Most Recent Developments

U.S.-China commercial ties are complex and have become increasingly contentious, due largely to China's incomplete transition to a free market economy. On March 8, 2018, the Trump Administration announced that it would impose additional imports tariffs on steel (by 25%) and aluminum (10%), based on "national security" justifications under the 1962 Trade Act, as amended. In 2017, total U.S. merchandise trade with China was $636 billion, making China the United States' largest trading partner (see Table 1 ). Merchandise Trade Deficit with China

A major concern among some U.S. policymakers is the size of the U.S. merchandise trade deficit with China, which rose from $10 billion in 1990 to $367 billion in 2015 (see Figure 4 ). China Trade and U.S. Jobs

Measuring and assessing the benefits and costs of growing U.S.-China economic ties are often hotly debated among U.S. policymakers and economists, particularly in regard to its impact on various manufacturing sectors and workers. Although growing U.S.-China economic ties are considered by most analysts to be mutually beneficial overall, tensions have risen over a number of Chinese economic and trade policies that many U.S. critics charge are protectionist, economically distortive, and damaging to U.S. economic interests. Major areas of concern for U.S. stakeholders include China's
Extensive network of industrial policies (including widespread use of trade and investment barriers, financial support, and indigenous innovation policies) that seek to promote and protect domestic sectors and firms, especially SOEs, deemed by the government to be critical to the country's future economic growth; Failure to provide adequate protection of U.S. intellectual property rights (IPR) and (alleged) widespread government-directed cyber-theft of U.S. trade secrets security to help Chinese firms; Mixed record on implementing its WTO obligations; and Government-directed financial policies that promote high savings (but reduce private consumption), encourage high fixed investment levels (but may contribute to overcapacity in many industries), and a managed exchange rate policy that may distort trade flows. It also seeks to sharply reduce the country's dependence on foreign technology. However, on May 29, the White House announced that it planned to move ahead with the proposed Section 301 sanctions against China by imposing 25% ad valorem tariffs on $50 billion worth of imports from China, including those related to the Made in China 2025 initiative (final list of imports to be issued by June 15); (2) implementing new investment restrictions and enhanced export controls on Chinese entities and persons in regards to the acquisition of "industrially significant technology" for national security purposes (details to be released by June 30); and (3) continuing to pursue the WTO case against China's licensing policies (initiated on March 23). On June 15, the USTR announced a two-stage plan to impose 25% ad valorem tariffs on $50 billion worth of Chinese imports. For the second stage, the USTR proposed increasing tariffs on 228 tariff lines on $16 billion worth of Chinese imports, mainly targeting China's industrial policies. China on June 16 issued its own two-stage retaliation plan against the United States. In response to China's actions, President Trump directed the USTR on June 18 to come up with a new list of that would increase tariffs by 10% tariffs on $200 billion worth of Chinese products, which would be imposed if China retaliated against U.S. tariffs, and he further warned that if China raised its tariffs yet again, the United States would pursue tariffs on another $200 billion worth of Chinese products. On July 6, the Trump Administration implemented the first round of tariff increases on $34 billion worth of Chinese products. For example, in addition to raising tariffs on imported U.S. products, China could
Encourage its citizens to boycott American products and services; Impose new restrictions on the commercial activities of U.S. firms in China (such as limiting U.S. FDI in China or halting production of iPhones and other major consumer goods); Selectively increase "enforcement" of its laws and regulations against U.S. entities (e.g., boosting health and safety inspections of imported U.S. commodities or delaying customs clearance); Reduce its holdings of U.S. Treasury securities; Urge Chinese firms to seek non-U.S. suppliers of goods as services, such as buying more planes from Airbus and fewer from Boeing; and Ban the export of certain critical minerals to the United States where China is a major producer and global supplier, such as rare earth elements. Section 301 action) could have based on three scenarios: (1) the United States increases tariffs on $50 billion worth of Chinese imports and China does not respond; (2) the United States increases tariffs on $50 worth of Chinese imports and China retaliates in kind; and (3): both the United States and China impose tariffs on $150 billion worth of imports from each other. On April 1, 2018, China announced that it had raised duties (by 15% to 25%) on 128 tariff lines covering imports from the United States, including pork products, aluminum waste and scrap, and fruits and nuts, which together totaled about $3 billion in 2017. On the one hand, China's past economic and trade reforms have made China an increasingly significant market for U.S. exporters, a central factor in U.S. global supply chains, and a major source of low-cost goods for U.S. consumers.
