China-U.S. Trade Issues
Congressional research reportJul 30, 2018
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China-U.S. Trade Issues
(name redacted)
Specialist in Asian Trade and Finance
July 30, 2018
Congressional Research Service
7-....
www.crs.gov
RL33536
China-U.S. Trade Issues
Summary
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.
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Contents
Introduction ..................................................................................................................................... 1
Most Recent Developments ............................................................................................................. 1
U.S. Trade with China ..................................................................................................................... 2
U.S. Merchandise Exports to China .......................................................................................... 2
Major U.S. Merchandise Imports from China........................................................................... 6
Trade in Services ....................................................................................................................... 8
The U.S. Merchandise Trade Deficit with China ...................................................................... 9
The Transfer of Pacific Rim Production to China by Multinational Firms ............................. 10
China as a Major Center for Global Supply Chains ................................................................ 12
China Trade and U.S. Jobs ...................................................................................................... 15
U.S.-China Investment Ties: Overview ......................................................................................... 17
China’s Holdings of U.S. Public and Private Securities ......................................................... 18
U.S. Residential Real Estate.................................................................................................... 20
Bilateral Foreign Direct Investment Flows ............................................................................. 21
Alternative Measurements of Bilateral FDI Flows ........................................................... 22
Chinese Restrictions on U.S. FDI in China ...................................................................... 25
Negotiations for a Bilateral Investment Treaty (BIT) ....................................................... 26
Concerns About Chinese FDI in the United States ................................................................. 28
Major U.S.-China Trade Issues ..................................................................................................... 29
Chinese “State Capitalism” ..................................................................................................... 30
China’s Plan to Modernize the Economy and Promote Indigenous Innovation ............... 33
New Restrictions on Information and Communications Technology ..................................... 37
Intellectual Property Rights (IPR) Issues ................................................................................ 39
Technology Transfer Issues............................................................................................... 44
Cyber-security Issues ........................................................................................................ 45
China’s Obligations in the World Trade Organization ............................................................ 49
WTO Implementation Issues ............................................................................................ 50
China’s Currency Policy ......................................................................................................... 54
The Trump Administration’s Approach to Commercial Relations with China ............................. 56
The Administration’s Section 301 Case on China’s IPR Policies ........................................... 58
U.S. and Chinese Products that Have Been or Could Be Subject to Increased
Tariffs Resulting from the Section 301 Dispute............................................................. 62
Economic Effects of Section 301 Tariff Increases ............................................................ 70
Section 232 Tariffs on Steel and Aluminum............................................................................ 74
Implications of Recent Trade Action against China ...................................................................... 75
Figures
Figure 1. Top 5 U.S. Merchandise Export Markets in 2017 ............................................................ 3
Figure 2. Top 5 Sources of U.S. Merchandise Imports: 2017 ......................................................... 6
Figure 3. Major U.S. Services Trading Partners in 2017 ................................................................. 9
Figure 4. U.S. Merchandise Trade Balance with China: 2000-2017 ............................................. 10
Figure 5. Five Largest U.S. Merchandise Trade Imbalances in 2017............................................ 10
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Figure 6. U.S. Manufactured Imports from Pacific Rim Countries as a Percentage of Total
U.S. Manufactured Imports: 1990 and 2017 ............................................................................... 11
Figure 7. U.S. Manufactured Imports from China and Japan as a Percentage of U.S. Total
Imports: 1990-2017 (%) ............................................................................................................. 12
Figure 8. Estimated Percentage Foreign Value-Added to China’s Exports in 2011 ...................... 13
Figure 9. Two Measurements of U.S. Trade in Goods and Services: 2011 ................................... 13
Figure 10. Top Five Country Locations of Facilities that Supplied
Apple Corporation in 2017 ......................................................................................................... 15
Figure 11. China’s Holdings of U.S. Treasury Securities: 2002-2017 .......................................... 20
Figure 12. Sales by Foreign Affiliates of U.S. Firms by Country in 2015 .................................... 22
Figure 13. BEA and RG Estimates of the Stock of U.S.-China FDI through 2016 ....................... 23
Figure 14. BEA and RG Data on Annual U.S. FDI Flows to China: 2005-2016 .......................... 24
Figure 15. BEA and RG Data on Chinese FDI Flows to the United States: 2005-2016 ............... 24
Figure 16. China and U.S. Simple Average MFN Tariff Rates...................................................... 50
Figure 17. RMB-Dollar Exchange Rates: January 2015 to June 2018 .......................................... 55
Figure 18. Estimated Sector Effect on U.S. Employment if Both U.S. and China
Increased Tariffs by 25% on $150 Billion Worth of Imports from Each Other.......................... 73
Figure 19. Estimate of the Top 10 States that Could be Impact by Lost Exports if China
Retaliated Against U.S. Section 301-Related Tariffs.................................................................. 74
Tables
Table 1. U.S. Merchandise Trade with China: 1980-2017 .............................................................. 2
Table 2. Major U.S. Exports to China in 2017: NAIC 4-Digit Level .............................................. 3
Table 3. Major U.S. Merchandise Export Markets .......................................................................... 4
Table 4. Major U.S. Merchandise Imports From China in 2017: NAIC 4-Digit Level ................... 7
Table 5. U.S Imports of ATP Products from China by Major Category in 2017 ............................. 8
Table 6. China’s Holdings of U.S. Treasury Securities: 2002-2017 .............................................. 19
Table 7. Summary of BEA Data on U.S.-China FDI Flows: 2016 ................................................ 21
Table 8. Top 10 Chinese Investments in the United States: 2005-2017 ........................................ 25
Table 9. Top 20 Chinese Companies on Fortune’s Global 500 in 2018 ........................................ 32
Table 10. Summaries of WTO U.S. Dispute Settlement Cases Against China ............................. 52
Table 11. Top 15 Merchandise Imports from China on an HTS 2-Digit Level and
Summary of Categories Impacted by Actual or Proposed U.S. Section 301 Tariffs .................. 63
Table 12. U.S. Section 301 First Round of 25% Ad Valorem Tariffs on $34 Billion Worth
of Imports from China (Implemented July 6) ............................................................................ 66
Table 13. U.S. Section 301 Second Round of 25% Ad Valorem Tariffs on $16 Billion
Worth of Imports from China (Proposed) .................................................................................. 67
Table 14. China’s First Round of Retaliatory of 25% Ad Valorem Tariffs on U.S. Products
in Response to U.S. Section 301 Action (Implemented July 6) ................................................. 68
Table 15. China’s Proposed Second Round Retaliatory List of 25% of Ad Valorem Tariffs
if U.S. Second Round of Section 301 Tariff Increases are Implemented ................................... 69
Table 16. Trump Administration’s Proposed 10% Ad Valorem Tariffs on $200 Billion
Worth of Chinese Imports .......................................................................................................... 70
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Table 17. Sales by Selective U.S. Firms to China in 2017 ............................................................ 71
Table 18. China’s Retaliatory Tariffs Against the U.S. for Increased Steel and Aluminum
Tariffs ......................................................................................................................................... 75
Appendixes
Appendix. Chinese Policies to Boost Innovation .......................................................................... 78
Contacts
Author Contact Information .......................................................................................................... 86
Acknowledgments ......................................................................................................................... 86
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Introduction
Economic and trade reforms begun in 1979 have helped transform China into one of the world’s
biggest and fastest-growing economies. China’s economic growth and trade liberalization,
including comprehensive trade commitments made upon its entry to the World Trade
Organization (WTO) in 2001, have led to a sharp expansion in U.S.-China commercial ties. Yet,
bilateral trade relations have become increasingly strained in recent years over a number of
issues, including China’s mixed record on implementing its WTO obligations; infringement of
U.S. intellectual property (such as through cyber-theft of U.S. trade secrets and forced technology
requirements placed on foreign firms); increased use of industrial policies to promote and protect
domestic Chinese firms; extensive trade and foreign investment restrictions; lack of transparency
in trade rules and regulations; distortionary economic policies that have led to overcapacity in
several industries; and its large merchandise trade surplus with the United States. China’s
economic and trade conditions, policies, and acts have a significant impact on the U.S. economy
as whole as well as specific U.S. sectors and thus are of concern to Congress. This report provides
an overview of U.S.-China commercial ties, identifies major issues of contention, describes the
Trump Administration’s trade policies toward China, and reviews possible outcomes.
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. The Trump Administration has
indicated its intent to take a harder line on trade policy towards China (and other countries). The
most significant action it has taken to date has been the initiation of a Section 301 case against
China’s policies on intellectual property rights, which could result in several rounds of tit-for-tat
trade sanctions and retaliation.1
A July 25 joint statement by the United States and European Union, said that the
two sides would “work closely together with like-minded partners to reform the
WTO and to address unfair trading practices, including intellectual property theft,
forced technology transfer, industrial subsidies, distortions created by state
owned enterprises, and overcapacity.” (This appears to have been largely aimed
at China).2
On July 6, the Trump Administration raised tariffs by 25% on $34 billion worth
of imports from China. On the same day, China announced it would retaliate
against a comparable level of U.S. products. In response to China’s tariff
increases, the United States Trade Representative (USTR) on July 10, threatened
to increase tariffs by 10% on $200 billion worth of Chinese products.
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. On April
2, China raised duties (by 15% to 25%) on about $3 billion worth of imports frim
from the United States, largely targeting agricultural products.
1 For additional information on what Section 301 is and how it works, see CRS In Focus IF10708, Enforcing U.S.
Trade Laws: Section 301 and China, by (name redacted)
.
2 A copy of the joint statement can be found at http://europa.eu/rapid/press-release_STATEMENT-18-4687_en.htm.
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U.S. Trade with China3
U.S.-China trade rose rapidly after the two nations reestablished diplomatic relations in January
1979, signed a bilateral trade agreement in July 1979, and provided mutual most-favored-nation
(MFN) treatment, beginning in 1980.4 In that year (which was shortly after China’s economic
reforms began), total U.S.-China trade (exports plus imports) was approximately $4 billion. China
ranked as the United States’ 24th-largest trading partner, 16th-largest export market, and 36thlargest source of imports. In 2017, total U.S. merchandise trade with China was $636 billion,
making China the United States’ largest trading partner (see Table 1).
Table 1. U.S. Merchandise Trade with China: 1980-2017
($ in billions)
Year
U.S. Exports
U.S. Imports
U.S. Trade Balance
1980
3.8
1.1
+2.7
1990
4.8
15.2
-10.4
2000
16.3
100.1
-83.8
2010
91.9
365.0
-273.0
2011
104.1
399.4
-295.3
2012
110.5
425.6
-315.1
2013
121.7
440.4
-318.7
2014
123.7
468.5
-344.8
2015
115.9
483.2
-367.3
2016
115.6
462.6
-347.0
2017
130.4
505.6
-375.2
Source: U.S. International Trade Commission (USITC) DataWeb.
U.S. Merchandise Exports to China
U.S. merchandise exports to China in 2017 were $115.6 billion, up 12.8% from the previous year.
China was the third-largest U.S. merchandise export market after Canada and Mexico (see Figure
1). China was the second-largest U.S. agricultural export market in 2017, at $19.6 billion, 63% of
which consisted of soybeans. From 2000 to 2017, the share of total U.S. merchandise exports
going to China rose from 2.1% to 8.4%. As indicated in Table 2, the top five U.S. goods exports
to China in 2017 were (1) aerospace products (mainly civilian aircraft and parts); (2) oil seeds and
grains (mainly soybeans); (3) motor vehicles; (4) semiconductors and electronic components; and
3 This report focuses primarily on U.S.-China trade relations. For information on China’s economy, see CRS Report
RL33534, China’s Economic Rise: History, Trends, Challenges, and Implications for the United States, by (name red
acted) . For general information on U.S.-China political ties, see CRS Report R41108, U.S.-China Relations: An
Overview of Policy Issues, by (name redacted) .
4 The United States suspended China’s MFN status in 1951, which cut off most bilateral trade. China’s MFN status was
conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act, as amended
(including the Jackson-Vanik freedom-of-emigration provisions). China’s MFN status (which was re-designated under
U.S. trade law as “normal trade relations” status, or NTR) was renewed on an annual basis until January 2002, when
legislation was enacted in 2000 (P.L. 104-286) granting permanent NTR (PNTR) to China once it joined the WTO
(which it did in December 2001).
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(5) waste and scrap. From 2002 to 2017, U.S. exports to China rose by 491%, faster than the
growth rate for U.S. exports to any of its top 10 export markets in 2017 (see Table 3). During the
first five months of 2018, U.S. merchandise exports to China rose by 7.8% year-on-year.
Figure 1.Top 5 U.S. Merchandise Export Markets in 2017
($ in billions)
Source: USITC DataWeb.
Table 2. Major U.S. Exports to China in 2017: NAIC 4-Digit Level
($ in millions and percentage change)
NAIC
Code
Products
2016
2017
Change
2016-2017
3364
AEROSPACE PRODUCTS & PARTS
14,578
16,273
11.6%
1111
OILSEEDS & GRAINS
15,524
13,724
-11.6%
3361
MOTOR VEHICLES
8,317
10,071
21.1%
3344
SEMICONDUCTORS & OTHER ELECTRONIC
COMPONENTS
6,686
6,887
3.0%
2111
OIL & GAS
1,448
6,856
373.3%
9100
WASTE AND SCRAP
5,182
5,625
8.5%
3345
NAVIGATIONAL/MEASURING/MEDICAL/CONTROL
INSTRUMENTS
5,466
5,582
2.1%
3251
BASIC CHEMICALS
4,595
4,897
6.6%
3252
RESIN, SYN RUBBER, ARTF & SYN FIBERS/FIL
3,577
4,123
15.3%
3254
PHARMACEUTICALS & MEDICINES
2,818
3,401
20.7%
115,602
130,370
12.8%
Total
Source: USITC DataWeb.
Note: NAIC is the North American Industrial Classification system.
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Table 3. Major U.S. Merchandise Export Markets
($ in billions and percentage change)
2002
2017
Percent Change
2002-2017
Canada
161
282
75.7%
Mexico
98
243
149.1%
China
22
130
491.2%
Japan
51
68
31.6%
United Kingdom
33
56
69.4%
Germany
27
53
100.9%
Korea
23
48
113.7%
Netherlands
18
42
130.3%
Hong Kong
13
40
217.4%
Brazil
12
37
198.8%
Global Total
693
1,547
123.1%
Country
Source: USITC DataWeb and Global Trade Atlas.
