economic issues between the two countries; the latest SED talks
were held on December 4-5, 2008. The two sides have discussed a number of issues, including
China’s currency policy, the global financial crisis, environment and energy issues, and financial
market reforms, and have announced several areas of joint cooperation. While some analysts
consider the SED a useful dialogue, others have complained that it has yielded few concrete
results on major trade disputes.
This report examines major U.S.-China trade issues and will be updated as events warrant.

U.S. Trade with China.....................................................................................................................1
Major U.S. Exports to China.....................................................................................................2
Major U.S. Imports from China................................................................................................5
Major U.S.-China Trade Issues.......................................................................................................7
Health and Safety Concerns Over Certain Imports from China................................................7
China’s Poor Regulatory System and Implications.............................................................8
China’s Currency Policy.........................................................................................................10
China Changes its Currency Policy..................................................................................10
China and the World Trade Organization.................................................................................11
WTO Implementation Issues...................................................................................................12
U.S. WTO Cases Against China.......................................................................................14
Violations of U.S. Intellectual Property Rights.......................................................................15
History of U.S. Efforts to Improve China’s IPR Regime..................................................15
The Scope of the IPR Piracy Problem in China................................................................17
The U.S. Files Two WTO Cases Against China on IPR...................................................19
Applying U.S. Countervailing Laws to China........................................................................20
Textile and Apparel Products..................................................................................................21
The U.S.-China Strategic Economic Dialogue (SED)............................................................21
U.S.-China Trade Legislation in the 110th Congress.....................................................................24
Currency Legislation.........................................................................................................24
Other Legislation..............................................................................................................25
Table 1. U.S. Merchandise Trade with China: 1980-2008..............................................................2
Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2007.............................2
Table 3. Major U.S. Exports to China: 2003-2007..........................................................................3
Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and 2007..........................3
Table 5. Top Five U.S. Imports from China: 2003-2007.................................................................5
Table 6. Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2007...................6
Author Contact Information..........................................................................................................26

conomic and trade reforms begun in 1979 have helped transform China into one of the
world’s fastest growing economies. China’s economic growth and trade liberalization,
including comprehensive trade commitments made upon entering the World Trade E

Organization (WTO) in 2001, have led to a sharp expansion in U.S.-China economic ties. Yet,
bilateral trade relations have grown increasingly strained in recent years over a number of issues,
including a large and growing U.S. trade deficit with China (which hit $256 billion in 2007 and is
projected to rise to about $267 billion in 2008), China’s refusal to adopt a floating currency, and
failure to fully implement many of its WTO obligations, especially in regards to protection of
intellectual property rights (IPR). Several Members have called on the Administration to take a
tougher stance against China to induce it to eliminate economic policies deemed harmful to U.S.
economic interests and/or are inconsistent with WTO rules. In addition, there has been growing
concerns in the United States over the health and safety of certain food products and consumer
goods (such as toys) imported from China that have been found to be unsafe or defective.
This report provides an overview of U.S.-China economic relations and surveys major trade

U.S.-China trade rose rapidly after the two nations established diplomatic relations (January
1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation
(MFN) treatment beginning in 1980. In 1978 (before China’s reforms began), total U.S.-China nd
trade (exports plus imports) was $1 billion; China ranked as the 32 largest export market and the thnd

57 largest source of U.S. imports. In 2007, bilateral trade hit $387 billion, making China the 2 rd

largest U.S. trading partner (after Canada). China overtook Japan to become the 3 largest U.S.
export market and also overtook Canada to become the largest source of U.S. imports. In recent
years, China has been one of the fastest growing U.S. export markets and the importance of this
market is expected to grow even further as living standards continue to improve and a sizable
Chinese middle class emerges.
The U.S. trade deficit with China has surged in recent years as imports from China have grown
much faster than U.S. exports to China. That deficit rose from $34 billion in 1995 to $256 billion 2
in 2007 (see Table 1). The U.S. trade deficit with China is significantly larger than that with any
other U.S. trading partner. In 2007, it was more than twice as large as with OPEC, as well as the
27 countries that make up the European Union, and three times larger than the trade deficit with
Japan (see Table 2). During the first nine months of 2008, the U.S. trade deficit with China was
about 4.2% larger than it was during the same period in 2007. On the basis of these data, the full
year 2008 U.S. trade deficit with China could be around $267 billion.

1 For more information on Chinas economy, see CRS Report RL33534, China's Economic Conditions, by Wayne M.
Morrison. For general information on U.S.-China ties, see CRS Report RL33877, China-U.S. Relations: Current Issues
and Implications for U.S. Policy, by Kerry Dumbaugh.
2 The United States ran trade deficits with 105 countries in 2007. These totaled $896.2 billion; the trade deficit with
China was equal to 28.6% of this amount. However, the United States ran trade surpluses with 127 countries, totaling
$105.2 billion, and the total U.S. trade deficit was $791.0 billion. The U.S. trade deficit with China was equal to 32.4%
of the total U.S. trade deficit.

Table 1. U.S. Merchandise Trade with China: 1980-2008
($ in billions)
Year U.S. Exports U.S. Imports U.S. Trade Balance
1980 3.8 1.1 2.7
1985 3.9 3.9 0
1990 4.8 15.2 -10.4
1995 11.7 45.6 -33.8
2000 16.3 100.1 -83.8
2001 19.2 102.3 -83.1
2002 22.1 125.2 -103.1
2003 28.4 152.4 -124.0
2004 34.7 196.7 -162.0
2005 41.8 243.5 -201.6
2006 55.2 287.8 -232.5
2007 65.2 321.5 -256.3
2008* 76.5 343.4 -267.0
Source: USITC DataWeb.
Note: Data for 2008 are projections, on the basis of actual data for January-September 2008.
Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2007
($ in billions)
Country or Trading Group U.S. Trade Balance
World -791.0
China -256.3
European Union (EU27) -107.4
Organization of Petroleum Exporting Countries (OPEC) -127.4
Japan -82.8
Canada -64.7
Mexico -74.3
Association of Southeast Asian Nations (ASEAN) -50.6
Source: USITC DataWeb.
U.S. merchandise exports to China in 2007 were $65.2 billion, up 18.1% over the previous year.3 rd
China overtook Japan to become the 3 largest export market in 2007. U.S. exports to China in

2007 accounted for 5.6% of total U.S. exports (compared to 3.9% in 2003). The top five U.S.

3 The United States also exports a significant level of private services to China; these totaled $9.1 billion in 2005.

exports to China in 2007 were aircraft and parts, semiconductors and electronic components,
waste and scrap, oilseeds and grain, and resins and synthetic rubber and fibers (see Table 3). th
China is a significant market for U.S. agricultural products. It was the 4 largest destination for
U.S. agricultural exports in 2007 at $8.3 billion. U.S. agricultural exports grew by 24% in 2007
over the previous year.
Over the past few years, China has been one of the fastest growing U.S. export market among
major U.S. trading partners, as can be seen in Table 4. U.S. exports to China rose by nearly 240%
from 2001 to 2007, which was significantly higher than that of any other top 10 trading partner.
During the first nine months of 2008, total U.S. exports to China were 17.4% higher than during
the same period in 2007 (U.S. agricultural exports to China were up 57.9%. For the entire year,
U.S. exports to China could hit around $77 billion.
Table 3. Major U.S. Exports to China: 2003-2007
($ in billions and % change)
NAIC Commodity Groupings 2003 2004 2005 2006 2007 2006-2007 % Change
Total all commodities 28.4 34.7 41.8 55.2 65.2 18.1%
Aerospace products and parts (mainly aircraft and parts) 2.7 2.1 4.5 6.3 7.4 18.0
Semiconductors and other electronic components 3.0 3.6 4.0 6.8 7.4 8.9
Waste and scrap 1.9 2.5 3.7 6.1 7.3 20.8
Oilseeds and grains (mainly soybeans) 2.9 2.8 2.3 2.6 4.1 59.8
Resin, synthetic rubber, & artificial & synthetic fibers &
filament 1.2 1.6 2.1 2.5 3.3 29.1
Source: U.S. International Trade Commission Database.
Note: Commodities sorted by top five exports in 2007 using NAIC classification, four-digit level.
Table 4. U.S. Merchandise Exports to Major Trading Partners in 2001 and 2007
($ in billions and % change)
2001 2007 % Change from 2006-2007 % Change from 2001-2007
Canada 163.7 248.4 7.9 51.7
Mexico 101.5 136.5 1.8 34.5
Japan 57.6 62.7 5.1 8.9
China 19.2 65.2 18.1 239.6
United Kingdom 40.8 50.3 10.8 23.3
Germany 30.1 49.7 20.2 65.1
South Korea 22.2 34.7 6.9 56.3
Netherlands 19.5 33.0 6.1 69.2
France 19.9 27.4 13.2 37.7
Taiwan 18.2 26.4 14.5 45.1