U.S.-China economic ties have expanded substantially since China began reforming its economy and liberalizing its trade regime in the late 1970s. Total U.S.-China merchandise trade rose from $2 billion in 1979 (when China's economic reforms began) to $636 billion in 2017. China is currently the United States' largest merchandise trading partner, its third-largest export market, and its biggest source of imports. In 2015, sales by U.S. foreign affiliates in China totaled $482 billion. Many U.S. firms view participation in China's market as critical to their global competitiveness. U.S. imports of lower-cost goods from China greatly benefit U.S. consumers. U.S. firms that use China as the final point of assembly for their products, or use Chinese-made inputs for production in the United States, are able to lower costs. China is also the largest foreign holder of U.S. Treasury securities (at $1.2 trillion as of April 2018). China's purchases of U.S. debt securities help keep U.S. interest rates low.
Despite growing commercial ties, the bilateral economic relationship has become increasingly complex and often fraught with tension. From the U.S. perspective, many trade tensions stem from China's incomplete transition to a free market economy. While China has significantly liberalized its economic and trade regimes over the past three decades, it continues to maintain (or has recently imposed) a number of state-directed policies that appear to distort trade and investment flows. Major areas of concern expressed by U.S. policymakers and stakeholders include China's alleged widespread cyber economic espionage against U.S. firms; relatively ineffective record of enforcing intellectual property rights (IPR); discriminatory innovation policies; mixed record on implementing its World Trade Organization (WTO) obligations; extensive use of industrial policies (such as subsidies and trade and investment barriers) to promote and protect industries favored by the government; and interventionist policies to influence the value of its currency. Many U.S. policymakers argue that such policies adversely impact U.S. economic interests and have contributed to U.S. job losses in some sectors.
The Trump Administration has pledged to take a more aggressive stance to reduce U.S. bilateral trade deficits, enforce U.S. trade laws and agreements, and promote "free and fair trade," including in regard to China. On March 8, 2018, President Trump announced a proclamation imposing additional tariffs on steel (25%) and aluminum (10%), based on Section 232 national security justifications (China is the world's largest producer of both of these commodities). On April 1, China announced that it had retaliated against the U.S. action by raising tariffs (from 15% to 25%) on various U.S. products, which together totaled $3 billion in 2017. On March 22, President Trump announced that action would be taken against China under Section 301 over its IPR policies deemed harmful to U.S. stakeholders. In addition, he stated that he would seek commitments from China to reduce the bilateral trade imbalance and to achieve "reciprocity" on tariff levels. On June 15, the United States Trade Representative (USTR) announced a two-stage plan to impose 25% ad valorem tariffs on $50 billion worth of Chinese imports. Under the first stage, U.S. tariffs would be increased on $34 billion worth of Chinese products and effective July 6. For the second stage, the USTR proposed increasing tariffs on $16 billion worth of Chinese imports, mainly targeting China's industrial policies. China released its own two-stage list of counter-retaliation of equal magnitude. President Trump then threatened 10% ad valorem tariffs on another $400 billion worth of Chinese products. On July 6, the Trump Administration implemented the first round of tariff increases and China retaliated in kind. These tit-for-tat actions threaten to sharply reduce U.S.-China commercial ties, disrupt global supply chains, raise import prices for U.S. consumers and importers of Chinese inputs, and diminish economic growth in the United States and abroad.