Note: Ranked according to the top 10 U.S. merchandise export markets in 2017.
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 healthy
economic growth is projected to continue in the years ahead, provided that it implements new
comprehensive economic reforms. China’s goals of modernizing its infrastructure, rebalancing
the economy, upgrading industries, boosting the services sector, and enhancing the social safety
net could generate substantial new demand for foreign goods and services. Economic growth has
improved the purchasing power of Chinese citizens considerably, especially those living in urban
areas along the east coast of China. In addition, China’s large foreign exchange reserves (at $3.1
trillion as of May 2018) and its huge population (at 1.39 billion) make it a potentially enormous
market. To illustrate
A January 2017 study prepared by Oxford Economics for the U.S.-China
Business Council estimated that in 2015 U.S. exports of goods and services to
China plus bilateral FDI flows directly and indirectly supported 2.6 million U.S.
jobs and contributed $216 billion to U.S GDP. The study further predicted that
U.S. exports of goods and services to China would grow from $165 billion in
2015 to over $520 billion by 2030.5
In 2016, Chinese visitors to the United States totaled 3.0 million (up 15.4% over
the previous year), ranking China as the fifth-largest source of foreign visitors to
the United States.6 Chinese visitors spent $33 billion in the United States in 2016
(including on education), which was the largest source of visitor spending in the
5 The U.S.-China Business Council, Understanding the US-China Trade Relationship, January 2017, available at
https://www.uschina.org/sites/default/files/
Oxford%20Economics%20US%20Jobs%20and%20China%20Trade%20Report.pdf.
6 China reported that it had 122 million outbound tourists in 2016 and estimated that they spent $110 billion.
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United States.7 The U.S. Department of Commerce projects that by 2021,
Chinese visitors to the United States will total 5.7 million.8
China has the world’s largest mobile phone network with 1.48 billion mobile
phone subscribers as of April 2018,9 and the largest number of internet users at
753 million,10 as of December June 2017.
China’s online sales in 2016 totaled $752 billion (more than double the U.S. level
at $369 billion).11
Boeing Corporation delivered 202 planes to China in 2017 (26% of total global
deliveries), making it Boeing’s largest market outside the United States.12 Boeing
predicts that over the next 20 years (2017-2036), China will need 7,240 new
airplanes valued at nearly $1.1 trillion and will be Boeing’s largest commercial
airplane customer outside the United States.13
General Motors (GM) reported that it sold more cars and trucks in China than in
the United States each year from 2010 to 2017.14 GM’s China sales in 2017 were
4.0 million vehicles, compared to 3.0 million in the United States. Equity income
from GM’s joint venture operations in China was $2.0 billion in 2017. GM
vehicle unit sales to China accounted for 42.1% of its global total.15 GM expects
China’s vehicle market to increase by 5 million units or more by 2020.16 In
addition, U.S. motor vehicle exports to China were $9.9 billion in 2017, making
it the second-largest U.S. motor vehicle export market after Canada.17
According to estimates by Credit Suisse (a global financial services company),
China overtook the United States in 2015 to become the country with the largest
middle class at 109 million adults (with wealth between $50,000 and $500,000);
7 U.S. Department of Commerce, International Trade Administration, Travel & Tourism Office, News, available at
http://tinet.ita.doc.gov/outreachpages/download_data_table/Fast_Facts_2016.pdf.
8 U.S. Department of Commerce, International Trade Administration, Travel & Tourism Office, News, available at
http://travel.trade.gov/view/f-2000-99-001/forecast/Forecast_Summary.pdf.
9 Medium, “China Has World’s Largest Online Population With 1.32 Bln Mobile Internet Subscribers< May 22, 2018,
available at https://medium.com/@yicaichina/china-has-worlds-largest-online-population-with-1-32-bln-mobileinternet-subscribers-e665e890302.
10 Xinhua, “China’s mobile phone shipments resume growth in May,” June 10, 2018, available athttp://en.people.cn/n3/
2018/0610/c90000-9469677.html.
11 Data for China from Digital Commerce 360 at https://www.digitalcommerce360.com/2017/02/06/online-shoppingchina-grows-262-2016/ and U.S. data from the U.S. Census Bureau at https://www2.census.gov/retail/releases/
historical/ecomm/16q4.pdf.
12 Xinhuanet, “Boeing delivers record high of 202 aircraft to China in 2017,” January 25, 2018, at
http://www.xinhuanet.com/english/2018-01/25/c_136924563.htm.
13 Boeing Corporation, Current Market Outlook, 2017-2036, September 2017, p. 32, at http://www.boeing.com/
resources/boeingdotcom/commercial/market/current-market-outlook-2017/assets/downloads/2017-cmocompressed_091917.pdf.
14 A large share of these vehicles was produced by GM and its joint-venture partners in China. GM’s website states that
it currently has 11 joint ventures and two wholly owned foreign enterprises (employing 58,000 workers) in China.
15 General Motors, Media, Sales Data, February 2018, at
https://media.gm.com/content/dam/Media/gmcom/investor/2018/feb/GM-Global-Q4-and-CYTD-2017-Sales-Chart.pdf.
16 General Motors, Media, China, General Motors Announces Growth Strategy for China, March 21, 2016, available at
http://media.gm.com/media/cn/en/gm/news.detail.html/content/Pages/news/cn/en/2016/Mar/0321_annoucement.html.
17 Source: U.S. Department of Commerce, International Trade Administration, Automotive Team: Industry Trade Data,
available at https://www.trade.gov/td/otm/assets/auto/New_Passenger_Exports.pdf.
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the U.S. level was estimated at 92 million.18 A study by the Brookings Institute
predicts that spending by China’s middle class (using 2011 purchasing power
parity measurements) will rise from $4.2 trillion in 2015 (12% of global total) to
$14.3 trillion (22% of global total) in 2030. China’s 2030 middle class
consumption levels are predicted to be more than three times U.S. levels.19
From 2007 to 2016, China’s private consumption grew at an average annual rate
of 8.9%, compared to 1.6% growth in the United States.20
Major U.S. Merchandise Imports from China
China was the largest source of U.S. merchandise imports in 2017, at $506 billion, up 9.3% over
the previous year. China’s share of total U.S. merchandise imports rose from 8.2% in 2000 to
21.6% in 2017. The importance (ranking) of China as a source of U.S. imports has risen sharply,
from eighth largest in 1990, to fourth in 2000, to second in 2004-2006, and to first in 2007present (see Figure 2). The top five U.S. imports from China in 2017 were (1) communications
equipment; (2) computer equipment; (3) miscellaneous manufactured commodities (such as toys
and games); (4) apparel; and (5) semiconductors and other electronic components (see Table 4).
China was also the fourth-largest source of U.S. agricultural imports in 2017 at $4.5 billion.
Figure 2.Top 5 Sources of U.S. Merchandise Imports: 2017
($ in billions)
Source: USITC DataWeb.
18 Credit Suisse, Global Wealth in 2015: Underlying Trends Remain Positive, October 3, 2015, available at
https://www.credit-suisse.com/us/en/about-us/research/research-institute/news-and-videos/articles/news-and-expertise/
2015/10/en/global-wealth-in-2015-underlying-trends-remain-positive.html.
19 The Brookings Institution, The Unprecedented Expansion of the Global Middle Class: An Update, February 2017, p.
16, at https://www.brookings.edu/wp-content/uploads/2017/02/global_20170228_global-middle-class.pdf.
20 Source: Economist Intelligence Unit, Country Data.
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Table 4. Major U.S. Merchandise Imports From China in 2017: NAIC 4-Digit Level
($ in millions and percentage change)
NAIC Code
Products
2016
2017
Percent
Change
2016-2017
3342
COMMUNICATIONS EQUIPMENT
65,674
77,957
18.7%
3341
COMPUTER EQUIPMENT
52,180
58,609
12.3%
3399
MISCELLANEOUS MANUFACTURED COMMODITIES
34,408
36,497
6.1%
3152
APPAREL
25,483
24,559
-3.6%
3344
SEMICONDUCTORS & OTHER ELECTRONIC
COMPONENTS
18,903
23,158
22.5%
3371
HOUSEHOLD & INSTITUTIONAL FURN & KITCHEN
CABINETS
16,535
18,222
10.2%
3352
HOUSEHOLD APPLIANCES AND MISC MACHINES
14,062
14,494
3.1%
3162
FOOTWEAR
14,620
14,074
-3.7%
3261
PLASTICS PRODUCTS
12,319
13,771
11.8%
3363
MOTOR VEHICLE PARTS
13,117
13,533
3.2%
462,618
505,597
9.3%
Total
Source: USITC DataWeb.
Throughout the 1980s and 1990s, nearly all U.S. imports from China were low-value, laborintensive 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 are more technologically advanced products (see text box below).
U.S.-China Trade in Advanced Technology Products
According to the U.S. Census Bureau, U.S. imports of “advanced technology products” (ATP) from China in 2017
totaled $171.1 billion. Information and communications products were by far the largest U.S. ATP import from
China, accounting for 91% of U.S. ATP imports from China and 60% of U.S. global imports of this category (see
Table 5). ATP products accounted for 33.8% of total U.S. merchandise imports from China. In addition, 36.8% of
total U.S. ATP imports were from China (compared with 14.1% in 2003). U.S. ATP exports to China in 2017 were
$35.7 billion; these accounted for 27.4% of total U.S. exports to China and 10.1% of U.S. global ATP exports. In
comparison, U.S. ATP exports to China in 2003 were $8.3 billion, which accounted for 29.2% of U.S. exports to
China and 4.6% of total U.S. ATP exports.21
The United States ran a $135.3 billion deficit in its ATP trade with China in 2017, up from a $21.0 billion deficit in
2003. Some see the large and growing U.S. trade deficit in ATP with China as a source of concern, contending that
it signifies the growing international competitiveness of China in high technology. Others dispute this, noting that a
large share of the ATP imports from China are in fact relatively low-end technology products and parts, such as
notebook computers, or are products that are assembled in China using imported high technology parts that are
largely developed and/or made elsewhere. Some Members of Congress have raised concerns over possible
national security implications of China’s significant role in global supply chains for various ATP products, especially
those that may be procured by U.S. government agencies.22
21 U.S. Census Bureau, Foreign Trade, at available at https://www.census.gov/foreign-trade/statistics/product/atp/2017/
12/ctryatp/index.html#C.
22 See for example, U.S.-China Economic and Security Review Commission, Supply Chain Vulnerabilities from China
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Table 5. U.S Imports of ATP Products from China by Major Category in 2017
Advanced Technology
Products (ATP) Category
U.S. Imports from
China
($ millions)
Total U.S.
Imports
($ millions)
Imports from China
as percentage of global
ATP total (%)
Biotechnology
194
26,127
0.7
Life Sciences
2,594
45,705
5.7
Opto-Electronics
5,132
23,036
22.3
155,535
259,392
60.0
Electronics
4,482
41,426
10.8
Flexible Manufacturing
1,347
13,726
9.8
Advanced Materials
413
2,844
14.5
Aerospace
1,027
48,592
2.1
Weapons
138
902
15.3
Nuclear Technology
25
1,698
1.5
171,067
464,258
36.8
Information & communications
Total U.S. ATP imports
Source: U.S. Census Bureau.
Trade in Services
China is a major U.S. trading partner in services. In 2017, China was the 4th-largest services
trading partner at $75 billion, the 3rd-largest services export market at $57.6 billion, and the 8thlargest source of services imports at $17.4 billion (see Figure 3). The United States ran a $40.2
billion services trade surplus with China, which was the largest services surplus of any U.S.
trading partner.
in U.S. Federal Information and Communications Technology, April 2018, available at https://www.uscc.gov/sites/
default/files/Research/
Interos_Supply%20Chain%20Vulnerabilities%20from%20China%20in%20U.S.%20Federal%20ICT_final.pdf.
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Figure 3. Major U.S. Services Trading Partners in 2017
($ in billions)
Source: BEA.
Note: Top five U.S. trading partners in total services trade (exports plus imports) in 2017.
The U.S. 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). The
deficit fell to $347 billion in 2016, but rose to $375 billion in 2017.23 For the past several years,
the U.S. merchandise trade deficit with China has been significantly larger than with any other
U.S. trading partner (see Figure 5). Some analysts contend that the large U.S. merchandise trade
deficits with China indicate that the trade relationship is somehow unbalanced, unfair, and
damaging to the U.S. economy. Others argue that such deficits are largely a reflection of shifts in
global production and the emergence of extensive and complex supply chains, where China is
often the final point of assembly for export-oriented multinational firms that source goods from
multiple countries.
23 During the first five months of 2018, the U.S. merchandise trade deficit with China was 9.9 higher than during the
comparable period in 2017. If this trend continues, the total U.S. merchandise deficit with China could reach $412
billion in 2018.
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Figure 4. U.S. Merchandise Trade Balance with China: 2000-2017
($ in billions)
Source: USITC DataWeb.
Figure 5. Five Largest U.S. Merchandise Trade Imbalances in 2017
($ in billions)
Source: USITC DataWeb.
The Transfer of Pacific Rim Production to China by
Multinational Firms
Many analysts contend that the sharp increase in U.S. imports from China (and hence the growing
bilateral trade imbalance) is largely the result of movement in production facilities from other
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(primarily Asian) countries to China. That is, various products that used to be made in such places
as Japan, Taiwan, Hong Kong, etc., and then exported to the United States, are now made in
China (in many cases, by foreign firms). To illustrate, in 1990, the share of U.S. manufactured
imports from Pacific Rim countries (including China) was 47.1%, and in 2017, that share
remained relatively constant at 47.1% (see Figure 6).24 What changed was the country source of
those imports. In 1990, China accounted for 7.6% of the share of U.S. manufactured imports from
the Pacific Rim, but by 2017, that share increased to 55.4%. In other words, between 1990 and
2016, the role of China as a supplier of U.S. manufactured products among Pacific Rim countries
increased sharply, while the relative importance of the rest of the Pacific Rim (excluding China)
for these products sharply decreased. This was partly due to many multinational firms shifting
their export-oriented manufacturing facilities from other countries to China.
