U. S. - China trade relation has developed substantially over last three decades. The relation got a new dimension with signing of bilateral trade agreement in July 1979 to provide mutual most-favored-nation (MFN) treatment from 1980. The two-way trade between the two countries, which grossed an amount less than U. S. $1billion in 1978, has touched $387billion in 2007. China is now the largest source of U.S. imports & 2nd largest U. S. trading partner. China is also third largest export market for U.S. A total of about U. S. $50billion of paid up capital has been invested till date in more than 40 thousand projects in China.
Over the last three decades, as the U. S. transformed itself from an industrialized to post industrialized nation, its Gross Domestic Product (GDP) leapfrogged almost five times. During the same period China went ahead with its Economic and Trade reforms, bringing about sustained growth in economy. This period also witnessed the fall of Soviet Union and emergence of U.S. as the only superpower. International trade witnessed a sea change in terms of business orientation and many countries were now more interested in doing business with U.S. During this period of intense competition in global trade, two way trade between U.S.A. and China increased by over sixty times. This not only signifies the emergence of China as a fast developing nation but also the importance it had gained in the U.S. international trade.
As China modernizes its infrastructure and upgrades its industries, demand for foreign capital goods and services in the country are set to increase. In a landmark development, China joined WTO (World Trade Organization) on November 11, 2001, and thereby agreed to reduce tariff for goods and agricultural products to 8.9%, limit subsidies for agricultural products to 8.5%, grant full trade and distribution rights to foreign countries (except few agricultural items, minerals & fuels), end discriminatory policy against foreign companies in China, open up banking system and implement Trade Related Aspects of Intellectual Property Rights (TRIPS).
U.S. Exports to China
The U. S. exports to China mainly consist of aircraft and its spare parts, electronic component and semiconductors, grains and oilseeds (mainly soybean), waste and scrap, resins, synthetic rubbers and fibers. China is also a big market for U.S.exporters of agricultural products. Agricultural exports in 2007 were US $ 8.3billion, which has grown by 24 percent over last year. U.S. exports to China accounted for 5.6 percent of total U.S. exports in 2007, which amounted to US $ 65.2 billion, maintaining an annual growth of 18 percent. China is now third largest market for U.S. exports. During the first half of 2008, U.S. exports had increased by 24 percent in comparison to the same period last year. During 2001-2007 U.S. exports to China had increased by a whooping 240 percent.
China has been growing with an average of 9% in terms of GDP. Economic growth has increased the purchasing power of people. American Exporters are increasingly feeling comfortable in doing business with China. With a liberalized economy and potentially huge market, American manufacturers are targeting China to explore its international business potentials.
China has the largest mobile phone network with an estimated user base of 600 million as on July 2007, and it is continuously growing. This offers a lucrative market for mobile network equipments and their sales and service. Moreover a widely covered network acts as an essential impetus to the communication infrastructure. Boeing Corporation expects China to be the largest market for commercial air travel outside U.S. In the next two decades, by 2025, China is expected to buy 3400 aircrafts valued at $ 340 billion. Thus the U.S. exporters have a strong export market for aircrafts and its spare parts, which is set for a stupendous growth. China is now the second largest market for new cars. Chinese government expects the new car sales to rise by 20.7 million units per annum by 2020. This presents an excellent opportunity for U.S. exporters engaged in automobile exports.
However there is a growing concern among U.S. exporters that China is framing its policy in such a manner as to impose restrictions on the imports of finished products, which in turn will force the American manufacturers to invest in manufacturing facilities in China. This is evident from the fact that most of the Chinese imports from U.S. are raw materials utilized to produce finished goods for exports.