2001 2007 % Change from 2006-2007 % Change from 2001-2007
World 731.0 1,162.7 12.1 59.7
Source: USITC DataWeb.
Note: Ranked by top 10 U.S. export markets in 2007.
Many trade analysts argue that China could prove to be a much more significant market for U.S.
exports in the future. China is one of the world’s fastest-growing economies, and rapid economic
growth is likely to continue in the near future, provided that economic reforms are continued.
China’s goal of modernizing its infrastructure and upgrading its industries is predicted to generate
substantial demand for foreign goods and services. Finally, economic growth has substantially
improved the purchasing power of Chinese citizens, especially those living in urban areas along
the east coast of China. China’s growing economy and large population make it a potentially
enormous market. To illustrate:
• China currently has the world’s largest mobile phone network, and one of the
fastest-growing markets, with an estimated 592 million mobile phone users (as of
May 2008), compared to 87 million users in 2000.
• Boeing Corporation predicts that China will be the largest market for commercial
air travel outside the U.S. for the next 20 years (2006-2026); during this period,
China will buy 3,400 aircraft valued at $340 billion. By 2026, China’s domestic
market for air travel is expected to become larger than today’s intra-North 4
American market. On April 11, 2006, Boeing announced it had signed a general
purchase agreement with China for 80 Boeing 737s. On September 6, 2007,
China announced it would buy 55 Boeing aircraft valued at $3.8 billion.
• In 2002, China replaced Japan as the world’s second-largest PC market. China
also became the world’s second-largest Internet user (after the United States).
The number of Chinese internet users rose from 111 million at the end of 2005, to 5

137 million in 2006, to 210 million users at the end of 2007.

• The Chinese government projects that by the year 2020, there will be 140 million
cars in China (seven times the current level), and that the number of cars sold 6
annually will rise from 7.2 million units (2006) to 20.7 million units. According
to some estimates, China is now the world’s second largest market for new cars.
General Motors (GM) and Ford reportedly sold over one million (up 19% over

2006 levels) and 216 thousand cars (up 30%), respectively in China in 2007.

According to the International Herald Tribune, GM expects to invest $5 billion 7
in China over the next five years to expand production facilities.
• However, some U.S. trade analysts contend that China continues to pursue
industrial policies aimed at promoting the development of industries that have

4Boeing, Press Release, September 18, 2007.
5 Peoples Daily Online, “210 million Internet users in China, January 21, 2008.
6 China Daily, September 9, 2004.
7 International Herald Tribune, “GM plans $5 billion in China investment,” December 6, 2007. For additional
information on Chinas auto industry, see CRS Report RL33317, China's Impact on the U.S. Automotive Industry, by
Stephen Cooney.

been deemed by the government as critical for Chinese future economic
development. They claim such policies seek to restrict imports of finished
products, thus forcing foreign firms to invest in China to gain access to the
domestic market. They note a significant level of U.S. exports to China are raw
materials, parts, and components used to produce finished goods for export.
China in 2007 became, for the first time, the largest source of U.S. imports. In 2007, imports from
China totaled $321.5 billion, accounting for 16.5% of total U.S. imports in 2007 (up from 6.5% in
1996). U.S. imports from China rose by 11.7% in 2007 over the previous year (compared with

18.2% in 2006). The importance (ranking) of China as a source of U.S. imports has risen ththnd

dramatically, from 8 largest in 1990, to 4 in 2000, to 2 in 2004-2006, to first in 2007. The top
five U.S. imports from China in 2007 were computers and parts, miscellaneous manufactured
articles (such as toys, games, etc.),communications equipment, apparel, and audio and video
equipment (see Table 5). U.S. imports from China appear to be slowing. During the nine months
of 2008, U.S. imports from China rose by only 6.8% over the same period in 2007 (compared to a

11.7% increase in 2007 over the previous year).

Table 5. Top Five U.S. Imports from China: 2003-2007
($ in billions and % change)
NAIC Commodity 2003 2004 2005 2006 2007 2006-2007 % Change
Total All Commodities 152.4 196.7 243.5 287.8 321.5 11.7%
Computer equipment 18.7 29.5 35.5 40.0 45.5 11.0
manufactured products
(e.g., toys, games, etc.) 21.8 23.7 26.4 28.9 34.8 20.6
equipment 5.9 9.0 14.1 18.0 23.2 29.0
Apparel 9.0 10.5 16.4 19.2 23.0 19.4
Audio and video
equipment 10.0 12.6 15.6 18.8 19.1 1.5
Source: U.S. International Trade Commission Trade Data Web.
Note: Commodities sorted by top five imports in 2007 using NAIC classification, four-digit level.
Throughout the 1980s and 1990s, nearly all of U.S. imports from China were low-value, labor-
intensive products such as toys and games, consumer electronic products, footwear, and textiles
and apparel. However, over the past few years, an increasing proportion of U.S. imports from
China has comprised of more technologically advanced products, such as computers. According
to the U.S. Census Bureau, in 2007, U.S. imports of advanced technology products from China
totaled $72.7 billion (27.4% of total U.S. imports from China), compared with $29.3 billion in 8
2003 (19.2% of total U.S. imports from China). In addition, imports of advanced technology
products accounted for 26.9% of total U.S. imports of such products in 2007, compared with

8 U.S. Census Bureau, Foreign Trade Division.

14.1% in 2003, indicating that U.S. dependency on China for advanced technology products is
rapidly increasing.
Many analysts contend that the sharp increase in U.S. imports from China is largely the result of 9
movement in production facilities from other (primarily) Asian countries to China. That is,
various products that used to be made in Japan, Taiwan, Hong Kong, etc., and then exported to
the United States are now being made in China (in many cases, by foreign firms in China) and
exported to the United States. An illustration of this shift can be seen in Table 6 on U.S. imports
of computer equipment and parts from 2000-2007. In 2000, Japan was the largest foreign supplier th
of U.S. computer equipment (with a 19.6% share of total shipments), while China ranked 4 th
(with a 12.1% share). In just seven years, Japan’s ranking fell to 4, the value of its shipments
dropped by over half, and its share of shipments declined to 7.0% (2007). China was by far the
largest foreign supplier of computer equipment in 2007 with a 51.5% share of total U.S. imports.
While U.S. imports of computer equipment from China rose by 436% over the past seven years,
the total value of U.S. computer imports from the world rose by only 26%. Many analysts
contend that a large share of the increase in Chinese computer production has come from foreign
computer companies that have moved manufacturing facilities China.
Table 6. Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2007
($ in billions and % change)
2000 2002 2004 2006 2007 2000-2007 % change
Total 68.5 62.3 73.9 83.8 86.3 26.0
China 8.3 12.0 29.5 40.0 44.5 436.1
Malaysia 4.9 7.1 8.7 11.1 10.9 122.4
Mexico 6.9 7.9 7.4 6.6 6.6 -4.3
Japan 13.4 8.1 6.3 6.3 5.0 -62.7
Singapore 8.7 7.1 6.6 5.6 4.3 -50.6
Source: U.S. International Trade Commission Trade Data Web.
Note: Ranked according to top six suppliers in 2007.
China is becoming a major supplier of U.S. agricultural products. It was the 3rd largest source of th10
U.S. agricultural imports in 2007 (compared with 5 largest in 2006), at $3.3 billion. U.S.
agricultural imports from China rose by 23% in 2007 and by 133% from 2003-2007. Major
agricultural imports from China include fish, vegetables and fruit, tea and spices, feeding stuff for
animals, and sugar products.

9 Chinese data indicate that the share of China’s exports produced by foreign-invested enterprises (FIEs) in China rose
from 1.9% in 1986 to 57% in 2007.
10 China ranked as the 4th largest export market for U.S. agricultural products at $8.3 billion.