Figure 6. U.S. Manufactured Imports from Pacific Rim Countries as a Percentage of
Total U.S. Manufactured Imports: 1990 and 2017
Source: USITC DataWeb.
Note: Standard International Trade Classification (SITC) definition of manufactured imports.
A significant amount of the shift in production appears to have involved Japan. In 1990, Japan
was the source of 23.8% of U.S. manufactured imports, but by 2017 this level had dropped to
7.0%. Conversely, China’s share of U.S. manufactured imports rose from 3.8% to 26.2% (see
Figure 7). Japan accounted for the single largest U.S. bilateral merchandise trade deficit for many
years until it was overtaken by China in 2000.
24 Pacific Rim countries include Australia, Brunei, Cambodia, China, Hong Kong, Indonesia, Japan, South Korea, Laos,
Macao, Malaysia, New Zealand, North Korea, Papua New Guinea, the Philippines, Singapore, Taiwan, Thailand,
Vietnam, and several small island nations.
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Figure 7. U.S. Manufactured Imports from China and Japan as a Percentage of
U.S. Total Imports: 1990-2017 (%)
Source: USITC DataWeb.
China as a Major Center for Global Supply Chains
A joint study by the Organisation for Economic Co-operation and Development (OECD) and the
WTO has sought to estimate trade flows according to the value that was added in each country.
For example, the OECD/WTO study estimated that in 2011, 32.2% of the overall value of China’s
gross exports was comprised of foreign imports. This level increased to 40.2% for China’s total
manufactured exports, and for electrical and optical equipment, it was 53.8% (see Figure 8). The
study estimated that if bilateral trade imbalances were measured according to the value of trade
that occurred domestically in each country, the U.S. trade deficit in goods and services with China
in 2011 (the most recent year available) would decline by 35% (from $278.6 billion to $181.1
billion) (see Figure 9). This is largely because of the role of trade in intermediate goods (parts
and materials imported to make products). For example, the World Bank estimates that U.S.
intermediate exports and imports to and from China in 2016 were $19.3 billion and $33.5 billion,
respectively.25 Thus, many Chinese products contain U.S.-made inputs and some U.S. products
contain Chinese-made inputs.
25 World Bank, World Integrated Trade Solution, available at http://wits.worldbank.org/Default.aspx?lang=en.
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Figure 8. Estimated Percentage Foreign Value-Added to China’s Exports in 2011
Source: OECD/WTO Trade in Value-Added, October 2015.
Figure 9. Two Measurements of U.S. Trade in Goods and Services: 2011
($ in billions)
Source: OECD/WTO Trade in Value-Added, October 2015.
Note: Gross trade balances are U.S. reported data, while OECD data are estimated balances based on
measurements of the value added that occurred in each country,
According to Apple Corporation, it used over 200 corporate suppliers with nearly 900 facilities
located around the world. The top five largest country sources of these facilities in 2017 were
China (358), Japan (137), the United States (64), Taiwan (55), and South Korea (34) (see Figure
10). Some U.S. corporate suppliers to Apple have facilities located in many countries. For
example, Intel Corporation has 10 facilities that supply products to Apple, three of which are
located in the United States, two in China, two in Malaysia, and one each in Ireland, Israel,
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Malaysia, and Vietnam.26 Apple iPhones are mainly assembled in China by Taiwanese companies
(Foxconn and Pegatron) using a number of intermediate goods imported from abroad (or in many
cases, intermediates made by foreign firms in China). Many analysts have estimated that the
value-added that occurs in China in the production of the iPhone is small relative to the total
value of the product because it mainly involves assembling foreign-made or foreign-owned
components. Apple Corporation, on the other hand, is thought to be the single largest beneficiary
(in terms of gross profit) on the sale of the iPhone. However, conventional trade data does not
accurately attribute the value-added that occurs in each stage of making the iPhone. Rather, when
the United States imports iPhones from China, U.S. trade data attributes nearly the full value of
the product as originating in China, which some argue artificially inflates the size of the U.S.
trade deficit with China.
One 2010 study estimated that in 2009, China exported 11.3 million iPhones to the United States,
with a shipping price of $179 per unit and total export value at $2.0 billion. The study estimated
that 96.4% of the value of the iPhone was attributed to foreign suppliers and producers of
components and parts, including the United States (at $122 million). Standard trade data would
put China’s trade surplus in iPhone trade with the United States at $1.9 billion, but that level
would fall to $73.5 million if that trade was measured according to the value-added that occurred
in each country.27 Several analysts have concluded that Apple’s innovation in developing and
engineering its products, along with its ability to source most of its production in low-cost
countries, such as China, has helped enable the company to become a highly competitive and
profitable firm (as well as a source for high-paying jobs in the United States).28 Apple products
illustrate that the rapidly changing nature of global supply chains has made it increasingly
difficult to interpret the implications of U.S. trade data because, while they may show where
products are being imported from, they often fail to reflect who benefits from that trade.
26 Apple Corporation, 2017 Supplier List, February 2018, available at https://images.apple.com/supplier-responsibility/
pdf/Apple-Supplier-List.pdf.
27 ADB Institute, How the iPhone Widens the United States Trade Deficit with the People’s Republic of China,
December 2010, available at http://www.adb.org/publications/how-iphone-widens-united-states-trade-deficit-peoplesrepublic-china. Note, given the changing nature of Apple’s supply chains, it is unclear if the estimates of value-added
still hold true today.
28 Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple’s iPod,
March 2009.
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Figure 10. Top Five Country Locations of Facilities that Supplied
Apple Corporation in 2017
Source: Apple Corporation 2017 Supplier List.
Note: Includes suppliers of materials, manufacturing, and assembly of products worldwide.
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.
The impact on U.S. employment (especially in various manufacturing sectors) resulting from
imports from China (particularly after it joined the WTO in 2001) has been a major point of
contention. Some critics of U.S. trade policy toward China attempt to link U.S. job losses to the
growth and size of U.S. imports from China and/or the bilateral trade imbalance. For example, a
study by the Economic Policy Institute (EPI) in December 2014 claims that growth in the U.S.
goods trade deficit with China between 2001 and 2013 “eliminated or displaced” 3.2 million U.S.
jobs (three-fourths of which were in manufacturing).29 The authors stated that they used an inputoutput model that “estimated the amount of labor, or number of jobs, that is required to produce a
given volume of exports and the labor displaced when a given volume of imports is substituted
for domestic output.” The difference between the two numbers is thus the estimated jobs
displaced by the trade deficit. Critics of the EPI study argue that the methodology used is flawed.
First, the study essentially takes the Department of Commerce’s estimates of the number of jobs
“supported” by each $1 billion in exports (5,744 in 2016)30 and makes the assumption that each
$1 billion in imports must displace the same level of jobs, a notion that most economists would
disagree with. For example, not all imports from China compete directly with U.S. producers.
Many are products that used to be made in other countries, and thus an increase in imports from
29 EPI, China Trade, Outsourcing and Jobs, December 11, 2014, available at http://www.epi.org/publication/china-
trade-outsourcing-and-jobs/.
30 U.S. Department of Commerce, International Trade Administration, Jobs Supported by Exports 2016: An Update,
August 2, 2017, available at https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/
tg_ian_005543.pdf.
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China alone did not necessarily displace U.S. domestic producers. In addition, some imports from
China contain U.S.-made intermediate parts (such as semiconductors) made in the United States.
Many imports from China are final assembled products (such as Apple iPhones) with a relatively
small share of value-added from China, and the jobs generated or supported by innovating the
products are not accounted for in the trade data. Finally, factors other than trade, such as
technological innovation, may also affect job levels in some sectors.
Similarly, while China is the largest source of U.S. merchandise imports, the overall impact on
the U.S. economy is relatively small. A Federal Reserve Bank of San Francisco study examined
U.S. consumer spending and estimated that, in 2010, U.S. personal consumption expenditures
(PCE) of domestically sourced goods and services goods was 88.5% of total U.S. PCE (total
imports accounted for 11.5%). Imports from China accounted for 2.7% of U.S. PCE, but less than
half of this amount was attributed to the actual cost (price) of Chinese imports—the rest went to
U.S. businesses and workers transporting, selling, and marketing the Chinese-made products,
which, the study estimated, would reduce China’s share of U.S. PCE to 1.9%.31
Economists generally argue that trade has an overall positive impact on the economy. Low-cost
imports boost consumer welfare, increase consumer choices, and help lower inflation. However,
some economists contend that the benefits of trade are not equally spread. Some sectors can be
negatively impacted, affecting employment and wages, and such negative effects can be
concentrated in certain regions or industries, and adjusting to such shocks can be challenging. A
2014 study by the National Bureau of Economic Research (NBER) concluded that increased
import penetration from China from 1999 to 2011 directly and indirectly resulted in net U.S. job
losses of 2.0 million to 2.4 million U.S. jobs, and accounted for 10% of the decline in U.S.
manufacturing jobs during this period.32
Another NBER study asserted that China’s rise as an economic power has “induced an epochal
shift in patterns of world trade” and has “challenged much of the received empirical wisdom
about how labor markets adjust to trade shocks.” The study said that for workers in importcompeting firms, “adjustment in local labor markets is remarkably slow, with wages and laborforce participation rates remaining depressed and unemployment rates remaining elevated for at
least a full decade after the China trade shock commences. Exposed workers experience greater
job churning and reduced lifetime income,” in part because workers that may lose their jobs due
to imports often remain in highly exposed industries or regions, which are subject to further trade
shocks.33 The study claimed that there is little evidence for substantial off-setting employment
gains in local industries not exposed to the trade shock.
Critics of the two NBER studies contend that while trade may impact the composition of jobs in
the U.S. economy, it has little long-term effect on the number of jobs, which they argue is largely
a function of aggregate demand. They also point out that between 2010 and 2015, the number of
U.S. manufacturing jobs rose by 6.8% even though U.S. imports from China increased by 32.4%.
In addition, U.S. manufacturing output during this period rose by 15.3%. Some economists
contend that U.S. productivity has been a major cause of job losses in manufacturing. A study by
Ball State University attributed 88% of U.S. manufacturing job losses from 2000 to 2010 to
31 Federal Reserve Bank of San Francisco, FRBSF Economic Letter, August 11, 2016, available at
http://www.frbsf.org/economic-research/publications/economic-letter/2011/august/us-made-in-china/.
32 NBER, Import Competition and the Great U.S. Employment Sag of the 2000s, August 2014, available at
http://www.nber.org/papers/w20395.pdf.
33 NBER, The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade, January 2016,
available at http://nber.org/papers/w21906.
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productivity gains, noting that had the United States “kept 2000-levels of productivity and applied
them to 2010-levels of production, we would have required 20.9 million manufacturing workers.
Instead, we employed only 12.1 million.”34
Similarly, while China is the largest source of U.S. merchandise imports, the overall impact on
the U.S. economy is relatively small. A Federal Reserve Bank of San Francisco study examined
U.S. consumer spending and estimated that, in 2010, U.S. personal consumption expenditures
(PCE) of domestically sourced goods and services goods was 88.5% of total U.S. PCE (total
imports accounted for 11.5%). Imports from China accounted for 2.7% of U.S. PCE, but less than
half of this amount was attributed to the actual cost (price) of Chinese imports—the rest went to
U.S. businesses and workers transporting, selling, and marketing the Chinese-made products,
which, the study estimated, would reduce China’s share of U.S. PCE to 1.9%.35
U.S.-China Investment Ties: Overview
Investment plays a large and growing role in U.S.-China commercial ties.36 China’s investment in
U.S. assets can be broken down into several categories, including holdings of U.S. securities,
foreign direct investment (FDI), and other non-bond investments. The Department of the Treasury
defines foreign holdings of U.S. securities as “U.S. securities owned by foreign residents
(including banks and other institutions), except where the owner has a direct investment
relationship with the U.S. issuer of the securities.”37 U.S. statutes define FDI as “the ownership or
control, directly or indirectly, by one foreign resident of 10% or more of the voting securities of
an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S.
business enterprise, including a branch.”38 The Bureau of Economic Analysis (BEA) is the main
U.S. government agency that collects and reports data on FDI flows to and from the United
States, which is done on a balance of payment basis.39 China has also invested in a number of
U.S. companies, projects, and various ventures that do not meet the U.S. definition of FDI, and
thus, are not reflected in BEA’s data.
For many years, the accumulation of foreign exchange reserves (FERs) has been a major driver of
China’s overseas investment. China’s FERs result from: (1) large annual trade surpluses and FDI
inflows; (2) intervention by the Chinese government to halt or slow the value of its currency, the
34 Ball State University, The Myth and the Reality of Manufacturing in America, June 2015, available at
http://conexus.cberdata.org/files/MfgReality.pdf.
35 Federal Reserve Bank of San Francisco, FRBSF Economic Letter, August 11, 2016, available at
http://www.frbsf.org/economic-research/publications/economic-letter/2011/august/us-made-in-china/.
36 Investment is often a major factor behind trade flows. Firms that invest overseas often import machinery, parts, and
other inputs from the parent company abroad to manufacture products for export or sale locally. Other such invested
overseas firms may produce inputs and ship them to their parent company for final production.
37 U.S. Department of the Treasury, Federal Reserve Bank of New York, and Board of Governors of the Federal
Reserve System, Foreign Portfolio Holdings of U.S. Securities as of June 30, 2016, April 2017, available at
http://ticdata.treasury.gov/Publish/shla2016r.pdf.
38 15 CFRS 806.15(a)(1). The 10% ownership share is the threshold considered to represent an effective voice or
lasting influence in the management of an enterprise. See BEA, International Economic Accounts, BEA Series
Definitions, available at http://www.bea.gov/international.
39 BEA also reports FDI data according to broad industrial sections, including mining; utilities; wholesale trade;
information; depository institutions; finance (excluding depository institutions); professional, scientific, and technical
services; nonbank holding companies; manufacturing (including food, chemicals, primary and fabricated metals,
machinery, computers and electronic products, electrical equipment, appliances and components, transportation
equipment, and other manufacturing); and other industries.