U.S. Imports from China
China has been the largest source of U.S. imports in 2007, with an annual growth of 11.7 percent; the import bill surged to $ 321.5 billion, accounting for 16.5% of total U.S. imports (in comparison to 6.5% in 1996). The major U. S. imports from China include computer and its parts, communication equipments, miscellaneous manufacturing articles (toys, games etc), apparel and audio video equipments. During the last two decades, the items exported by China exporters were mainly labor-intensive low valued products, such as toys and games, footwear and consumer electronic products. In the recent times more technologically advanced products such as computers have now overtaken it. During the period 2003 - 2007 import bills of computer equipments have grown to $ 45.5 billion from $ 18.7 billion, followed by $ 34.8 billion in miscellaneous manufacturing articles from $ 21.8 billion. At the same period import of communication equipments and apparels have increased to $ 23 billion each, from about $ 9 billion. The rank of China as a source of U.S. import, has improved dramatically from 8th in 1990 to 1st in 2007. Import of computer remains the most important item with a growth 436 percent in the last seven years, while at the same period computer imports by U.S. from other countries rose to about 26 percent.
Analysts attribute this phenomenal growth to the fact that the major American manufacturers of computer have shifted their production facilities from other Asian countries like Japan to China to take advantage of cheap labor and liberalized economy. China exporters of agricultural products are doing brisk business by exporting items such as fish, tea and spices, vegetables and fruits, animal-fodder and sugar products. Agricultural imports rose by 133 percent for the period 2003 -2007 and China has grown to be the 3rd largest source of U.S. agricultural imports. However U.S. imports from China had slowed down recently. During the first three months of 2008 it grew only by 1.8 percent over the same period in 2007. It may be attributed to increase in price, which is highest since 2003.
Areas of Dispute
Trade relations between the two countries have suffered due to various reasons time and again. The issue of large U.S. trade deficit is a major area of concern for U.S., which has grown to $ 256 billion in 2007. This has been largely attributed to the fact that Chinese imports in U. S. has not increased much as China has failed to implement the strict health and safety standards of its exports, as required by U.S. A floating and fully convertible currency system and change in certain policies of the Chinese government in accordance with the WTO (World Trade Organization) has been demanded by American manufacturers and U.S. exporters. Non-implementation of Intellectual Property Act is another area of concern in doing business with China. While the central government of China is committed to protect IPR, local bodies in China lack such commitment. Sharp rise of Chinese apparel imports were strongly objected by U.S. garment industry causing China to limit its export of apparels to U.S. Antidumping Disputes has surfaced more than once against China. It has been argued that, China by virtue of its cheap labor and low margin has been flooding the U.S. markets with Chinese products and disrupting the business of American manufacturers. It has been observed that major U.S. based companies who were doing business with U.S. for last fifty years has been shifting their production facilities to China thus resulting loss of job in U.S., which in turn is slowing down consumer spending. In what is perceived to be a retaliatory move, in June, July and August of 2007, China blocked various shipments of fruits, apricots , frozen chicken and pork from U.S. citing health concerns. It also refuted U.S. action against what were alleged as unsafe products by Chinese manufacturers.
In an attempt to ease the tension, both the administrations have begun a Strategic Economic Dialogue (SED) to resolve bilateral disputes. Last round of SED talks were held in December 2007 to establish a bilateral forum in order to identify areas of dispute and remedial steps, and to implement various liberal trade practices for promotion of bilateral trade. Renminbi (Yuan) exchange rate (relating to currency conversion) remains the core area of dispute. It has been said that the Yuan is undervalued compared to U.S.dollar making Chinese exports cheaper. In a major step to address this issue, government of China on July 21, 2005 took some policy measures to adjust the exchange rate of Yuan with respect to a basket of currencies. Since then, till May 2008 the Dollar- Yuan exchange rate has witnessed an appreciation of 16 percent.
It has been observed that international trade is mainly dominated by developed nations. The global trade policies are framed and implemented by them. In such an era of foreign trade, doing business with U.S. and topping its foreign trade list is a remarkable achievement for a developing nation like China. At the same time it may be said that this phenomenal growth in bilateral trade between U.S. and China has benefited the U.S. exporters and China exporters as well as people of both the countries. American manufacturers are finding new production hub in China, China manufacturers are increasingly invading U.S. market fuelling their growth story. As more and more U.S. exporters target the huge market of China that has a growing number of middle-class with high disposable income, U.S. and China trade relation is poised for a spectacular growth in the coming days.