Although China’s economic reforms and rapid economic growth have expanded U.S.-China
commercial relations in recent years, tensions have arisen over a wide variety of issues, including
the growth and size of the U.S. trade deficit with China (which many Members contend is an
indicator that the trade relationship is unfair), concerns over unsafe Chinese food and consumer
products, China’s currency policy (which many Members blame for the size of the U.S. trade
deficit with China and the loss of manufacturing jobs in the United States), China’s mixed record
on implementing its obligations in the WTO, failure to provide adequate protection of U.S. IPR,
and Chinese industrial policies used to promote and protect domestic industries. Several bills
have been introduced to respond to several of these issues (see section on legislation).

Reports throughout 2007 of tainted or unsafe food and consumer products (including seafood, pet
food, toys, and tires) from China raised concerns in the United States over the health, safety, and
quality of imports from China. Some analysts contend that China maintains a poor regulatory
framework for enforcing its health and safety regulations and standards, and that this is proving to
be a growing problem for U.S. consumers. Many U.S. policymakers have raised concern over
how to press China to improve enforcement of its health and safety standards of its exports as
well as the ability of U.S. regulatory agencies to ensure the health and safety of imports from
China (and other countries).
In 2007 and early 2008, there were numerous recalls, warnings, and import restrictions involving
Chinese products, as the following instances illustrate.
The Food and Drug Administration (FDA) in March 2007 issued warnings and announced
voluntary recalls on over 150 brands of pet foods (and products such as rice protein concentrate
and wheat gluten used to manufacture pet food and animal feed) from China believed to have 12
caused the sickness and deaths of numerous pets in the United States. In May 2007, the FDA
issued warnings on certain toothpaste products (some of which were found to be counterfeit)
found to originate in China that contained poisonous chemicals. In June 2007, the FDA
announced import controls on all farm-raised catfish, basa, shrimp, dace (related to carp), and eel
from China after antimicrobial agents, which are not approved in the United States for use in
farm-raised aquatic animals, were found. The FDA ordered that such shipments will be detained 13
until they are proven to be free of contaminants. On January 25, 2008, the FDA posted on its
website a notice by Baxter Healthcare Corporation that it had temporarily halted the manufacture
of its multiple-dose vials of heparin (a blood thinner) for injection because of recent reports of
serious adverse events (including four deaths and 350 complications) associated with the use of

11 For additional information on this issue, see CRS Report RS22713, Health and Safety Concerns Over U.S. Imports of
Chinese Products: An Overview, by Wayne M. Morrison.
12 For a legal overview of FDA recalls, see CRS Report RL34167, The FDA's Authority to Recall Products, by Vanessa
K. Burrows.
13 In addition, FDA has refused shipments of a variety of Chinese food and drug products. See CRS Report RL34080,
Food and Agricultural Imports from China, by Geoffrey S. Becker.

this drug. Some analysts have speculated that an unlicensed drug company in China, which 14
produces ingredients for the drug, may be the source of the problem. On September 12, 2008,
the FDA issued a health information advisory on infant formula in response to reports of
contaminated milk-based infant formula manufactured and sold in China, and later issued a
warning on other products containing milk imported from China. On November 12, 2008, the
FDA issued a new alert stating that all products containing milk imported from China would be
detained unless proven to be free of melamine. On December 2, 2008, the Chinese government
reported that melamine-tainted formula had so far killed six children and sickened 294,000 others 15
(51,900 of whom had to be hospitalized and 154 were in serious condition).
The National Highway Traffic Safety Administration (NHTSA) in June 2007 was informed by
Foreign Tire Sales, Inc., an importer of foreign tires, that it suspected that up to 450,000 tires
(later reduced to 255,000 tires) made in China may have a major safety defect (i.e., missing or
insufficient gum strip inside the tire). The company was ordered by the NHTSA to issue a recall.
The Chinese government and the manufacturer have maintained that the tires in question meet or
exceed U.S. standards.
The Consumer Product Safety Commission (CPSC) has issued alerts and announced voluntary
recalls by U.S. companies on numerous products made in China. From January-December 2007,
over four-fifths of CPSC recall notices have involved Chinese products. Over this period, roughly
17.6 million toy were recalled because of excessive lead levels. Recalls were also issued on 9.5
million Chinese-made toys (because of the danger of loose magnets), 4.2 million “Aqua Dots”
toys (because beads contain a chemical that can turn toxic if ingested) and 1 million toy ovens 16
(due to potential finger entrapment and burn hazzards). China is the dominant supplier of toys to
the United States, accounting for 89% of total U.S. imports (2007). U.S. recalls of lead-tainted
Chinese-made toys were sharply down in 2008, totaling about 2.5 million units (January 1-
December 2, 2008).
China is believed to have a rather weak health and safety regime for manufactured goods and
agricultural products. Problems include
• weak consumer protection laws and poorly enforced regulations,
• lack of inspections and ineffective penalties for code violators,
• underfunded and understaffed regulatory agencies and poor interagency
• the proliferation of fake goods,
• the existence of numerous unlicensed producers,

14 New York Times, “China Didnt Check Drug Supplier, Files Show,” February 16, 2008.
15 On October 15, 2008, the Chinese government issued an urgent notice to recall all dairy products made prior to
September 14, 2008, so that they could be tested.
For a list of company recalls of Chinese products, see the CPSC website at
prerel.html. In addition, several U.S. retailers have announced that they have halted sales of certain Chinese products,
due to health and safety concerns, which do not appear on the CPSC website.

• falsified export documents,
• extensive pollution,17
• intense competition that often induces firms to cut corners,
• the relative absence of consumer protection advocacy groups,
• failure by Chinese companies to effectively monitor the quality of their suppliers’
• restrictions on the media,18 and
• extensive government corruption and lack of accountability, especially at the
local government level.
Although China has criticized the United States for its recent actions against unsafe Chinese 19
products, it has pledged to improve and strengthen food and drug safety supervision and
standards, beef up inspections, require safety certificates before some products can be sold, and to
crack down on government corruption.
The United States and China reached a number of agreements in 2007 to address health and
safety concerns:
• On September 11, 2007, the CPSC and its Chinese counterpart, the General
Administration of Quality Supervision, Inspection and Quarantine (AQSIQ),
signed a Joint Statement on enhancing consumer product safety. China pledged to
implement a comprehensive plan to intensify efforts (such as increased
inspections, efforts to educate Chinese manufacturers, bilateral technical personal
exchanges and training, regular meetings to exchange information with U.S.
officials, and the development of a product tracking system) to prevent exports of
unsafe products to the United States, especially in regard to lead paint in toys.
• On September 12, 2007, the NHTSA signed a Memorandum of Cooperation with
its Chinese counterpart on enhanced cooperation and communication on vehicles
and automotive equipment safety.
• On December 11, 2007, the U.S. Health and Human Services (HHS) announced
that it had signed two Memoranda of Agreements (MOA) with its Chinese
counterparts; the first covering specific food and feed items that have been of
concern to the United States, and the second covering drugs and medical devices.
Both MOAs would require Chinese firms that export such products to the United
States to register with the Chinese government and to obtain certification before
they can export. Such firms would also be subject to annual inspections to ensure

17 For example, many fish farmers in China are believed to feed various drugs to the fish to help keep them alive in
polluted waters. See Washington Post, “Farmed in Chinas Foul Waters, Imported Fish Treated with Drugs; Traditional
Medicine, Banned Chemicals Both Used,” July 6, 2007, p. A1.
18 Chinas media often reports on health and safety problems, but rarely criticizes the central government for such
19 In June 2007, China impounded U.S. shipments of apricots and orange pulp, claiming that they contained excessive
bacteria. In July 2007, China had suspended some frozen chicken and pork products imported from the U.S., citing
various health concerns. In August 2007, China rejected a shipment of U.S. pacemakers, due to quality concerns. Some
analysts contend these have been retaliatory moves over U.S. recalls and detentions of Chinese products.

they meet U.S. standards. The MOAs also establish mechanisms for greater
information sharing, increase access of production facilities by U.S. officials, and
create working groups in order to boost cooperation.