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renminbi (RMB); and (3) restrictions on capital outflows by private Chinese citizens. Rather than
holding foreign currencies, such as U.S. dollars which would earn no interest, the Chinese
government has invested much of those reserves abroad. For many years, much of that investment
has gone into U.S. Treasury securities. Although they generate low returns, such securities are
generally viewed globally as a relatively safe investment because they are backed by the full faith
and credit of the U.S. government and are liquid (e.g., easily sold), albeit generating relatively
small rates of returns. More recently, the Chinese government has diversified its investments in
order to obtain higher returns, such as by encouraging its firms (especially SOEs) to invest
overseas to become more globally competitive, as well as to help China gain access to raw
materials (such as oil), food, and technology. As a result, Chinese annual FDI outflows have
grown significantly in recent years, rising from $21 billion in 2006 to $183 billion in 2016,
making China the second-largest source of annual global FDI outflows.40
U.S. investment in China has largely been in the form of FDI flows (due in part to Chinese
restrictions on portfolio investment).41 Initially, most U.S. FDI flows (especially after China
began to open up its economy in 1979) likely went toward export-oriented manufacturing to take
advantage of China’s relatively low wages. In more recent years, as China’s economy has rapidly
grown, a larger share of U.S. FDI in China has gone to tap into the country’s booming domestic
demand for goods and services. However, many U.S. firms raise concerns that Chinese
investment restrictions and requirements (such as technology sharing) often hamper their efforts.
China’s Holdings of U.S. Public and Private Securities42
China’s holdings of U.S. public and private securities are significant and by far constitute the
largest category of Chinese investment in the United States.43 These securities include U.S.
Treasury securities, U.S. government agency (such as Freddie Mac and Fannie Mae) securities,
corporate securities, and equities (such as stocks). China’s investment in public and private U.S.
securities totaled $1.54 trillion as of June 2017, making it the fourth-largest holder after Japan,
the Cayman Islands, and the United Kingdom.44 U.S. Treasury securities, which help the federal
government finance its budget deficits, are the largest category of U.S. securities held by China.45
As indicated in Table 6 and Figure 11 (which show end-year data), China’s holdings of U.S.
Treasury securities increased from $118 billion in 2002 to $1.24 trillion in 2014, but fell to $1.06
trillion in 2016. They rose to nearly $1.19 trillion in 2017, making China the largest foreign
holder of U.S. Treasury securities.46 China’s holdings of U.S. Treasury securities as a share of
total foreign holdings rose from 9.6% in 2002 to a historical high of 26.1% in 2010. That level
40 United Nations Conference on Trade and Development, World Investment Report 2016, June 22, 2016, available at
http://unctad.org/en/PublicationsLibrary/wir2016_Overview_en.pdf.
41 U.S. portfolio investment in China through 2016 was $101.4 billion, mostly in equities. Source: U.S. Department of
Treasury, Federal Reserve Bank of New York, and Board of Governors of the Federal Reserve System, U.S. Portfolio
Holdings of Foreign Securities as of December 31, 2016, October 2017.
42 For additional information on this issue, see CRS Report RL34314, China’s Holdings of U.S. Securities: Implications
for the U.S. Economy, by (name redacted) and (name redacted) .
43 About 70% of China’s total holdings of U.S. government and private securities are in U.S. Treasury securities.
44 U.S. Department of the Treasury, Preliminary Report on Foreign Portfolio Holdings of U.S. Securities as of June
2017, February 2018, available at https://home.treasury.gov/news/press-releases/sm0301.
45 Some describe foreign holdings of U.S. Treasury securities as “foreign ownership of U.S. government debt.”
46 China’s holdings of U.S. Treasuries could be higher as Department of the Treasury data may not always capture
Chinese purchases of U.S. Treasury securities that may occur in global financial centers.
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fell to 17.6% in 2016, but rose to 18.8% in 2017.47 China’s holdings of U.S. Treasury securities as
of April 2018 were $1.18 trillion and constituted 19.2% of total foreign holdings.
Table 6. China’s Holdings of U.S.Treasury Securities: 2002-2017
2002
2004
2006
2008
2010
2012
2014
2016
2017
China’s
holdings
($ billions)
118
223
397
727
1,160
1,203
1,244
1,058
1,185
China’s
holdings as a
percentage of
total foreign
holdings
9.6%
12.1%
18.9%
23.6%
26.1%
23.0%
21.7%
17.6%
18.7%
Source: U.S. Department of the Treasury.
Note: Annual data are year-end. Data excludes Hong Kong and Macau which are treated separately.
Some analysts and Members of Congress have sometimes raised concerns that China’s large
holdings of U.S. debt securities could give it leverage over U.S. foreign policy, including trade
policy. They argue, for example, that China might attempt to sell (or threaten to sell) a large share
of its U.S. debt securities over a policy dispute, which could damage the U.S. economy. Others
counter that China’s holdings of U.S. debt give it very little practical leverage over the United
States. They argue that, given China’s economic dependency on a stable and growing U.S.
economy, and its substantial holdings of U.S. securities, any attempt to try to sell a large share of
those holdings would likely damage both the U.S. and Chinese economies. It could also cause the
U.S. dollar to sharply depreciate against global currencies, which could reduce the value of
China’s remaining holdings of U.S. dollar assets.
47 In addition to China’s FDI in the United States and its holdings in U.S. Treasury securities, China (as of June 2016)
held $178 billion in U.S. equities (such as stocks), up from $3 billion in June 2005. It also held $196 billion in U.S.
agency securities and $15 billion in corporate debt.
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Figure 11. China’s Holdings of U.S. Treasury Securities: 2002-2017
($ in billions)
Source: U.S. Department of the Treasury.
Notes: Data are year-end and exclude Hong Kong and Macau, which are treated separately.
In the 112th Congress, the conference report accompanying the National Defense Authorization
Act of FY2012 (H.R. 1540, P.L. 112-81) included a provision requiring the Secretary of Defense
to conduct a national security risk assessment of U.S. federal debt held by China. The Secretary
of Defense issued a report in July 2012, stating that “attempting to use U.S. Treasury securities as
a coercive tool would have limited effect and likely would do more harm to China than to the
United States. As the threat is not credible and the effect would be limited even if carried out, it
does not offer China deterrence options, whether in the diplomatic, military, or economic realms,
and this would remain true both in peacetime and in scenarios of crisis or war.”48
U.S. Residential Real Estate
Over the past few years, Chinese purchases of U.S. residential real estate have risen sharply, from
$11.2 billion in 2010 to $31.7 billion in 2017. Chinese investors were the largest foreign
purchases of U.S. residential restate buyers each year from 2015 to 2017. In 2017, Chinese
investors purchased 40,572 properties.49
48 Office of the Secretary of Defense, Report to Congress, Assessment of the National Security Risks Posed to the
United States as a Result of the U.S. Federal Debt Owed to China as a Creditor of the U.S. Government, July 2012.
49 Values are for 12 months from April-March. Source: National Association of Realtors, 2017 Profile of International
Activity in U.S. Residential Real Estate, July 2017 available at https://www.nar.realtor/sites/default/files/documents/
2017-Profile-of-International-Activity-in-US-Residential-Real-Estate.pdf.
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Bilateral Foreign Direct Investment Flows50
The level of foreign direct investment (FDI) flows between China and the United States is
relatively small given the large volume of trade between the two countries. Many analysts
contend that an expansion of bilateral FDI flows could greatly expand commercial ties.51 BEA
data on U.S.-China FDI (see Table 7) indicate that in 2016
U.S. FDI flows to China were $9.5 billion (up 28.2% over 2015 flows), making
China the ninth-largest destination of U.S. FDI outflows.
The stock of U.S. FDI in China on a historical-cost basis (i.e., the book value)
was $92.5 billion (up 9.4% over the previous year), making China the 12th-largest
overall destination of U.S. FDI through 2016.
Chinese FDI flows to the United States were $10.3 billion (up 74.7% over 2015
levels), making China the 11th-largest source of U.S. FDI inflows in 2016.
At the end of 2016, the stock of Chinese FDI in the United States on a historical-cost basis, was
$27.5 billion (up 63.7% over the previous year), making China the 16th-largest overall source of
U.S. FDI through 2016.52
Table 7. Summary of BEA Data on U.S.-China FDI Flows: 2016
FDI Data
Quantity ($millions)
Ranking of FDI Flows
U.S. FDI flows to China in 2016
9,474
9th
China FDI flows to U.S. in 2016
10,337
11th
Stock of U.S. FDI in China through 2016
92,481
12th
Stock of Chinese FDI in U.S. through 2016
58,154
16th
Source: Bureau of Economic Analysis.
Notes: FDI stock data are on a historical-cost basis. Rankings were made using only countries and exclude
broad groupings of territories or islands. Data for China exclude Hong Kong and Macau which are counted
separately.
BEA also collects various financial data of foreign-invested multilateral firms. Data for 2015 (the
most recent year available) indicate that sales by foreign affiliates of U.S. firms in China totaled
$481 billion,53 which was the third-largest market for U.S.-affiliated firms overseas, after the
United Kingdom ($697 billion) and Canada ($625 billion) (see Figure 12). In addition, U.S.
affiliates in China employed 2.1 million workers, paid $35 billion in employment compensation,
and spent $3.4 billion on R&D.54
50 For a general discussion of U.S. FDI data and issues, see CRS In Focus IF10636, Foreign Direct Investment:
Overview and Issues, by (name redacted) and (name redacted)
.
51 According to the BEA, direct investment implies that a person in one country has a lasting interest in, and a degree of
influence over, the management of, a business enterprise in another country. As such, it defines FDI as ownership or
control of 10% or more of an enterprise’s voting securities, or the equivalent, is considered evidence of such a lasting
interest or degree of influence over management.
52 Data on country sources of U.S. FDI inflows should be interpreted with caution as they may not fully reflect the
ultimate beneficiary of that investment owner (UBO). For example, a foreign company located in one country that
invests in the United States may be owned by a multinational corporation headquartered in another country.
53 That level rises to $630 billion when sales by U.S. affiliates in Hong Kong are included.
54 BEA, at https://www.bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm.
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Figure 12. Sales by Foreign Affiliates of U.S. Firms by Country in 2015
($ in billions)
Source: BEA.
Alternative Measurements of Bilateral FDI Flows
The Rhodium Group (RG), a private consulting firm, estimates that Chinese FDI in the United
States is significantly higher than BEA estimates. RG notes that “official data often exhibit a 1-2
year time lag and do not capture major trends, due to problems such as significant round tripping
and trans-shipping of investments.”55 The Rhodium Group’s approach is to calculate the full
value of a Chinese acquisition in the year it was made, attributing it to China if a Chinese entity is
the investor, regardless of where the financing of the deal originated (such as through oft-used
Hong Kong and Caribbean offshore centers). RG’s data on U.S.-China FDI are significantly
higher than BEA’s data (see Figure 13, Figure 14, and Figure 15).56 To illustrate
RG’s data on the stock of Chinese FDI in the United States through 2016 ($110.1
billion), is 300.4% higher than BEA’s data (at $27.5 billion).
RG’s estimate of the stock of U.S. FDI in China, at $242.6 billion, is 162.3%
higher than BEA’s estimate (at $92.5 billion).
RG puts Chinese FDI flows to the United States in 2016 at $46.2 billion, which
was 348.5% higher than BEA’s data ($10.3 billion).
RG’s estimate of U.S. FDI flows to China in 2016, at $13.8 billion, was 45.3%
higher than BEA’s data ($9.5 billion).
55 The Rhodium Group, China Investment Monitor: Methodology Update, July 21, 2015, available at http://rhg.com/
notes/china-investment-monitor-methodology-update.
56 The Rhodium Group, China Investment Monitor, available at http://rhg.com/interactive/china-investment-monitor.
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Both BEA and RG data indicate a sharp increase in Chinese FDI flows to the United States in
2016 over the previous year. BEA’s data show a 28.2% rise while RG’s data indicate a 201.9%
surge.
The Chinese government reports in 2017 that its global overseas nonfinancial FDI dropped by
29.4% over the same period in 2016.57 The RG’s data of 2017 indicate that Chinese FDI flows to
the United States in 2017 were $29.4 billion, a 36.4% decline over the previous year, RG
estimates that during the first half of 2018, Chinese FDI in the United States totaled $1.8 billion, a
90% drop over the first half of 2017 and the lowest level in seven years.58 Some of the decline in
China’s overseas FDI appears to be largely driven by new Chinese policies to seek to increase
scrutiny of proposed overseas investments to ensure that they are not “irrational or illegal.” In
February 2018, the Chinese government announced that it would take over Anbang Insurance
Company (which owns the Waldorf Astoria in New York City and other U.S. properties) for a
year because of illegal business practices that allegedly threatened the solvency of the company.59
Falling Chinese FDI in the United States may also be the result of closer scrutiny to proposed
Chinese acquisitions of U.S. assets by U.S. officials.
Figure 13. BEA and RG Estimates of the Stock of U.S.-China FDI through 2016
($ in billions)
Source: Bureau of Economic Analysis and the Rhodium Group.
Note: BEA and the Rhodium Group use different methodologies to measure China’s FDI in the United States.
57 China Daily, “China outbound investment drops 29.4% in 2017,” January 16, 2018, at
http://www.chinadaily.com.cn/a/201801/16/WS5a5dab1ea3102c394518f95c.html.
58 Rhodium Group, Arrested Development: Chinese FDI in the US in 1H 2018, June 19, 2018, available at
https://rhg.com/research/arrested-development-chinese-fdi-in-the-us-in-1h-2018/,
59 Xinhuanet, “Chinese insurance regulator takes control of Anbang Insurance Group,” February 23, 2018, available at
http://www.xinhuanet.com/english/2018-02/23/c_136993912.htm.
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Figure 14. BEA and RG Data on Annual U.S. FDI Flows to China: 2005-2016
($ in millions)
Source: Bureau of Economic Analysis and the Rhodium Group.
Note: BEA and RG methodologies for measuring FDI differ significantly.
Figure 15. BEA and RG Data on Chinese FDI Flows to the United States: 2005-2016
($ in millions)
Source: Bureau of Economic Analysis and the Rhodium Group.
Note: BEA and RG methodologies for measuring FDI differ significantly.
The American Enterprise Institute (AEI) and the Heritage Foundation jointly maintain the China
Global Investment Tracker database, which lists Chinese global investments of $100 million or
more since 2005. Table 8 lists the 10 largest Chinese investments in the United States through
2017, which include HNA’s purchase of CIT Group’s aircraft leasing business for $10.4 billion;
Shuanghui’s (now called WH Group) purchase of Smithfield Foods for $7.1 billion; HNA’s $6.5
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billion investment in Hilton from Blackstone; HNA’s purchase of Ingram Micro for $6 billion;
and Anbang’s $5.7 billion acquisition of hotel properties from Blackstone.
Table 8. Top 10 Chinese Investments in the United States: 2005-2017
Year
Investor
Transaction
Value ($millions)
2017
HNA
10,380
2013
Shuanghui
7,100
2016
HNA
2016
Share
Size
Transaction Party
Sector
CIT Group
Transport
100%
Smithfield Foods
Agriculture
6,500
25%
Blackstone
Tourism
HNA
6,000
100%
Ingram Micro
Technology
2016
Anbang
5,720
Blackstone
Tourism
2016
Haier
5,400
General Electric
Other
2007
CIC
5,000
10%
Morgan Stanley
Finance
2016
Dalian Wanda
3,500
100%
Legendary
Entertainment
Entertainment
2016
Zhuhai Seine
Technology and Legend
3,400
Lexmark
Technology
2007
CIC
3,030
Blackstone
Finance
9%
Source: American Enterprise Institute and Heritage Foundation, China Global Investment Tracker.
Chinese Restrictions on U.S. FDI in China
U.S. trade officials have urged China to liberalize its FDI regime in order to boost U.S. business
opportunities in, and expand U.S. exports to, China. Although China is one of the world’s top
recipients of FDI, the Chinese central government imposes numerous restrictions on the level and
types of FDI allowed in China. According to the U.S.-China Business Council (USCBC), China
imposes ownership barriers on nearly 100 industries.60 The OECD’s 2016 FDI Regulatory
Restrictiveness Index, which measures statutory restrictions on FDI in 62 countries, ranked
China’s FDI regime as the fourth most restrictive.61
Some recent surveys by U.S. and European business groups suggest that foreign firms in China
may be less optimistic about the Chinese market than in the past, due in part to perceived growing
protectionism. To illustrate:
A 2017 American Chamber of Commerce in China (AmCham China) business
climate survey of 500 member companies found that while a majority of
respondents felt optimistic about their investments in China, 81% said that
foreign businesses in China were less welcome in China than before, compared
to 41% who asserted that in 2013. The survey found that 55% of respondents said
that foreign firms are treated less favorably treated by the Chinese government
than domestic Chinese firms.62
60 U.S.-China Business Council, China’s WTO Compliance, September 20, 2013.
61 OECD, FDI Regulatory Restrictiveness Index, at http://www.oecd.org/investment/fdiindex.htm.
62 AmCham China, 2017 China Business Climate Survey Report, January 2017.
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A 2016 European Union Chamber of Commerce in China business confidence
survey stated that the business environment in China was becoming “increasingly
hostile” and “perpetually tilted in favor of domestic enterprises.” For example,
among respondents, 56% said doing business in China was becoming more
difficult and 57% claimed foreign companies tend to receive unfavorable
treatment in China compared to domestic Chinese firms.63
Negotiations for a Bilateral Investment Treaty (BIT)64
The United States and China initiated negotiations on reaching a bilateral investment treaty (BIT)
in 2008, with the goal of expanding bilateral investment opportunities. U.S. negotiators hoped
such a treaty, if implemented, would improve the investment climate for U.S. firms in China by
enhancing legal protections and dispute resolution procedures, and by obtaining a commitment
from the Chinese government that it would treat U.S. investors no less favorably than Chinese
investors.
In April 2012, the Obama Administration released a “Model Bilateral Investment Treaty” that was
developed to enhance U.S. objectives in the negotiation of new BITs.65 The new model BIT
addressed six core principles or issues for investors, including national treatment and mostfavored nation (MFN) treatment at all stages of investment, rules on expropriations and
compensation if this occurs, ability to transfer funds in and out of the country, limits on
performance requirements (such as domestic content targets or mandated technology transfer),
neutral arbitration of disputes, and freedom by investors to appoint their own senior officials.66
During the July 10-11, 2013 session of the U.S.-China Strategic and Economic Dialogue (S&ED),
China indicated its intention to negotiate a high-standard BIT with the United States that would
include all stages of investment and all sectors, a commitment a U.S. official described as “a
significant breakthrough, and the first time China has agreed to do so with another country.”67 A
press release by the Chinese Ministry of Commerce stated that China was willing to negotiate a
BIT on the basis of nondiscrimination and a negative list, meaning the agreement would identify
only those sectors not open to foreign investment on a nondiscriminatory basis (as opposed to a
BIT with a positive list which would only list sectors open to foreign investment).
During the July 9-10, 2014 S&ED session, the two sides agreed to a broad timetable for reaching
agreement on core issues and major articles of the treaty text, and committed to initiate the
“negative list” negotiation early in 2015.68 During BIT negotiations held in June 2015, each side
submitted their first negative list proposals, and later agreed to submit a revised list in September
2015 right before President Xi’s summit visit to the United States, which they did, but a
63 European Chamber, European Business in China, Business Confidence Survey, 2016, available at
http://www.europeanchamber.com.cn/en/publications-business-confidence-survey.
64 For additional information, see CRS In Focus IF10307, A U.S.-China Bilateral Investment Treaty (BIT): Issues and
Implications, by (name redacted)
.
65 The Administration began efforts to review and revise the U.S. BIT model in 2009. The previous model BIT dated to
2004. The Administration’s review process likely meant that negotiations with China for a BIT were limited. Model
BIT can be found at https://ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf.
66 See, CRS In Focus IF10052, U.S. International Investment Agreements (IIAs), by (name redacted) and (name red
acted)
.
67 U.S. Department of the Treasury, Remarks of Treasury Secretary Jacob J. Lew at the Close of the Fifth U.S.-China
Strategic and Economic Dialogue, July 13, 2013.
68 U.S. Department of the Treasury, U.S.-China Joint Fact Sheet Sixth Meeting of the Strategic and Economic
Dialogue, July 11, 2014.
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breakthrough was not achieved. New negative lists were submitted in June 2016 and August
2016,69 and the BIT was discussed at the September 2016 G-20 Summit held in Hangzhou, China,
but no breakthrough was announced.
Many analysts contend that a U.S.-China BIT could have significant implications for bilateral
commercial relations and the Chinese economy. According to then-USTR Michael Froman, such
an agreement “offers a major opportunity to engage on China’s domestic economic reforms and
to pursue greater market access, a more level playing field, and a substantially improved
investment environment for U.S. firms in China.”70 For China, a high-standard BIT could help
facilitate greater competition in China and result in a more efficient use of resources, factors
which economists contend could boost economic growth. Some observers contend that China’s
pursuit of a BIT with the United States represents a strategy that is being used by reformers in
China to jumpstart widespread economic reforms (which appear to have stalled in recent years).
This strategy, it is argued, is similar to that used by Chinese reformers in their efforts to get China
into the WTO in 2001. Such international agreements may give political cover to economic
reformers because they can argue that the agreements build on China’s efforts to become a leader
in global affairs. This may make it harder for vested interests in China who benefit from the status
quo to resist change. Some critics raise concerns that even if a high standard BIT is reached,
ensuring China’s full compliance may prove difficult, given China’s extensive use of industrial
policies. Others have raised questions as to the effect of such an agreement in boosting FDI flows
and how that might impact U.S. jobs in affected industries.71 A BIT would have to be approved in
the U.S. Senate by a two-thirds majority.
The BIT was not concluded by the end of the Obama Administration’s term (the original goal of
completion). While the Chinese government has indicated that it supports continuing BIT
negotiations, the Trump Administration has been less clear on its position. U.S. Secretary of
Treasury Steven Mnuchin was quoted by Inside Trade in June 2017 as saying:
It’s on our agenda; I wouldn't say it’s at the very top of our agenda. I think what we're
looking for is, opposed to just negotiating a large agreement, we're looking to negotiate
very specific issues that deal with market issues today, deal with market fairness today,
deal with opening their markets to the same extent that our markets are open, and that’s
really our focus.... Once we can make progress in that we can turn to the bilateral
investment treaty.72
The U.S.-China Economic and Security Review Commission’s (USCC’s) November 2015 annual
report recommended that the Administration provide a comprehensive, publicly available
assessment of Chinese FDI in the United States prior to completion of BIT negotiations that
includes an identification of the nature of investments, whether investments received support of
any kind from the Chinese government and at any level, and the sector in which the investment
was made.73 The USCC’s 2016 annual report recommended that Congress should “amend the
69 The White House, Fact Sheet: U.S.-China Economic Relations, September 4, 2016, available at
https://www.whitehouse.gov/the-press-office/2016/09/04/fact-sheet-us-china-economic-relations.
70 USTR, Remarks by Ambassador Michael Froman to AmCham China and the U.S. Chamber of Commerce, April 27,
2015, available at https://ustr.gov/about-us/policy-offices/press-office/speechestranscripts/2015/april/remarksambassador-michael.
71 See, for example, the U.S.-China Economic and Security Commission, Policy Considerations for Negotiating a U.S.China Bilateral Investment Treaty, August 1, 2016, available at http://www.uscc.gov/Research/policy-considerationsnegotiating-us-china-bilateral-investment-treaty.
72 https://insidetrade.com/daily-news/mnuchin-china-bit-agenda-only-if-quicker-specific-deals-can-be-reached.
73 U.S.-China Economic and Security Review Commission, 2015 Report to Congress, November 2015, p. 33.
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statute authorizing the Committee on Foreign Investment in the United States to bar Chinese
state-owned enterprises from acquiring or otherwise gaining effective control of U.S.
companies.”74
Concerns About Chinese FDI in the United States
Chinese FDI in the United States has come under increasing scrutiny by U.S. policymakers. Some
have expressed concerns over Chinese investments (especially by SOEs or government-backed
entities) that appear to target industries and technologies that the Chinese government has
identified as critical to China’s future economic development. Some have called for reforms to
the process in which the Federal government evaluates certain FDI, such as the Committee on
Foreign Investment in the United States (CFIUS), an interagency committee that reviews the
national security aspects of certain foreign acquisitions, seek to modify the terms of the proposed
acquisition, and makes recommendations to the President, who can block the transaction.75
The USCC’s 2017 Annual Report identified three trends that may impact the ability of CFIUS to
review Chinese investment in the United States, including China’s targeting investments in
industries it deems as strategic, the use of private entities as fronts by the Chinese government
SOEs to obtain assets in strategic sectors; and attempting to bypass U.S. regulatory procedures
(such as investing through shell companies outside China) and using cyber-espionage to
financially undermine the targeted firm before acquiring it.76 The commission made a number of
recommendations to Congress on Chinese investment in the United States, including a ban on
acquisition of U.S. assets by Chinese state-owned or state-controlled entities, including sovereign
wealth funds.
In September 2017, President Trump, citing national security concerns, blocked the acquisition of
the U.S. firm Lattice Semiconductor by China Venture Capital Fund Corporation Limited77 for
$1.3 billion.78 In March 2018, national security concerns were also used by President Trump
when he blocked a bid to purchase Qualcomm Incorporated (a U.S. high-technology firm) to
Broadcom Limited (a semiconductor firm headquartered in Singapore). The decision to block the
sale appears to have been motivated in part by concerns it would weaken Qualcomm’s position
and enable China to, according to CFIIUS, dominate 5G technology and the standards setting
process.79
Some Members of Congress argue that the structure and scope of CFIUS needs to modernized
and strengthened in order to close loopholes that may exist in the current system for certain types
of foreign investments. Several CFIUS bills have been introduced in Congress, many of which be
appear to be largely aimed at Chinese FDI activities. For example, a press release by
74 Ibid., p. 126.
75 For additional information on CFIUS, see CRS Report RL33388, The Committee on Foreign Investment in the
United States (CFIUS), by (name redacted) .
76 U.S.-China Economic and Security Review Commission, 2017 Annual Review, November 15, 2017, pp. 2-3, at
https://www.uscc.gov/Annual_Reports/2017-annual-report.
77 Bloomberg describes the Chinese firm as “a private-equity firm backed by a Chinese state-owned asset manager.”
See https://www.bloomberg.com/news/articles/2017-09-13/trump-blocks-china-backed-bid-for-chipmaker-oversecurity-risk.
78 The White House, Press Release, September 13, 2017, at https://www.whitehouse.gov/the-press-office/2017/09/13/
order-regarding-proposed-acquisition-lattice-semiconductor-corporation.
79 The letter can be found at https://www.wsj.com/articles/a-deal-with-broadcom-may-weaken-qualcomms-innovationcfius-says-1520353879.
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Representative Pittenger for his introduction of H.R. 4311 (the Foreign Investment Risk Review
Modernization Act of 2017) stated
China is buying American companies at a breathtaking pace. While some are legitimate
business investments, many others are part of a backdoor effort to compromise U.S.
national security.... For example, China recently attempted to purchase a U.S. missile
defense supplier using a shell company to evade detection. The global economy presents
new security risks, and so our bipartisan legislation provides Washington the necessary
tools to better track and evaluate Chinese investment. 80
Some CFIUS reform bills have been taken up by Congress, including H.R. 5841 (the Foreign
Investment Risk Review Modernization Act of 2018, introduced by Representative Pittenger),
which passed the House on June 26, 2018); and S. 2098 (the Foreign Investment Risk Review
Modernization Act of 2018, introduced by Senator Cornyn), which was added as an amendment
by the Senate to H.R. 5515 (the National Defense Authorization Act for Fiscal Year 2019) and
passed by the Senate on June 18.81There is also support by some in Congress to modernize and
reform U.S. export control laws, such as H.R. 5040 (the Export Control Reform Act of 2018).82
The Trump Administration had indicated under its Section 301 investigation of China’s IPR
policies that it would to impose new FDI restrictions and tighter export controls against China.