Between 1994 and July 2005, China pegged its currency, the renminbi (RMB) or yuan, to the
U.S. dollar at about 8.28 yuan to the dollar. In order to maintain a target rate of exchange with the
dollar, the government has maintained restrictions and controls over capital transactions and has
made large-scale purchases of U.S. dollars (and dollar assets).
On July 21, 2005, the Chinese government announced that the yuan’s exchange rate would
become “adjustable, based on market supply and demand with reference to exchange rate
movements of currencies in a basket,” (which include the U.S. dollar, the Japanese yen, the euro,
the South Korean won, and a number of other currencies), and that the exchange rate of the yuan
to the U.S. dollar would be immediately adjusted from 8.28 to 8.11, an appreciation of about

2.1%. Congressional reaction to China’s announcement was mixed—many welcomed the move,

but some referred to it as merely a good first step and called on China to further appreciate the
yuan. However, on July 26, 2005, China’s Central Bank stated it had no immediate plans for
further revaluations and that reforms would be done in a “gradual” way.
Many U.S. policymakers and business representatives have charged that China’s currency is
significantly undervalued vis-à-vis the U.S. dollar (with estimates ranging from 15% to 40%).
They charge that China’s currency policy makes Chinese exports to the United States cheaper,
and U.S. exports to China more expensive, than they would be if exchange rates were determined
by market forces. They complain that this policy has particularly hurt several U.S. manufacturing
sectors (such as textiles and apparel, furniture, plastics, machine tools, and steel), which are
forced to compete against low-cost imports from China, and that this has contributed to the
growing U.S. trade deficit with China. They have called on the Bush Administration to pressure
China either to significantly appreciate its currency or to let it float freely in international
Section 3004 of the 1988 Omnibus Trade and Competitiveness Act (P.L. 100-418) requires the
Secretary of Treasury to issue a report every six months on international economic policy
(including exchange rate policy) and to determine if any country is manipulating its currency in
order to prevent an effective balance of payments adjustment or to gain an unfair competitive
advantage in international trade. Since China reformed its currency in July 2005, Treasury has
continued to press China to reform its currency, but has not cited it for currency manipulation.
Chinese officials have argued that its currency policy is not meant to favor exports over imports,
but instead to foster economic stability. They have expressed concern that abandoning its
currency policy could cause an economic crisis in China and would especially hurt its export
industries sectors at a time when painful economic reforms (such as closing down inefficient

20 For additional information on this issue, see CRS Report RS21625, China's Currency: A Summary of the Economic
Issues, by Wayne M. Morrison and Marc Labonte; and CRS Report RL32165, China's Currency: Economic Issues and
Options for U.S. Trade Policy, by Wayne M. Morrison and Marc Labonte.

state-owned enterprises and restructuring the banking system) are being implemented. Chinese
officials view economic stability as critical to sustaining political stability; they fear an
appreciated currency could reduce jobs and lower wages in several sectors and thus cause worker
U.S. critics of China’s currency policy contend that the low value of the yuan has forced other
East Asian economies to keep the value of their currencies low vis-à-vis the U.S. dollar in order
to compete with Chinese products. They further note that while China is still a developing
country, it has been able to accumulate massive foreign exchange reserves (estimated to have
reached nearly $1.9 trillion at the end of September 2008) and thus has the resources to maintain
the stability of its currency if it were fully convertible. They also argue that appreciating the yuan
would greatly benefit China by lowering the cost of imports and by balancing economic growth
to include greater domestic consumption.
According to the Bank of China, from July 21, 2005, to October 7, 2008, the dollar-yuan 21
exchange rate went from 8.11 to 6.85, an appreciation of 18.4%. Many members contend that 22
China’s currency reforms and the appreciation of its currency have not moved fast enough. As a
result, numerous bills have been introduced in Congress to respond to China’s currency policy
(see section on legislation).
Further complicating the issue is China’s large holdings of U.S. debt, such as Treasury securities.
In September 2008, China surpassed Japan to become the largest foreign holder of such
securities, at $585 billion. China’s purchases such securities in order to obtain some level of
return on its huge holdings of U.S. dollar assets, which it has obtained to meet the government’s
exchange rate targets. On the one hand, some analysts welcome China’s purchases of U.S. debt
securities (which are needed to help fund U.S. budget deficits), while others have expressed
concerns that growing Chinese holdings of U.S. debt may increase China’s leverage over the 23
United States and could diminish its willingness to appreciate its currency.
Negotiations for China’s accession to the General Agreement on Tariffs and Trade (GATT) and its
successor organization, the WTO, began in 1986 and took over 15 years to complete. During the
WTO negotiations, Chinese officials insisted that China was a developing country and should be
allowed to enter under fairly lenient terms. The United States insisted that China could enter the
WTO only if it substantially liberalized its trade regime. In the end, a compromise was reached
that requires China to make immediate and extensive reductions in various trade and investment
barriers, while allowing it to maintain some level of protection (or a transitionary period of
protection) for certain sensitive sectors. China’s WTO membership was formally approved at the
WTO Ministerial Conference in Doha, Qatar on November 10, 2001 (Taiwan’s WTO membership
was approved the next day). On November 11, 2001, China notified the WTO that it had formally

21 Source: Calculated from Bank of China data using the official middle rate.
22 In recent months, China has allowed the yuan to depreciate against the dollar. Many speculate that this has been done
to help Chinas export sector, which has been negatively impacted by the global financial crisis.
23 For additional information on this issue, see CRS Report RL34314, China’s Holdings of U.S. Securities: Implications
for the U.S. Economy, by Wayne M. Morrison and Marc Labonte; and CRS Report RS22984, China and the Global
Financial Crisis: Implications for the United States, by Wayne M. Morrison.

ratified the WTO agreements, and on December 11, 2001, it formally joined the WTO. Under the
WTO accession agreement, China agreed to
• Reduce the average tariff for industrial goods and agriculture products to 8.9%
and 15%, respectively (with most cuts made by 2004 and all cuts completed by


• Limit subsidies for agricultural production to 8.5% of the value of farm output
and eliminate export subsidies on agricultural exports.
• Within three years of accession, grant full trade and distribution rights to foreign
enterprises (with some exceptions, such as for certain agricultural products,
minerals, and fuels).
• Provide non-discriminatory treatment to all WTO members. Foreign firms in
China will be treated no less favorably than Chinese firms for trade purposes.
End discriminatory trade policies against foreign invested firms in China, such as
domestic content rules and technology transfer requirements.
• Implement the WTO’s Trade-Related Aspects of Intellectual Property Rights
(TRIPS) Agreement upon accession. That agreement establishes basic standards
on IPR protection and rules for enforcement.
• Accept a 12-year safeguard mechanism (available to other WTO members as
well) in cases where a surge in Chinese exports cause or threaten to cause market
disruption to domestic producers.
• Fully open the banking system to foreign financial institutions withing five years
(i.e., by the end of 2006). Joint ventures in insurance and telecommunication will
be permitted (with various degrees of foreign ownership allowed).
China has made great strides in implementing key aspects of its WTO commitments. For
example, its average overall tariff has dropped to from 15.6% in 2001 to 9.9% in 2006 and a
number of non-tariff measures have been eliminated. However, there have been several areas
where China’s implementation is considered to be incomplete. The USTR’s sixth annual China
WTO compliance report (issued in December 2007) identified several areas of concern, including
failure by the Chinese government to maintain an effective IPR enforcement regime (discussed
below), industrial policies that attempt to promote Chinese firms (while discriminating against
foreign firms), restrictions on trading and distribution rights (especially in regards to IPR
products, such as movies, books, and music), discriminatory and unpredictable health and safety
rules on imports (especially agricultural products), burdensome regulations and restrictions on
services (including excessive capital requirements), and failure to provide adequate transparency 24
of trade laws and regulations.
The USTR’s December 2007 China WTO report stated that China’s failure to comply with key
areas of its WTO commitments largely stemmed in part from its incomplete transition to a market
based economy. A significant part of the economy, including the banking system and state owned
enterprises (SOEs), are controlled by the central government—remnants of the old command