However, on June 27, President Trump announced that legislation currently under consideration
in Congress to reform CFIUS and export control laws would, if enacted, meet the
Administration’s goals on these issues.83
Major U.S.-China Trade Issues
China’s economic reforms and rapid economic growth, along with the effects of globalization,
have caused the economies of the United States and China to become increasingly integrated.84
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. According to the USTR, most U.S. trade disputes with China stem from the
consequences of its incomplete transition to a free market economy. 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;
80 Representative Robert Pittenger, Press Release, November 7, 2017, at https://pittenger.house.gov/media-center/
press-releases/pittenger-takes-aim-at-china.
81 For more information on CFIUS legislation, see CRS Insight IN10924, Foreign Investment Risk Review
Modernization Act (FIRRMA), by (name redacted) and (name redacted)
.
82 See CRS Report R41916, The U.S. Export Control System and the Export Control Reform Initiative, by (name r
edacted) and (name redacted)
.
83 See https://www.whitehouse.gov/briefings-statements/statement-president-regarding-investment-restrictions/.
84 The impact of globalization has been a somewhat controversial topic in the United States. Some argue that it has
made it easier for U.S. firms to shift production overseas, resulting in lost jobs in the United States (especially in
manufacturing) and lower wages for U.S. workers. Others contend that globalization has induced U.S. firms to become
more efficient and to focus a greater share of their domestic manufacturing on higher-end or more technologically
advanced production (while sourcing lower-end production abroad), making such firms more globally competitive. The
result has been that the United States continues to be a major global manufacturer in terms of value-added, but there are
fewer U.S. workers in manufacturing.
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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.
Chinese “State Capitalism”
Currently, a significant share of China’s economy is thought to be driven by market forces. A
2010 WTO report estimated that the private sector now accounted for more than 60% of China’s
gross domestic product (GDP).85 A 2016 WTO study estimated that the private sector accounted
for 41.8% of China’s exports.86
However, the Chinese government continues to play a major role in economic decision-making.
For example, at the macroeconomic level, the Chinese government maintains policies that induce
households to save a high level of their income, much of which is deposited in state-controlled
Chinese banks. This enables the government to provide low-cost financing to Chinese firms,
especially SOEs. At the microeconomic level, the Chinese government (at the central and local
government level) seeks to promote the development of industries deemed critical to the
country’s future economic development by using various policies, such as subsidies, tax breaks,
preferential loans, trade barriers, FDI restrictions, discriminatory regulations and standards,
export restrictions on raw materials (including rare earths), technology transfer requirements
imposed on foreign firms, public procurement rules that give preferences to domestic firms, and
weak enforcement of IPR laws.
Many analysts argue that the Chinese government’s intervention in various sectors through
industrial policies has intensified in recent years. The December 2013 USTR report on China’s
WTO trade compliance stated
During most of the past decade, the Chinese government emphasized the state’s role in the
economy, diverging from the path of economic reform that had driven China’s accession
to the WTO. With the state leading China’s economic development, the Chinese
government pursued new and more expansive industrial policies, often designed to limit
market access for imported goods, foreign manufacturers and foreign service suppliers,
while offering substantial government guidance, resources and regulatory support to
Chinese industries, particularly ones dominated by state-owned enterprises. This heavy
state role in the economy, reinforced by unchecked discretionary actions of Chinese
government regulators, generated serious trade frictions with China’s many trade partners,
including the United States.87
The extent of SOE involvement in the Chinese economy is difficult to measure, due to the opaque
nature of the corporate sector in China and the relative lack of transparency regarding the
85 World Trade Organization, Trade Policy Review Body, Trade Policy Review, Report by the Secretariat, China,
Revision, 2010, Part 2, p. 1.
86 WTO, Trade Policy Review, China, June 15, 2016, p. 20, available at https://www.wto.org/english/tratop_e/tpr_e/
s342_e.pdf.
87 U.S. Trade Representative, 2013 USTR Report to Congress on China’s WTO Compliance, December 2013, p. 2.
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relationship between state actors (including those at the central and noncentral government levels)
and Chinese firms. According to one study by the USCC
The state sector in China consists of three main components. First, there are enterprises
fully owned by the state through the State-owned Assets and Supervision and
Administration Commission (SASAC) of the State Council and by SASACs of provincial,
municipal, and county governments. Second, there are SOEs that are majority owners of
enterprises that are not officially considered SOEs but are effectively controlled by their
SOE owners. Finally, there is a group of entities, owned and controlled indirectly through
SOE subsidiaries based inside and outside of China. The actual size of this third group is
unknown. Urban collective enterprises and Government-owned Township and village
enterprises (TVEs) also belong to the state sector but are not considered SOEs. The stateowned and controlled portion of the Chinese economy is large. Based on reasonable
assumptions, it appears that the visible state sector—SOEs and entities directly controlled
by SOEs, accounted for more than 40 percent of China’s nonagricultural GDP. If the
contributions of indirectly controlled entities, urban collectives, and public TVEs are
considered, the share of GDP owned and controlled by the state is approximately 50
percent.88
According to the Chinese government, there are 150,000 state-owned or state-controlled
enterprises at the central and local government excluding financial institutions, with total assets
worth $15.2 trillion, and 30 million workers.89 Chinese SOEs have undergone significant
restructuring over the years. The government contends that 68% of all SOE-funded firms in 2016
were mixed-ownership. The Chinese government has identified a number of industries where the
state should have full control or where the state should dominate. These include autos, aviation,
banking, coal, construction, environmental technology, information technology, insurance, media,
metals (such as steel), oil and gas, power, railways, shipping, telecommunications, and tobacco.90
Many SOEs are owned or controlled by local governments. According to one analyst
The typical large industrial Chinese company is ...wholly or majority-owned by a local
government which appoints senior management and provides free or low-cost land and
utilities, tax breaks, and where possible, guarantees that locally made products will be
favored by local governments, consumers, and other businesses. In return, the enterprise
provides the local state with a source of jobs for local workers, tax revenues, and
dividends.91
China’s banking system is largely dominated by state-owned or state-controlled banks. In 2011,
the top five largest banks in China, all of which were shareholding companies with significant
state ownership, accounted for 57.5% of Chinese banking assets. The Chinese government also
has four banks that are 100% state-owned and holds shares in a number of joint stock commercial
banks.92 SOEs are believed to receive preferential credit treatment by government banks, while
U.S.-China Economic and Security Review Commission, An Analysis of State‐owned Enterprises and State
Capitalism in China, by Andrew Szamosszegi and Cole Kyle, October 26, 2011, p. 1.
89 China Daily, “China eyes breakthroughs in SOE reform,” December 23, 2016, at http://www.chinadaily.com.cn/
business/2016-12/23/content_27753459.htm.
90 Testimony for the U.S.–China Economic and Security Review Commission by Derek Scissors, Ph.D, Chinese State
Owned Enterprises and the US Policy on China, February 12, 2012.
91 Anderson, G.E., PhD, Designated Drivers, How China Plans to Dominate the Global Auto Industry, 2012, p. 2.
92 Lund University, Lending for Growth? An Analysis of State-Owned Banks in China, by Fredrik N.G. Anderson,
Katarzyna Burzynska, and Sonja Opper, June 2013, p. 41.
88
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private firms must often pay higher interest rates or obtain credit elsewhere. According to one
estimate, SOEs accounted for 85% ($1.4 trillion) of all bank loans in 2009.93
Not only are SOEs dominant players in China’s economy, many are quite large by global
standards. Fortune’s 2018 list of the world’s 500 largest companies includes 111 Chinese firms
(compared to 29 listed firms in 2007), the top 20 of which are listed in Table 9.94
Table 9. Top 20 Chinese Companies on Fortune’s Global 500 in 2018
Company
Global
500 Rank
State or
Nonstate
Industry
Revenue
($billions)
State Grid
2
State
Utility
349
Sinopec Group
3
State
Energy
327
China National Petroleum
4
State
Energy
326
China State Construction Engineering
23
State
Engineering &
Construction
156
Industrial & Commercial Bank of China
26
State
Banking
153
Ping An Insurance
29
Nonstate
Insurance
144
China Construction Bank
31
State
Banking
139
SAIC Motor
36
State
Motor Vehicles &
Parts
129
Agricultural Bank of China
40
State
Banking
122
China Life Insurance
42
State
Insurance
120
Bank of China
46
State
Banking
115
China Mobile Communications
53
State
Telecommunications
110
China Railway Engineering Group
56
State
Engineering &
Construction
107
China Railway Construction
58
State
Engineering &
Construction
101
Dongfeng Motor
65
State
Motor Vehicles &
Parts
93
Huawei Investment & Holding
72
Nonstate
Telecommunications
89
China Resources
86
State
Pharmaceuticals
82
China National Offshore Oil
87
State
Mining, Crude-Oil
Production
81
China Communications Construction
91
State
Engineering &
Construction
79
Pacific Construction Group
96
Nonstate
Engineering &
Construction
77
Source: Fortune 2017 Global 500.
Notes: State companies are those to have government ownership of 50% or more in the firm.
93 The Economist, “State Capitalism’s Global Reach, New Masters of the Universe, How State Enterprise is
Spreading,” January 21, 2012.
94 The listing can be found at http://fortune.com/global500/.
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Out of the top 20 Chinese firms listed in the Fortune Global 500, 17 (85%) are majority-owned
(50% or more) by Chinese government, and for the entire list, 78 or (70%) are primarily owned
by the government. Some of the 111 Chinese firms on the Fortune 500 list, while not majorityowned by the government, may be partially state-controlled or favored by the government. For
example
Several of the listed firms are banks where the Chinese government owns a large
or controlling share, including 26.5% of the Bank of Communications, 15.7% of
China Minsheng Banking Corp., 21% of China Industrial Bank, 17.9% of China
Merchant Bank, and 20% of Shanghai Pudong Development Bank.95
Lenovo, a major global computer producer, was started by the Chinese National
Academy of Social Sciences, which started Legend Holdings in 1984. Lenovo
was spun off from Legend in 2001, but Legend still owns 31% of Lenovo’s
shares.96
Huawei (a major telecommunications company) describes itself as an employeeowned firm. However, many U.S. analysts contend that Huawei has strong links
with the Chinese government, including the Chinese People’s Liberation Army
(PLA), and has not published a full breakdown of its ownership structure. In
addition, in the past, the Chinese government reportedly ordered state banks to
extend loans to the company early in its development so that it could compete
against foreign firms in the domestic telecommunications market.97
Ping An Insurance is the largest nonstate company on the 2017 Global 500 list. In
2012, The New York Times published an article that reported that in 2004 a
network of family and friends of then-Chinese Premier Wen Jiabao owned 135
million shares of Ping An Insurance through a series of investment companies.98
A March 2016 Times article described Ping An as a “labyrinthine shareholding
structure made up of 37 interlocking holding companies.”99
China’s Plan to Modernize the Economy and Promote Indigenous Innovation
Many of the industrial policies China has implemented or formulated since 2006 appear to stem
largely from a comprehensive document issued by China’s State Council (the highest executive
organ of state power) in 2006 titled the National Medium-and Long-Term Program for Science
and Technology Development (2006-2020), often referred to as the MLP.100 The MLP appears to
represent an ambitious plan to modernize the structure of China’s economy by transforming it
from a global center of low-tech manufacturing to a major center of innovation (by the year 2020)
and a global innovation leader by 2050.101 It also seeks to sharply reduce the country’s
dependence on foreign technology. The MLP includes the stated goals of “indigenous innovation,
95 Lund University, Lending for Growth? An Analysis of State-Owned Banks in China, by Fredrik N.G. Anderson,
Katarzyna Burzynska, and Sonja Opper, June 2013, p. 41.
96 Lenovo, Investor Relations, Stock Information, Shareholding.
97 McGregor, Richard, The Party, the Secret World of China’s Communist Rulers, 2010, p. 204.
98 The New York Times, Ping An’s Hidden Shareholders: Friends and Family of Wen Jiabao, November 23, 2012.
99 The New York Times, Starwood Bidder Is a Reclusive Chinese Insurer With Opaque Backing, March 29, 2016.
100 An English translation of the MLP can be found at http://sydney.edu.au/global-health/international-networks/
National_Outline_for_Medium_and_Long_Term_ST_Development1.doc.
101 As some observers describe it, China wants to go from a model of “made in China” to “innovated in China.”
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leapfrogging in priority fields, enabling development, and leading the future.”102 Some of the
broad goals of the MLP state that by 2020
The progress of science and technology will contribute 60% or above to China’s
development.
The country’s reliance on foreign technology will decline to 30% or below (from
an estimated current level of 50%).
Gross expenditures for research and development (R&D) would rise to 2.5% of
gross domestic product (from 1.3% in 2005). Priority areas for increased R&D
include space programs, aerospace development and manufacturing, renewable
energy, computer science, and life sciences.103
The document states that “China must place the strengthening of indigenous innovative capability
at the core of economic restructuring, growth model change, and national competitiveness
enhancement. Building an innovation-oriented country is therefore a major strategic choice for
China’s future development.” This goal, according to the document, is to be achieved by
formulating and implementing regulations in the country’s government procurement law to
“encourage and protect indigenous innovation,” establishing a coordination mechanism for
government procurement of indigenous innovative products, requiring a first-buy policy for major
domestically made high-tech equipment and products that possess proprietary intellectual
property rights, providing policy support to enterprises in procuring domestic high-tech
equipment, and developing “relevant technology standards” through government procurement.
Reaction by U.S. Stakeholders
Beginning in 2009, several U.S. companies began to raise concerns over a number of Chinese
government circulars that would establish an “Indigenous Innovation Product Accreditation”
system. For example, in November 2009, the Chinese government released a “Circular on
Launching the 2009 National Indigenous Innovation Product Accreditation Work,” requiring
companies to file applications by December 2009 for their products to be considered for
accreditation as “indigenous innovation products.” Similar proposed circulars were issued at the
provincial and local government levels. U.S. business representatives expressed deep concern
over the circulars, arguing that they were protectionist in nature because they extended
preferential treatment for Chinese government procurement to domestic Chinese firms that
developed and owned intellectual property (IP), and thus, largely excluded foreign firms.104
AmCham China described China’s attempt to link IP ownership with market access as
“unprecedented worldwide.”105 A letter written by the U.S. Chamber of Commerce and 33
business associations to the Chinese government on December 10, 2009, stated that the
indigenous innovations circulars would “make it virtually impossible for any non-Chinese
company to participate in China’s government procurement market—even those that have made
102 The MLP identifies main areas and priority topics, including energy, water and mineral resources, the environment,
agriculture, manufacturing, communications and transport, information industry and modern service industries,
population and health, urbanization and urban development, public security, and national defense. The report also
identifies 16 major special projects and 8 “pioneer technologies.”
103 R&D Magazine, December 22, 2009.
104 U.S. business representatives also claim that the Chinese government is using tax incentives, standards setting and
requirements, security regulations, subsidies, technology transfer requirements, and other measures to promote the
goals of indigenous innovation.
105 AmCham China,2011 White Paper, April 26, 2011, p. 66.
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substantial and long-term investments in China, employ Chinese citizens, and pay taxes to the
Chinese government.” Such groups contend that a large share of their technology is developed
globally, and thus, it would be difficult to attribute the share of technology developed in China
needed to obtain accreditation.106
A 2011 AmCham China survey found that 40% of respondents believed that China’s indigenous
innovation policies would hurt their businesses and 26% said their businesses were already being
hurt by such policies. At a November 2011 WTO review of China’s IPR policies, the U.S. WTO
representative stated that China’s policies of adopting indigenous innovation had “created a
troubling trend toward increased discriminatory policies which were aimed at coercing
technology transfer.” He stated that “Chinese regulations, rules and other regulatory measures
frequently called for technology transfer, and in certain cases, conditioned, or proposed to
condition, the eligibility for government benefits or preferences on intellectual property being
owned or developed in China, or being licensed, in some cases exclusively, to a Chinese party.”107
China’s Response to U.S. Concerns
The Chinese government responded to U.S. concerns over its indigenous innovation policies by
arguing that they did not discriminate against foreign firms or violate global trade rules.108
However, during the visit of (then) Chinese President Hu Jintao to the United States in January
2011, the Chinese government stated that it would not link its innovation policies to the provision
of government procurement preferences.109 During the May 2011 session of the U.S.-China
Strategic and Economic Dialogue (S&ED), China pledged that it would eliminate all of its
indigenous innovation products catalogs.110 During the November 2011 talks held under the U.S.China Joint Commission on Commerce and Trade (JCCT), the Chinese government announced
that the State Council had issued a measure requiring governments of provinces, municipalities,
and autonomous regions to eliminate by December 1, 2011, any catalogues or other measures
linking innovation policies to government procurement preferences.111 This occurred after foreign
business groups raised concerns that discriminatory indigenous innovation policies might
continue to be implemented at the local level even after Hu Jintao’s commitment. For example,
the USCBC reported in February 2011 that it had identified 22 municipal and provincial
governments that had issued at least 61 indigenous innovation catalogues. U.S. business
representatives sought to ensure that Beijing’s pledge on indigenous innovation would apply at all
levels of government in China.
106 Some U.S. business representatives argue that one of the main goals of China’s indigenous innovation regulations is
to induce foreign firms to boost their R&D activities in China in order to qualify for government contracts.
107 WTO, Transitional Review Under Section 18 of the Protocol on the Accession of the People’s Republic of China,
Report to the General Council by the Chair, November 17, 2011, p. 4.
108 Wall Street Journal, China Defends Rule on ‘Indigenous’ Tech, December 15, 2009.
109 The White House, U.S.-China Joint Statement, January 19, 2011.
110 According to a U.S. fact sheet on the meeting “China pledged to eliminate all of its government procurement
indigenous innovation products catalogues and revise Article 9 of the draft Government Procurement Law
Implementing Regulations (which have preferences in government procurement to national indigenous innovation
products), in fulfillment of President Hu’s January 2011 commitment not to link Chinese innovation policies to
government procurement preferences. See U.S. Department of the Treasury, The 2011 U.S.-China Strategic and
Economic Dialogue U.S. Fact Sheet – Economic Track, May 10, 2011.
111 U.S. Department of Commerce, 22nd U.S.-China Joint Commission on Commerce and Trade Fact Sheet, November
21, 2011.
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In May 2013, the USCBC reported that, although the central government had largely been
successful in ensuring that sub-national governments complied with Hu Jintao’s January 2011
commitments, 13 provinces had not yet issued any measures to comply.112 In addition, an October
2012 USCBC survey found that 85% of respondents said they had seen little impact on their
businesses resulting from China’s commitments delinking indigenous innovation with
government procurement.113
Remaining U.S. Concerns
While many U.S. business leaders have applauded China’s pledge to delink indigenous
innovation from government procurement, some remain wary that China will implement new
policies that attempt to provide preferences to local Chinese firms over foreign firms. According
to Adam Segal with the Council on Foreign Relations: “Even if China reverses certain policies
under U.S. pressure, it will remain dedicated to those goals. U.S. policy is likely to become a
game of Whac-a-Mole, beating down one Chinese initiative on indigenous innovation only to see
another pop up.”114 U.S. business groups are also concerned with how the MLP blueprint will
affect China’s commitment to enforcing foreign IPR. They note, for example, that the MLP
states: “Indigenous innovation refers to enhancing original innovation, integrated innovation, and
re-innovation based on assimilation and absorption of imported technology, in order to improve
our national innovation capability.” To some, this seems to indicate that China intends to take
existing technology, make some changes and improvements on it, and then claim it as its own
without acknowledging or compensating the original IPR holders. A 2011 report by the U.S.
Chamber of Commerce stated that China’s indigenous innovation policies led many international
technology companies to conclude that the MLP is a “blueprint for technology theft on a scale the
world has never seen before.”115
U.S. officials have attempted to convince Beijing that, while its desire to increase innovation in
China is a commendable goal, its efforts to limit the participation of foreign firms in such efforts,
or attempting to condition market access in China to the development of IPR by foreign firms in
China will hinder, not promote, the advancement of innovation in China. The direction China
takes on this issue could have a significant impact on U.S. economic interests, as noted by USITC
To the extent that China’s policies succeed in accelerating technological progress,
productivity, and innovation in the Chinese economy, they could provide spillover benefits
for other countries. But if indigenous innovation policies act as a form of technological
import substitution, systematically favoring Chinese domestic firms over foreign firms in
relevant industries, they would be expected to have a negative effect on foreign firms and
economies roughly analogous to what would occur if China simply imposed a protective
tariff on imports of goods in the relevant sectors or levied a discriminatory excise tax on
the sales of FIEs in the Chinese market.116
112 U.S.-China Business Council, Status Report: China’s Innovation and Government Procurement Policies, May 1,
2013, at https://www.uschina.org/sites/default/files/innovation-status-report.pdf.
113 U.S.-China Business Council, USCBC 2012 China Business Environment Survey Results: Continued Growth and
Profitability; Tempered Optimism Due to Rising Costs, Competition, and Market Barriers, October 2012, p. 6,
available at https://www.uschina.org/advocacy/press/uscbc-2012-china-business-environment-survey-results-uscompanies-report-continued.
114 Foreign Affairs, China’s Innovation Wall: Beijing’s Push for Homegrown Technology, September 28, 2010.
115 U.S. Chamber of Commerce, China’s Drive for ‘Indigenous Innovation’ - A Web of Industrial Policies, February
2011, p. 4.
116 USITC, China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring
the Effects on the U.S. Economy (Investigation No. 332-514, USITC Publication 4199, November 2010, pp. 6-7.
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New Restrictions on Information and Communications Technology
According to the USTR’s 2015 report on China’s WTO accession, while progress has been made
to delink China’s efforts to link indigenous innovation goals with procurement at the central and
local efforts, such policies have continued in other areas. Many foreign business groups have
expressed increasing concerns over a number of recently proposed or enacted laws and
regulations on information and communications technology (ICT) products and services that
could limit foreign access to ICT markets in China on so-called national security grounds. Several
proposals include language stating that critical information infrastructure should be “secure and
controllable,” an ambiguous term that has not been precisely defined by Chinese authorities.
Other proposals lay out policies to promote indigenous ICT industries or would require foreign
firms to hand over proprietary information. According to the U.S. Department of Commerce
The policies set forth in these measures could cause long-term damage to U.S. businesses
trying to sell ICT products into China, a market estimated to be worth about $465 billion
this year. They also could add significant costs to foreign ICT companies operating in
China and could prevent them from supplying the China market with the most
technologically advanced and reliable products.
Such restrictions could have a significant impact on U.S. ICT firms. According to BEA, U.S.
exports of ICT services and potentially ICT-enabled services (i.e., services that are delivered
remotely over ICT networks) to China totaled $12.8 billion in 2015.117 Examples of recently
passed or proposed measures of concern to foreign ICT firms include the following:
In 2014, the China Banking Regulatory Commission issued guidelines for IT
security equipment used in banks (such as cash machines and smartcard chips),
which included provisions on encryption and the disclosure of source code. It
emphasized the importance of developing local technology and stated that the
need for “secure and controllable technologies” in the banking sector, with the
goal of 15% in 2015, growing to no less than 75% in 2019. China suspended
some of the guidelines in April 2015. At the June 2015 S&ED session, China
agreed to ensure that bank ICT regulations “will be nondiscriminatory, are not to
impose nationality-based requirements, and are to be developed in a transparent
manner.”118
China’s national security law (enacted in July 2015) includes a provision (Article
24) that says “the State strengthens the establishment of capacity for independent
innovation, accelerating the development of autonomously controlled strategic
advanced technologies and key technologies in core fields, strengthens the use of
intellectual property rights, protects capacity building in protection of
technological secrets, and ensures security in technology and engineering.”119
Article 59 says that “the State establishes national security review and oversight
management systems and mechanisms, conducting national security review of
foreign commercial investment, special items and technologies, internet
117 China was the fourth-largest U.S. export market for such services for countries where data is available. See, BEA,
International Trade Data, U.S. Trade in Services, available at http://www.bea.gov/iTable/iTable.cfm?ReqID=62&
step=1#reqid=62&step=1&isuri=1&6210=4.
118 U.S. Department of Commerce, U.S. Fact Sheet: 26th U.S.-China Joint Commission on Commerce and Trade,
November 23, 2016, available at https://www.commerce.gov/news/fact-sheets/2015/11/us-fact-sheet-26th-us-chinajoint-commission-commerce-and-trade.
119 Translation from the Council on Foreign Relations, National Security Law of the People’s Republic of China, July 1,
2015, available at http://www.cfr.org/homeland-security/national-security-law-peoples-republic-china/p36775.
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information technology products and services, projects involving national
security matters, as well as other major matters and activities, that impact or
might impact national security.”
In October 2015, the China Insurance Regulatory Commission issued new draft
rules on cyber-security in the insurance industry. The draft rules called for the
adoption of “secure and controllable” technology by insurance companies, data
localization requirements, and the use of products and systems employing
domestic encryption methods. On June 1, 2016, 28 business groups sent a letter
to the chairman of the China Insurance Regulatory Commission, arguing that the
draft rules “would create unnecessary obstacles to international trade and likely
to constitute a means of arbitrary or unjustifiable discrimination against providers
in countries where the same conditions prevail.”120 On June 2, 2016, the United
States raised concerns about the draft regulations with the WTO Committee on
Trade-Related Measures, arguing that such language appears to require that
Chinese insurance firms give preferences to Chinese domestic providers of
hardware equipment and software over foreign firms.121
In December 2015, China enacted a new counterterrorism law.122 It requires
telecommunications operators and internet service providers to “provide
technical interfaces, decryption and other technical support assistance to public
security organs and state security organs conducting prevention and investigation
of terrorist activities.”123 Originally, the Chinese government sought to require
providers to provide it encryption codes (i.e., security back-door access) and to
store local user data on servers within China, but these provisions were later
dropped from the final draft of the law, in part because of sharp criticism by
President Obama, who contended that such rules “would essentially force all
foreign companies, including U.S. companies, to turn over to the Chinese
government mechanisms where they can snoop and keep track of all the users of
those services.”
China passed a new cyber-security law on November 7, 2016,124 which appears
to promote the development of indigenous technologies and impose restrictions
on foreign firms. Article 15 directs government entities to “support key network
security technology industries and programs; support network security
technology research and development, application and popularization; spread
safe and trustworthy network products and services; protect the intellectual
property rights for network technologies; and support research and development
institutions, schools of higher learning, and so forth to participate in State
network security technology innovation programs.” Article 23 states that
“Critical network equipment and specialized network security products shall
120
The letter can be found at https://www.uschina.org/sites/default/files/
Industry%20letter%20on%20TBT%20notification%20of%20CIRC%20Tech%20Regulations%20(ENG).pdf.
121 Inside U.S. Trade’s, China Trade Extra, “U.S. Signals It Wants China To Slow Implementation Of Draft Insurance
Regs,” June 3, 2016.
122 A translated copy of the law can be found at the China Law Translate at http://chinalawtranslate.com/?lang=en.
123 Translation from China Law Translate, available at http://chinalawtranslate.com/?lang=en.
124 The law follows China’s assertion of its right to “cyber-sovereignty, which it describes as “an individual country’s
right to choose its own Internet regulation model.” See Xinhuanet, “China Voice: Why does cyber-sovereignty
matter?,” December 12, 2016, available at http://news.xinhuanet.com/english/2015-12/16/c_134923687.htm.
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follow the national standards and mandatory requirements, and be safety certified
by a qualified establishment or meet the requirements of a safety inspection,
before being sold or provided. The state network information departments,
together with the relevant departments of the State Council, formulate and release
a catalog of critical network equipment and specialized network security
products, and promote reciprocal recognition of safety certifications and security
inspection results to avoid duplicative certifications and inspections.”125 Article
37 states that personal information and other important data gathered or produced
by critical information infrastructure operators during operations within China
must store it in China.126 A statement issued by Amcham on November 7 said the
new law would not “do much to improve security,” but rather would “create
barriers to trade and investment.” Other critics contend that provisions of the law
are too broad or vague as to the level of cooperation internet firms are required to
give to government authorities and would impose new internet restrictions.127
China’s 13th five-year plans and other government policy pronouncements have
laid out a number of plans to boost innovation and promote the development of
indigenous ICT and other high tech sectors, including semiconductors (see
Appendix).