24 USTR, 2007 Report to Congress on China’s WTO Compliance, December 11, 2007.

economy that existed before reforms began in 1979. Although China agreed to make SOEs
operate according to free market principles when it joined the WTO, U.S. officials contend that
SOEs are still being subsidized, especially through the banking system. In addition, China is
attempting to promote the development of several industries (such as autos, steel,
telecommunications, and high technology products) deemed by the government as important to
China’s future economic development and has implemented policies to promote and protect them.
When China joined the WTO, it agreed to provide a full description of all its subsidy programs,
but to date has failed to fully do so. In addition, China agreed to make its state-owned enterprises
operate according to market principles; yet such firms continue to receive direction and subsidies.
Some major issues of concern to the United States include the following.
• In December 2006, the Chinese government designated seven industries (military
equipment, power generation and distribution, oil, telecommunications, coal,
civil aviation, and shipping) as critical to the nation’s economic security and 25
stated it must retain “absolute control” and limit foreign participation.
• On June 30, 2006, China announced a partial opening of its beef market (which
had been completely closed to U.S. imports in 2003 due to concerns over mad
cow disease). However, U.S. officials have expressed disappointment that China
has failed to develop a science-based trading protocol for importing beef from the
United States, which would enable the United States to resume beef trade with
• In July 2005, the Chinese government issued new guidelines on steel production,
which reportedly includes provisions for the preferential use of domestically
produced steel-manufacturing equipment and domestic technologies; extensive
government involvement in determining the number, size, location, and
production quantities of steel producers in China; technology transfer
requirements on foreign investment, and restrictions on foreign majority
ownership. On June 14, 2006, Assistant U.S. Trade Representative for China Tim
Stratford stated that China’s steel guidelines were “troubling, because it attempts
to dictate industry outcomes and involves the government in making decisions 26
that should be left to the marketplace.” The U.S. steel industry has expressed
growing fears that Chinese government policies have led to overinvestment and
overcapacity in China’s domestic steel industry, which could lead it to flood 27
world markets with cheap steel. Such concerns led the USTR to begin a Steel
Dialogue with China (which first met in March 2006) to discuss issues of
concern to the U.S. steel industry.
• China’s Automotive Industrial Policy, issued by the government in May 2004
includes provisions discouraging the importation of auto parts and encouraging
the use of domestic technology, while requiring new automobile and automobile
engine plants to include substantial investment in research and development

25 China Daily, “Nation Lists Sectors Critical to National Economy, December 19, 2006.
26 Statement of Timothy Stratford, Assistant U.S. Trade Representative for China Affairs, before the Congressional
Steel Caucus, June 14, 2006.
27 China is now the worlds largest steel producer, accounting for 31% of the worlds steel production. Its steel
production levels rose by 25% over the previous year. According to U.S. officials, China’s excess steel capacity in
2006 could be larger than total U.S. steel production.

facilities. New auto parts regulations that went into effect in April 2005
discriminate against imported auto parts by assessing an additional charge on
imported parts if they are incorporated into a vehicle that does not meet 28
minimum levels of domestic content.
To date, the United States has initiated five WTO dispute resolution cases against China, three of
which have been resolved. Cases outstanding include the following.
• On April 10, 2007, the USTR filed two IPR-related cases against China: the first
case charges that China has failed to comply with the TRIPS agreement (namely
in terms of its enforcement of IPR laws) and the second case charges that China
has failed to provide sufficient market access to IPR-related products, namely in
terms of trading rights and distribution services (see below).
• On March 30, 2006, the USTR initiated a WTO case against China for its use of
discriminatory regulations applied to imported auto parts (which often applies the
high tariff rate on finished autos to certain auto parts), stating that the purpose of
these rules was to discourage domestic producers from using imported parts and
encouraging foreign firms to move production to China. On February 13, 2008, a
WTO panel ruled that China’s discriminatory tariff policy was inconsistent with
its WTO obligations. China has appealed the decision.
The three WTO cases that have been resolved include:
• On March 3, 2008, the USTR requested WTO dispute resolution consultations
with China regarding its discriminatory treatment of U.S. suppliers of financial
information services in China. On November 13, 2008, the USTR announced that
China had agreed to eliminate discriminatory restrictions on how U.S. and other
foreign suppliers of financial information services do business in China.
• On February 5, 2007, the USTR announced it had requested WTO dispute
consultations with China over government regulations that give illegal (WTO-
inconsistent) import and export subsidies to various industries in China (such as 29
steel, wood, and paper) that distort trade and discriminate against imports.
China’s WTO accession agreement required it to immediately eliminate such
subsidies. On November 29, 2007, China formally agreed to eliminate the
subsidies in question by January 1, 2008.
• On March 18, 2004, the USTR announced it had filed a WTO dispute resolution
case against China over its discriminatory tax treatment of imported
semiconductors. The United States claimed that China applied a 17% VAT rate on
semiconductor chips that were designed and made outside China, but gave VAT

28 China applies higher tariffs on imported auto parts when a specific combination of parts is used to produce cars in
China, or if the value of these parts amounts to 60% or more of the cost of a car made in China. This policy increases
tariffs on some auto parts from about 10% to about 25% (which is the tariff China currently applies to imports of
completed autos). Source: USTR 2007 Report to Congress on China’s WTO Compliance, p. 61.
29 Some programs give tax preferences, tariff exemptions, discounted loans, or other benefits to firms that meet certain
export performance requirements, while others give tax breaks for purchasing Chinese-made equipment and accessories
over imports.

rebates to domestic producers. Following consultations with the Chinese
government, the USTR announced on July 8, 2004, that China agreed to end its
preferential tax policy by April 2005. However, the USTR has expressed concern
over new forms of financial assistance given by the Chinese government to its
domestic semiconductor industry.
On September 19, 2008, China initiated its first WTO case against the United States in regards to
its use of antidumping and countervailing measures against certain Chinese products.
The United States has pressed China to improve its IPR protection regime since the late 1980s. In
1991, the United States (under a Section 301 case) 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 once
again threaten China 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,
establishing mechanisms to ensure long-term enforcement of IPR laws and providing greater
market access to U.S. IPR-related products.
Under the terms of China’s WTO accession (see above), China agreed to immediately bring its
IPR laws in compliance with the TRIPS agreement. The U.S. Trade Representative’s (USTR)
office has stated on a number of occasions that China has made great strides in improving its IPR
protection regime, noting that it has passed several new IPR-related laws, closed or fined several
assembly operations for illegal production lines, seized millions of illegal audio-visual products,
curtailed exports of pirated products, expanded training of judges and law enforcement officials
on IPR protection, and expanded legitimate licensing of film and music production in China.
However, the USTR has indicated that much work needs to be done to improve China’s IPR
protection regime.
IPR protection has become one of the most important bilateral trade issues between the United
States and China in recent years, as the following examples illustrate.
• During the April 2004 U.S.-China Joint Commission on Commerce and Trade
(established in 1983) meeting, the Chinese government pledged to “significantly
reduce” IPR infringement levels by increasing efforts to halt production, imports,
and sales of counterfeit goods and lowering the threshold for criminal
prosecution of IPR violations.
• On November 19, 2004, eight members of the House Ways and Means
Committee sent a letter to the Chinese Ambassador to the United States
expressing concern that proposed Chinese regulations on government
procurement of software would virtually lock out U.S. software companies due to
requirements for local content and technology transfer.
• On December 16, 2004, General Motors Daewoo Auto & Technology Company
(a division of General Motors) filed a case in China against Chery Automobile

Co. Ltd. (a Chinese firm) for allegedly violating its IPR by copying one of its car
models (the Chevrolet Spark) to produce the Chery QQ. The two companies 30
reportedly settled the issue in November 2005.
• On February 9, 2005, the International Intellectual Property Alliance and the U.S.
Chamber of Commerce urged the USTR to initiate WTO consultations with
China over its poor record on IPR enforcement.
• On April 29, 2005, the USTR announced that it had placed China on the Special
301 “Priority Watch List,” due to “serious concerns”over China’s compliance
with its WTO IPR obligations and China’s failure to fully implement its pledges
on IPR made in April 2004 to make a significant reduction in IPR piracy. The
USTR urged China to launch more criminal piracy cases and to improve market
access for IPR-related products, and warned that it was considering taking a case
to the WTO if IPR enforcement did not soon show significant improvement.
• During the July 2005 U.S.-China Joint Commission on Commerce and Trade 31
(JCCT) meeting, China agreed to boost enforcement of IPR, such as increasing
criminal prosecutions of IPR offenders, improving cooperation among Chinese
enforcement officials and between U.S. and Chinese IPR officials, and taking
special steps to halt movie and internet piracy. It also pledged to improve
government coordination of enforcement efforts, and to ensure the use by all
levels of the Chinese government (including state-owned firms) of legitimate
software products. In addition, the Chinese government agreed to delay
implementing proposed regulations restricting government purchases of foreign-
made software.
• On October 26, 2005, the United States initiated a special process under WTO
rules to obtain detailed information on China’s IPR enforcement efforts.
However, on December 22, 2005, China responded by challenging the legal basis
for such a request in the WTO and subsequently refused to provide the data.
• During the JCCT meeting on April 11, 2006, China pledged to improve IPR
protection by requiring that computers manufactured in China contain legitimate
software. On April 19, 2006, Chinese president Hu asserted that licensed
computer software was being introduced in all levels of government and that in

2006 this would be extended to include large state enterprises.

• On April 28, 2006, the USTR listed China as a Priority Foreign Country in its
Special 301 report, and stated that, based on China’s limited progress in
improving its IPR enforcement regime, the USTR was close to filing a WTO
dispute case against China. In addition, the USTR indicated that next year’s
Special 301 report would include a survey of China’s IPR protection practices at 32
the provincial level. The 2006 report identified Guangdong Province, Beijing

30 Asia Wall Street Journal, November 21, 2005.
31 The JCCT was established in 1983 to serve as a forum for high-level dialogue on bilateral trade issues. In 1994, it
was enhanced by the establishment of specific working groups, which have grown to include trade and investment
issues, business development and industrial cooperation, commercial law, textiles, IPR, trade remedies, statistics, travel
and tourism, high-tech and strategic trade, and agricultural trade.
32 This appears to be motivated by the belief that since IPR enforcement is particularly bad at the local level, the
designation or description of specific provinces might prompt officials there to boost their enforcement efforts.

City, Zhejiang Province, and Fujian Province as “hot spots” that required
additional attention and resources for IPR enforcement. The report stated that,
despite some improvements, China had failed to meet its April 2004
commitments to substantially reduce the level of IPR piracy.
• On December 12, 2007, the Motion Pictures Association of America, Inc. issued
a press release stating that “China may have instituted a block on the import of 33
American films into their country.” Although Chinese officials said no such ban
was in effect, several U.S. industry officials claimed that such restrictions were in
place and speculated they were in retaliation over the U.S. WTO cases against 34
China involving IPR issues.
U.S. firms contend that IPR piracy in China has worsened in recent years, despite Chinese
government promises to strengthen IPR enforcement by increasing criminal prosecutions of IPR
offenders (and toughening penalties), improve coordination among IPR enforcement officials, 35
and make a long term concentrated effort to stamp out major piracy centers. Many business
groups contend that poor IPR protection is one of the most significant obstacles for doing
business in China. To illustrate:
• The International Intellectually Property Rights Alliance (IIPA) estimates that
piracy in China cost U.S. firms $3.5 billion in 2007 (compared to $2.4 billion in 36

2006)—more than any other country.

• According to the U.S. Customs and Border Protection (CBP), China accounted
for 80% ($158 million domestic value) of pirated goods seized by the agency in 37
• According to a representative of the Motion Picture Association of America,
“China is the most difficult market to crack for the U.S. motion picture industry,”
nine out of ten movie DVDs are fake, and 2005 losses from piracy in China were 38
an estimated $244 million. Major causes of the high piracy levels in China are
attributed to be the Chinese government’s tight restrictions on the number of
foreign movies allowed to be imported (20 per year), extensive periods of
government review and censure requirements before a foreign movie can be
legitimately shown, tight limits on distribution of films by foreign companies,
and government pressure on movie houses to show only Chinese-made movies.

33 Press release available at
34 New York Times, “China Said to Block U.S. Films, December 11, 2007.
35 Often the Chinese government will announce a major campaign to crack down on piracy, conducting widespread
raids, shutting down illegal factories, and destroying pirated products. However, once the campaign period is over,
enforcement becomes lax, and the illegal activity resurfaces. As a result, the long term result of the government’s anti-
piracy campaign appears to be negligible in terms of piracy rates.
36 IIPA attempts to measure industry losses incurred by motion pictures, records and music, business software,
entertainment software, and books. In 2007, loss estimates for piracy in China was not available for motion pictures
and entertainment software. See IIPA website at
37 See CBP website at
38 Statement by Dan Glickman, Chairman and Chief Executive Officer, Motion Picture Association of America before
the House Ways & Means Committee, Subcommittee on Trade, hearing on Trade With China, February 15, 2007.

• American music producers have faced similar problems in terms of high piracy
rates in China (estimated by IIPA at 90% in 2007), trade and investment barriers
on legitimate products, and large-scale exports of pirated music CDs by illegal
Chinese firms. Piracy of music and recordings is estimated to have cost U.S. 39
firms $451 million in 2007. Pirated music, music videos, and movies are also 40
widely distributed over the Internet in China.
• The Chinese government estimates that counterfeits constitute between 15% and
20% of all products made in China and are equivalent to about 8% of China’s
annual gross domestic product.
• A study by the Motion Picture Association of America estimated that China’s
domestic film industry lost about $1.5 billion in revenue to piracy in 2005 (and
that the combined losses of both foreign and Chinese film makers totaled $2.7 41
billion). It also found that about half of pirated films in China are Chinese
• The Chinese government estimates that 500 million pirated books are produced 42
each year.
Opinions differ as to why the Chinese government has been unable make a significant reduction
in the level of piracy in China. Some explanations put forward by various analysts include the
• China’s transformation from a Soviet-style command economy (in which the
government owned and controlled nearly every aspect of the economic life) to
one that is becoming more market-based is a very recent occurrence. IPR is a
relatively alien or unfamiliar concept for most people in China to grasp (as is the
concept of private property rights) and thus it is difficult for the government to 43
convince the public that piracy is wrong.
• Chinese leaders want to make China a major producer of capital-intensive and
high-technology products and thus they are tolerant of IPR piracy if its helps 44
Chinese firms become more technologically advanced.
• Although the central government may be fully committed to protection of IPR,
local government officials are often less enthusiastic to do so because production
of pirated products generates jobs and tax revenue, and some officials may be
obtaining bribes or other benefits which prompts them to tolerate piracy.

39 The International Federation of the Phonographic Industry (IFPI) estimates that more than 350 million illegal discs
were sold in China in 2005.
40 IPR piracy has become so prevalent in China that it has produced a number of humorous quips, such asif you did
not see a fake DVD, you were not in China,” and (in Shanghai) “we can copy everything except your mother.
41 Reuters, “China Piracy Costs Film Industry $2.7 Billion in 2005,” June 19, 2006.
42 Xinhua News Agency, March 19, 2007.
43 Some Chinese officials have noted that some individuals who were arrested for IPR piracy violations expressed
shock at their arrest because in their minds they were not harming anybody.
44 On the other hand, IPR piracy may prevent foreign firms from investing in high-tech production in China.

• As a developing country, China (like many other developing countries) lacks the
resources and a sophisticated legal system to go after and punish IPR violators, 45
and that establishing an effective enforcement regime will take time.
• As a practical matter, IPR enforcement in China will always be problematic until
Chinese-owned companies begin to put pressure on the government to protect
their own brands and other IPR-related products.
• Chinese trade barriers and regulatory restrictions on IPR-related products and
their distribution are so onerous that they prevent legitimate products from
entering the market, or raise costs so high that they are unaffordable to the
average individual, thus creating a huge demand for low-cost pirated products.
U.S. trade officials were reportedly on the verge of filing a WTO dispute resolution case against
China in the fall of 2006 over its inadequate IPR enforcement, but were convinced by the Chinese
government to give them more time to implement new IPR enforcement policies. In addition,
U.S. officials indicated that they were are in the process of building a WTO case on IPR that
would also include Chinese trade barriers to IPR-related products (which is seen as a major factor 46
in the high piracy rates in China). Despite various efforts on the part of the Chinese government
to improve IPR enforcement, the USTR decided to file two WTO cases against China on April 47

10, 2007.

The U.S. WTO cases on China’s IPR regime represent the most comprehensive and complex
cases the United States has filed against any WTO to date. Most WTO cases involve specific
restrictions on specific products; however these two cases challenge a broad range of China’s IPR
policies, and could potentially lead the WTO to authorize the United States to impose a 48
significant level of sanctions against China. Specifically, the U.S. WTO complaints against 49
China’s IPR regime involve the following issues:
• The thresholds for criminal prosecutions of IPR violations are too high, meaning
the government will only pursue cases it considers to be serious or excessively
large, creating a safe harbor for smaller producers or violators. In addition, the
thresholds for prosecuting IPR violations are based on the value of the pirated
products rather than the value such legitimate products would fetch in the
marketplace. Such thresholds make it very difficult to pursue cases against many
commercial producers of illegal IPR-related products.

45 Some critics of this argument note that China seems to be very efficient at going after political dissenters and others
deemed to bethreats” to social stability.
46 Inside U.S. Trade, February 21, 2007.
47 For example, the Chinese government claimed it seized 73 million pirated products in 2006, made improvements to
its legal system and increased prosecutions, and that it developed a national comprehensive strategy to deal with piracy.
48 If the cases go to a WTO dispute resolution panel, and that panel ruled in favor of the United States, the panel would
seek to estimate that level of trade losses suffered by the United States due to China’s failure to enforce its IPR laws or
to provide market access to IPR-related products. This figure could potentially be over a billion dollars (based on U.S.
industry estimates of trade losses from IPR piracy in China).
49 See USTR April 9, 2007, Press Release and related documents at

• China often allows seized imported pirated goods to re-enter the market rather
than disposing of them.
• China’s copyright laws fail to protect imported works (such as movies) that are
under review by Chinese censorship authorities (and must be approved before the
works can be distributed in China). As a result, pirated copies of the works can be
widely distributed without violating copyright law and thus do not face
• Chinese IPR laws do not appear to allow producers of pirated products to be
prosecuted unless they also illegally distribute such products.
• China has not abided by its 2001 WTO accession agreement to liberalize its rules
on trading rights and distribution services. As a result, U.S. IPR-related products
face significant trade barriers in China, and such barriers are a major factor for
causing the high rate of piracy in China.
The USTR’s 2008 Special 301 Report (issued on April 25, 2008) stated that its top IPR protection
and enforcement priorities were China (along with Russia). The report stated that, despite
progress in many areas, the level of piracy in China remained unacceptably high, with piracy of
U.S. IPR related products at 85 to 95%.

Many critics of Chinese trade policies contend that the Chinese government provides a significant
level of subsidies to many of its industries, such as preferential bank loans and grants, debt 51
forgiveness, and tax breaks and rebates. In addition, some analysts charge that China’s currency 52
policy constitutes a form of government export subsidy. Such critics contend that U.S.
countervailing laws, which seek to address the negative impact foreign government subsides on
exported products may have on U.S. producers in the United States, should be applied to 53
nonmarket economies such as China.
Until very recently, the Commerce Department contended that U.S. countervailing laws could not
be applied to a non-market economy because of the assumption that most production and prices
in such an economy are determined by the government, and thus it would be impractical to
determine the level of government subsidy that might be conveyed to various exported products.
However, in November 2006, the Commerce Department decided to pursue a countervailing case
against certain imported Chinese coated free sheet paper products. On March 30, 2007, the
Commerce Department issued a preliminary ruling to impose countervailing duties (ranging from
11% to 20%) against the products in question. Commerce contends that, while China was still a
non-market economy for the purposes of U.S. trade laws, economic reforms in China have made

50 For additional information on this issue, see CRS Report RL33550, Trade Remedy Legislation: Applying
Countervailing Action to Nonmarket Economy Countries, by Vivian C. Jones.
51 See USTR 2007 National Trade Estimates of Foreign Trade Barriers, April 2, 2007.
52 They charge that government intervention in currency markets to keep the value of the yuan low vis-a-vis the dollar,
keeps the price of Chinese exports low.
53 The relief comes in the form of additional duties that are imposed on the imported products in question after a
determination is made that a foreign government subsidized export to the United States has harmed a U.S. producer.
The additional duties are intended to offset the impact of the subsidy.

several sectors of the economy relatively market based, and therefore it is possible to identify the 54
level of government subsidies given to the Chinese paper firms in question.
Many Members of Congress have called on the Administration to expand its use of countervailing
measures against other Chinese products (as well to apply the law to the products of other
nonmarket economies), and some have argued that Commerce should consider China’s 55
undervalued currency as a factor in determining the level of countervailing duties.

Various U.S. industry groups have called on the Administration to invoke special safeguard
provisions (included in China’s WTO accession package) that would enable the United States to
restrict imports of certain Chinese products deemed harmful to U.S. industries. U.S. producers of
textile and apparel products have been particularly vocal over the competitive pressures they face
from China, especially since U.S. textile and apparel quotas on Chinese goods were eliminated in 57
January 2005. According to the U.S. Commerce Department, China is the largest foreign
supplier of textiles and apparel to the United States at $37.5 billion, or 34.9% (2007), and were 58
nearly double 2004 levels ($19.2 billion).
The sharp rise in textile and apparel imports from China, and U.S. industry contention that these
imports were disrupting U.S. markets, led the Administration to seek an agreement with China to
limit its exports to the United States. On November 8, 2005, China agreed to restrict various
textile and apparel exports to the United States (according to specified quota levels) from January

2006 through the end of 2008.

On September 29, 2006, President Bush and Chinese President Hu agreed to establish a Strategic
Economic Dialogue (SED) in order to have discussions on major economic issues at the “highest
official level.” According to a U.S. Treasury Department press release, the intent of the SED is to
“discuss long-term strategic challenges, rather than seeking immediate solutions to the issues of
the day,” in order to provide a stronger foundation for pursuing concrete results through existing 59
bilateral economic dialogues. The first meeting (chaired by Secretary of Treasury Paulson and
Chinese Vice Premier Wu Yi) was held on December 14-15, 2006. The two sides have focused on
four main topics: macroeconomic policy (including China’s currency policy), innovation and IPR
protection, energy and the environment, and services trade and investment. The United States has

54 Countervailing investigations have also been initiated of Chinese off-the-road tires (June 18, 2007) and Chinese steel
pipe (June 14, 2007).
55 Legislation has been introduced in the 110th Congress that would clarify U.S. law to indicate that countervailing laws
can apply to nonmarket economies. Other proposed legislation makecurrency manipulation” orcurrency
misalignment” actionable under U.S. countervailing laws (see section on legislation).
56 For additional information, see CRS Report RL34106, U.S. Clothing and Textile Trade with China and the World:
Trends Since the End of Quotas, by Michael F. Martin.
57 For additional information on U.S.-China textile issues, see CRS Report RL32168, Safeguards on Textile and
Apparel Imports from China, by Vivian C. Jones.
58 For more detailed data on U.S. imports of textile and apparel products from China, see Department of Commerce,
Office of Textiles and Apparel Office website at
59 U.S. Treasury Department press release, December 15, 2006.

sought to use the talks to induce China to: quicken the pace of its currency reforms, expand
market access for financial and non-financial services (beyond its WTO accession commitments),
take steps to boost domestic consumption (including developing a social safety net), improve the
business climate in China (such as transparency), and to address U.S. high priority trade issues
(such as Chinese restrictions on U.S. beef, IPR protection, and health and safety issues regarding
Chinese food products).
The second round of SED talks were held on May 22-23, 2007, in Washington, DC. The Chinese
delegation was led by Chinese Vice Premier Wu Yi and included representatives from 15
ministries. According to the Treasury Department, China agreed to the following terms:
• resume licensing for qualified joint ventures with foreign securities firms in
China and expand the scope of their operations (such as in securities brokerages,
propriety trading, and asset management), increase the level of permitted foreign
investment (by qualified entities) in China’s securities markets (e.g., stocks,
bonds, etc.), and expand the scope of overseas equity investments that Chinese
nationals are allowed to make through domestic entities;
• allow foreign banks in China to issue RMB bank cards;
• double the number of daily U.S. passenger flights to China by 2012 and provide
full liberalization for cargo providers by 2011;
• expand cooperation with the United States on sharing data on seizures of pirated
goods in order to track violators; and
• increase cooperation and lower barriers for bilateral trade in environmental goods
and services.
The December 2007 SED talks focused on a number of issues, many of which led to formal 60
agreements, including the following:
• a Memorandum of Understanding (MOU) on illegal logging and associated trade.
The MOU establishes a Bilateral Forum between the two countries to identify
joint work promoting both sustainable forest management and trade in legally-
sourced forest products, as well as encourage public-private partnerships;
• MOAs on food and feed and on drugs and medical products;
• an MOA on strengthening cooperation on sound environmental management
practices related to trade;
• an MOU to expand collaboration and cooperation for the exchange of
information on regulatory standards for alcohol and tobacco products, and to
improve the safety of imports and exports between the two countries;
• an MOU on biofuels, including cooperation on scientific, technical, and policy
aspects of biofuels development, production, and use;
• an MOU on bilateral tourism promotion;

60 Note, some of these agreements occurred during the December 11, 2007 JCCT meeting, which was held right before
the SED meeting (December 12-13).

• an agreement on “Guidelines for U.S.-China High-Technology and Strategic
Trade Development” to expand information sharing on market opportunities, and
to identify and remove trade barriers;
• an MOU to expand U.S. exports to major urban areas in China;
• a memorandum of cooperation (MOC) to launch the Environmental Industries
Forum, a forum of public and private sector groups, to promote the deployment
of environmental technologies in China and increased trade in environmental
goods and services; and
• renewal of a 2002 protocol promoting cooperation and collaboration on
agricultural science and technology, and renewal and expansion of a 2002 MOU
on cooperation in fighting HIV/AIDS.
The two sides also agreed to expand cooperation in the following areas:
• the use of strategic oil reserves;
• the use of low-sulfur fuels;
• clean water (the United States will provide technical assistance to China); and
• improved transparency on trade issues.
In addition, China agreed to allow foreign companies doing business in China to issue RMB-
denominated stocks and bonds, and to complete a study with recommendations on adjusting the
extent of foreign equity participation in the securities sector. The United States agreed to allow
mutual funds administered by Chinese banks to invest in the U.S. stock market. China also agreed
to re-list six of the 11 U.S. plants that had been de-listed for export to China because of Chinese
claims that a feed additive (ractopamine) was unsafe.
The fourth round of SED talks were held in June 2008, the two sides
• signed a Ten Year Energy and Environment Cooperation Framework;
• discussed ways to remove barriers to trade in environmental goods and services;
• agreed to begin discussions on reaching a bilateral investment treaty; and
• discussed furthering opening up China’s financial services market. China agreed
to reduce certain barriers.
During the fifth round of SED talks in December 2008, the two sides agreed to deepen
cooperation on the global financial crisis, energy use, the environment, and health and safety
issues. In addition, the two sides announced an agreement to jointly provide $20 billion in export
financing to emerging markets. China agreed to allow foreign incorporated banks in China to
trade bonds in China in the inter-bank market. Some Members expressed disappointment with the
SED forum, arguing that they have done little to resolve major trade disputes (such as China’s
restrictions on imports of U.S. beef), while others have argued that the SED provides a sound
basis for cooperation on long-term issues.

Several bills have been introduced in the 110th Congress to address various concerns over China’s
economic policies, especially its currency policy.
A significant share of trade legislation aimed at China involves efforts to change China’s currency
policy. The bills reflect various approaches. Some would impose tariffs against Chinese products
(equal to the estimated undervaluation of China’s currency) if China does not appreciate its
currency to market levels. Another approach would apply U.S. countervailing laws to China’s
currency policy in the belief that such a policy constitutes a government subsidy. Some bills
would change U.S. law regarding the Treasury Department’s bi-annual determination of countries
that manipulate their currencies. For example, some would replace the term currency
“manipulation” with currency “misalignment” and would change factors Treasury would have to
consider when determining which countries to cite, thus increasingly the likelihood that Treasury 61
would have to designate China. A final approach would make China’s undervalued currency a
factor in U.S. antidumping cases. Major currency legislation includes those below.
• H.R. 321 (English) would require the Treasury Department to determine if China
manipulated its currency and to estimate the rate of that manipulation (if such a
determination were made), which then would require the imposition of additional
tariffs on Chinese products (equal to the estimated rate of manipulation). The bill
also calls on the United States to file a WTO case against China over its currency
policy and to work within the WTO to modify and clarify rules regarding
currency manipulation.
• H.R. 708 (English), H.R. 1229 (Davis) and S. 974 (Collins) would apply U.S.
countervailing laws to non-market economies. S. 364 (Rockefeller) would apply
U.S. countervailing laws to non-market economies and make exchange rate
manipulation actionable under those laws.
• H.R. 782 (Tim Ryan) and S. 796 (Bunning) would make exchange rate
“misalignment” actionable under U.S. countervailing duty laws, require the
Treasury Department to determine whether a currency is misaligned in its semi-
annual reports to Congress on exchange rates, prohibit the Department of
Defense from purchasing certain products imported from China if it is
determined that China’s currency misalignment has disrupted U.S. defense
industries, and would include currency misalignment as a factor in determining
safeguard measures on imports of Chinese products that cause market disruption.
• H.R. 1002 (Spratt) would impose 27.5% in additional tariffs on Chinese goods
unless the President certifies that China is no longer manipulating its currency.

61 Current U.S. law implies that there has to be intent to prevent an effective balance of payments or to seek an unfair
competitive advantage before a country can be designated as a currency manipulator. Some of the proposed currency
bills attempt to factor out thistechnicality so that a designation would occur as long as if Treasury found that a
currency was fundamentally misaligned.

• H.R. 2942 (Tim Ryan) would apply countervailing laws to nonmarket economies,
make an undervalued currency a factor in determining antidumping and
countervailing duties, require Treasury to identify fundamentally misaligned
currencies and to list those meeting the criteria for priority action. If
consultations fail to resolve the currency issues, the USTR would be required to
take action in the WTO.
• S. 1607 (Baucus) would require the Treasury Department to identify currencies
that are fundamentally misaligned and to designate such currencies for priority
action under certain circumstances in its semi-annual reports to Congress on 62
exchange. If after consultations the country maintaining the designated
currency policy fails to adopt appropriate policies, the U.S. would make currency
undervaluation a factor in determining antidumping duties, ban federal
procurement of products or services from the designated country, bar financing 63
by the U.S. Overseas Private Investment Corporation (OPIC), and would
oppose multilateral financing for that country. If the designated country failed to
take appropriate measures, the USTR would be required to file a case in the
WTO. A modified version of the bill passed the Senate Finance Committee on
July 31, 2007.
• S. 1677 (Dodd) would require the Treasury Department to identify countries that
manipulate their currencies regardless of their intent and to submit an action plan
for ending the manipulation; and gives Treasury the authority to file a case in the
WTO. The bill was approved by the Senate Banking Committee on August 1,


• S. 2813 (Bunning) would require the Treasury to cite China for currency
manipulation and to submit an action plan to Congress for inducing China to end
such manipulation.
Other proposed bills that would affect commercial relations with China include
• H.Res. 552 (Marshall) calls on China to remove barriers to U.S. financial
services firms doing business in China.
• H.Res. 730 (Ros-Lehtinen) expresses the sense of the House regarding the
planned acquisition of a minority interest in 3Com Corporation (a U.S. producer
of data-networking equipment) by affiliates of Huawei Technologies (a Chinese
• H.Res. 925 (Poe) would condemn China for its socially unacceptable business
practices, including the manufacturing and exportation of unsafe products, casual
disregard for the environment, and exploitative employment practices.

62A designation would occur based on such factors as protracted large-scale currency intervention, excessive reserve
accumulation, restrictions on capital flows, or any other policy the Treasury Department determines that would warrant
such a designation.
63 OPIC has been banned from operating in China since 1989 under U.S. sanctions.

• H.R. 275 (Christopher Smith), the Global Online Freedom Act, attempts to
promote free expression and a free flow of information on the Internet by
preventing U.S. companies from aiding regimes who restrict access to the
• H.R. 388 (Kildee) would prohibit U.S. imports of Chinese autos as long as
Chinese tariffs on autos are higher than U.S. tariffs.
• H.R. 571 (Tancredo) would raise tariffs on countries classified as non-market
economies (including China).
• H.R. 1958 (Kaptur) and S. 571 (Dorgan) would terminate China’s permanent
normal trade relations (PNTR) status and instead would re-apply provisions of
U.S. trade law that would extend conditional normal trade relations (NTR) status
to China, renewable on an annual basis, as specified under Title IV of the 1974
Trade Act, as amended.
• H.R. 3220 and H.R. 3221 (both by Pelosi) would (among other things) promote
U.S. exports of clean and efficient energy technologies to China (and India) and
help build the capacity of government officials to become more familiar with
available clean and efficient technologies.
• H.R. 3272 (Kirk) would provide for increased funding and support for diplomatic
engagement with China and would provide funding for rule of law programs in
• H.R. 3273 (Larsen) seeks to expand U.S. export promotion programs in order to
boost exports to China by small and medium-sized firms.
• H.R. 3274 (Israel) would authorize the Secretary of Energy to make grants to
encourage cooperation between the United States and China on joint research,
development, or commercialization of carbon capture and sequestration
technology, improved energy efficiency, or renewable energy sources.
• H.R. 3275 (Davis) would, for the purpose of boosting U.S. global economic
competitiveness, provide resources to U.S. schools in order to provide Chinese
language and cultural studies classes.
• H.R. 5960 (Altmire) and S. 1919 and (Baucus) attempt to limit the discretion of
the president in regards to Section 421 (China-specific safeguards) investigations
on import surges from China. S. 1919 would also amend U.S. trade law to apply
U.S. countervailing laws to nonmarket economies.
Wayne M. Morrison
Specialist in Asian Trade and Finance, 7-7767