A U.S. Chamber of Commerce report estimated that a decision by China to “purge foreign ICTs”
would reduce China’s annual GDP by 1.77% up to 3.44%, or at least $200 billion (based on 2015
GDP), and would cost the Chinese economy at a minimum nearly $3 trillion overall by 2025.128
Intellectual Property Rights (IPR) Issues129
U.S. business and government representatives voice growing concern over economic losses
suffered by U.S. firms as a result of IPR infringement in China (and elsewhere), including those
from cyber-attacks. U.S. innovation and the intellectual property (IP) that it generates have been
cited by various economists as a critical source of U.S. economic growth and global
competitiveness.130 For example, according to the Department of Commerce, in 2014, U.S. IPintensive industries, either directly or indirectly, supported 45.5 million jobs and contributed $6.6
trillion in value added to the economy (up 30% from 2010), equal to 48.2% of U.S. GDP. In
addition, total merchandise exports of IP-intensive industries totaled $842 billion.131 According to
the U.S. Bureau of Economic Analysis, in 2017, foreign entities paid U.S. IP holders $128.4
125 See translation of the law at http://chinalawtranslate.com/cybersecuritylaw/?lang=en#LBQMwbmaWhGozeMj.99.
126 For additional information on digital trade issues, see CRS Report R44565, Digital Trade and U.S. Trade Policy,
coordinated by (name redacted).
127
Lawfare, Understanding China’s Cybersecurity Law, November 8, 2016, available at https://www.lawfareblog.com/
understanding-chinas-cybersecurity-law.
128 U.S. Chamber of Commerce, Preventing Deglobalization, March 17, 2016, p. 8, available at
https://www.uschamber.com/sites/default/files/documents/files/preventing_deglobalization_1.pdf.
129 China’s IPR policies subject to the Section 301 investigation are discussed later in the report.
130 See CRS Report RL34292, Intellectual Property Rights and International Trade, by (name redacted) and (nam
e redacted) .
131 U.S. Department of Commerce, Intellectual Property and the U.S. Economy: 2016 Update, March 2012, available at
https://www.uspto.gov/sites/default/files/documents/IPandtheUSEconomySept2016.pdf.
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billion ($8.8 billion was paid by Chinese entities) for use of their IPR and $42.2 billion for
telecommunications, computer, and information services.132
A study by NDP Consulting estimated that in 2008, U.S. workers in IP-intensive production
earned 60% more than workers at similar levels in non-IP industries.133 A study on the Apple iPod
concluded that Apple’s innovation in developing and engineering the iPod and its ability to source
most of its production to low-cost countries, such as China, have enabled it to become a highly
competitive and profitable firm, as well as a creator of high-paying jobs (such as engineers
engaged in the design of Apple products) in the United States.134
IPR piracy and infringement is a significant global problem. Lack of effective and consistent
protection of IPR has been cited by U.S. firms as one of the most significant problems they face
in doing business in China. Other U.S. firms have expressed concern over pressures they often
face from Chinese government entities to share technology and IPR with a Chinese partner.
Although China has significantly improved its IPR protection regime over the past few years,
U.S. IP industries complain that piracy rates in China remain unacceptably high and economic
losses are significant, as illustrated by studies and estimates made by several stakeholders.
An April 3, 2018 USTR press release estimated annual U.S. economic losses
from China’s “unfair” IPR policies at $50 billion.135
A May 2013 study by the Commission on the Theft of American Intellectual
Property estimated that global IPR theft costs the U.S. economy $300 billion, of
which China accounted for 50% ($150 billion) to 80% ($240 billion) of those
losses.136
The U.S. Department of Homeland Security reported that in FY2017, goods from
China and Hong Kong together accounted for 78% of seized counterfeit goods
with a total value of $941 million (based on their estimated manufacturer’s retail
price).137
Business surveys reveal mixed reactions to China’s IPR enforcement efforts. For
example, a majority of respondents in a 2016 AmCham China survey said IPR
enforcement was effective for patents (54%) and trademarks or brand protection
(51%), but less than a majority found copyrights (48%) and trade secrets (40%)
enforcement to be effective. At the same time, 91% of respondents agreed that
IPR enforcement over the last five years had improved.138 The European
Chamber’s 2016 China business survey found that although 59% of its members
132 U.S. Bureau of Economic Affairs, International Data, International Services, at http://www.bea.gov/index.htm.
133 Nam Pham, The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity,
Competitiveness, Jobs, Wages and Exports, 2010, NDP Consulting.
134 Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple’s iPod,
March 2009.
135 USTR, Press Release, April 3, 2018, available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/
2018/april/under-section-301-action-ustr.
136 The Commission on the Theft of American Intellectual Property, the Report of the Commission on the Theft of
Intellectual Property, May 2013.
137 U.S. Department of Homeland Security, Intellectual Property Rights Seizure Statistics Fiscal Year 2017, April
2018, available at https://www.cbp.gov/sites/default/files/assets/documents/2018-Apr/ipr-seizure-stats-fy2017.pdf.
138 AmCham China, China Business Climate Survey Report, 2016, January 2016, available at
http://www.amchamchina.org/about/press-center/amcham-statement/amcham-china-releases-2016-business-climatesurvey.
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said China’s IPR enforcement was “inadequate,” this was an improvement from
the 95% rate reported for 2009.139
The USCBC’s 2017 member survey found that IPR enforcement and cybersecurity ranked as the fifth and sixth, respectively, biggest challenges among its
member firms. Among respondents, 94% stated they concerned about IPR
enforcement in China and 82% expressed concerns about data flow restrictions
and cyber-security. Major cyber-related areas of greatest concern include
restrictions on cross-border data flows in Chinese regulations (cited by 65% of
respondents), inability to use global IT solutions or non-Chinese cloud-based
applications in China (55%), consumer or company data theft (53%), Internet
access and performance issues (53%), and IPR theft (51%).140
The USTR’s 2016 report on foreign trade barriers stated that over the past
decade, China’s internet restrictions have “posed a significant burden to foreign
suppliers,” and that 8 out of the top 25 most globally visited sites (such as Yahoo,
Facebook, YouTube, eBay, Twitter, and Amazon) are blocked in China.141
Freedom House’s 2015 Freedom on the Net report ranked China’s internet
regime as the most restrictive out of 65 countries surveyed.142
The U.S. International Trade Commission (USITC) in 2001 estimated that U.S.
intellectual property-intensive firms that conducted business in China lost $48.2
billion in sales, royalties, and license fees in 2009 because of IPR violations. It
also estimated that an effective IPR enforcement regime in China that was
comparable to U.S. levels could increase employment by IP-intensive firms in
the United States by 923,000 jobs.143
The Business Software Alliance (BSA) estimated the commercial value of
illegally used software in China at $8.7 billion in 2015 (up from $7.6 billion in
2009), and that the software piracy rate in China was 70% (down from 79% in
2007).144 BSA further estimated that legitimate software sales in China were only
$3.7 billion, compared to legal sales of $41.0 billion in the United States.
The Organization for Economic Development and Cooperation (OECD)
estimates that counterfeit products accounted for 2.5% of global trade in 2013 (or
$461 billion).145
Chinese officials contend that they have significantly improved their IPR protection regime, but
argue that the country lacks the resources and a sophisticated legal system to effectively deal with
IPR violations. They also contend that IPR infringement is a serious problem for domestic
139 European Chamber, European Business in China, Business Confidence Survey: 2016, July 7, 2016, available at
http://www.europeanchamber.com.cn/en/publications-business-confidence-survey.
140 USCBC, 2017 Membership Survey, available at https://www.uschina.org/sites/default/files/
2017_uscbc_member_survey.pdf.
141
USTR, the 2016 National Trade Estimate Report, March 23, 2016, p. 91, available at https://ustr.gov/sites/default/
files/2016-NTE-Report-FINAL.pdf.
142 Freedom House, Freedom on the Net 2015, available at https://freedomhouse.org/sites/default/files/
FH_FOTN_2015Report.pdf.
143 The United States International Trade Commission, China: Effects of Intellectual Property Infringement and
Indigenous Innovation Policies on the U.S. Economy, USITC Publication 4226, May 2011, p. xiv.
144 BSA, Shadow Market, 2011 BSA Global Software Piracy Study, Ninth Edition, May 2012, at http://portal.bsa.org/
globalpiracy2011/downloads/study_pdf/2011_BSA_Piracy_Study-Standard.pdf.
145 OECD, Trade in Counterfeit and Pirated Goods, Mapping the Economic Impact, 2016, p. 5.
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Chinese firms as well. A survey by the Chinese State Administration for Industry and Commerce
found that 58.7% of products sold online in China were genuine in 2014.146 Many analysts
contend that China’s goals of becoming a global leader in innovation will induce the government
to strengthen IPR laws and enforcement. However, some analysts contend that China’s relatively
poor record on IPR enforcement can be partially explained by the fact that 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 it helps Chinese firms become more technologically advanced.
According to an official at the U.S. Chamber of Commerce
The newer and emerging challenge to U.S. IPR is not a function of China’s lack of political
will to crackdown on infringers. Rather, it is a manifestation of a coherent, and
government-directed, or at least government-motivated, strategy to lessen China’s
perceived reliance on foreign innovations and IP. China is actively working to create a
legal environment that enables it to intervene in the market for IP, help its own companies
to “re-innovate” competing IPR as a substitute to American and other foreign technologies,
and potentially misappropriate U.S. and other foreign IP as components of its industrial
policies and internal market regulation.... The common themes throughout these policies
are: 1) undermine and displace foreign IP; 2) leverage China’s large domestic market to
develop national champions and promote its own IP, displacing foreign competitors in
China; and 3) building on China’s domestic successes by displacing competitors in foreign
markets.147
An illustration of alleged IPR theft in China involves American Superconductor Corporation
(AMSC). On September 14, 2011, AMSC announced that it was filing criminal and civil
complaints in China against Sinovel Wind Group Co., Ltd. (Sinovel), China’s largest wind
turbine producer, and other parties, alleging the illegal use of AMSC’s intellectual property.
According to AMSC, Sinovel illegally (by bribing an AMSC employee) obtained and used
AMSC’s wind turbine control software code to upgrade its 1.5 megawatt wind turbines in the
field to meet proposed Chinese grid codes and to potentially allow for the use of core electrical
components from other manufacturers.148 In addition, AMSC claimed that Sinovel refused to pay
for past shipments from AMSC as well as honoring for future shipments of components and spare
parts as well.149 AMSC has brought several civil cases against Sinovel, seeking to recover more
than $1.2 billion for contracted shipments and damages caused by Sinovel’s contract breaches.150
In 2013, the U.S. Justice Department issued indictments against Sinovel and two of its
employees, along with a former AMSC employee, with trade secrets theft, describing the action
as “nothing short of attempted corporate homicide.”151According to AMSC, it lost about half of
its market capitalization after Sinovel refused to honor its contracts, and that as of 2017 AMSC’s
stock valued had dropped by 96% and its workforce by 70%. One AMSC official said that it
146 Quartz, “Chinese government study based on shoddy data claims 40% of China’s online products are shoddy,”
November 3, 2015, available at http://qz.com/539824/chinese-government-study-based-on-shoddy-data-claims-40-ofchinas-online-products-are-shoddy/.
147 Testimony of Jeremie Waterman, Senior Director, Greater China, U.S. Chamber of Commerce, before the U.S.
International Trade Commission, Hearing on China: Intellectual Property Infringement, Indigenous Innovation
Policies, and Frameworks for Measuring the Effects on the U.S. Economy, June 15, 2010.
148 AMSC claims Sinovel had obtained the intellectual property from a former AMSC employee who was then under
arrest in Austria for economic espionage and fraudulent manipulation of data.
149 AMSC Press Release, “AMSC Filing Criminal and Civil Complaints Against Sinovel,” September 14, 2011.
150 AMSC, Press Release, April 10, 2012, at http://files.shareholder.com/downloads/AMSC/2346100399x0x558743/
f01e0c5a-a526-4102-a818-f61f2d71ef79/AMSC_News_2012_4_10_Commercial.pdf.
151 Department of Justice, Press Release, June 27, 2013, at https://www.justice.gov/opa/pr/sinovel-corporation-andthree-individuals-charged-wisconsin-theft-amsc-trade-secrets.
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possessed emails that “include the actual transfer and Skype messages indicating that senior level
Sinovel officials ordered the theft of AMSC IP and understood the devastating impact it would
have on AMSC,” and it estimated that 8,000 windmills in China (20% of the country’s total) were
operating on AMSC’s stolen technology.152
According to a specialist in intellectual property at Tufts University, “Chinese companies, once
they acquire the needed technology, will often abandon their Western partners on the pretext that
the technology or product failed to meet Chinese governmental regulations. This is yet another
example of a Chinese industrial policy aimed at procuring, by virtually any means, technology in
order to provide Chinese domestic industries with a competitive advantage.”153 to pursue trade
secret and copyright infringement litigation in China and the United States.154 Market access in
China remains a significant problem for many U.S. IP industries (such as music and films), and is
considered a significant cause of high IPR piracy rates. For example, China’s growing middle
class has resulted in a surge in movie box office sales in recent years, which hit $6.8 billion in
2015 (up 49% over the previous year), making China the largest market outside the United States
and Canada.155 When China joined the WTO in 2001 it agreed to allow 20 imported foreign films
per year.156 During the visit to the United States by then-Chinese Vice President Xi Jinping in
February 2012, China agreed that it would allow in more American exports of 3D, IMAX, and
similarly enhanced format movies on favorable commercial terms; strengthen the opportunities to
distribute films through private enterprises rather than the state film monopoly; and ensure fairer
compensation levels for U.S. blockbuster films distributed by Chinese SOEs.157 This extended
China’s foreign movie quota to 34, based on a revenue-sharing agreement (foreign studios receive
25% of the box office receipts) with a Chinese SOE.158 Some business groups complain that
China has failed to allow competition in the distribution of movies, noting that no private firms
have been given a license to distribute movies nationally. Two Chinese government entities
determine which foreign films will enter the market, set opening dates, and determine the number
of screens on which films can be shown, which some argue, is mainly based on the goal of
protecting and promoting Chinese films.159 The share of Hollywood movies in box office sales in
China dropped from 45.5% in 2014 to 38.4% in 2015.160
152 USTR, Section 301 Investigation: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual
Property, and Innovation, October 10. 2017, at https://ustr.gov/sites/default/files/
03142013%20Update%20Org%20Chart.pdf.
153 “Data Theft Case May Test U.S. China Ties,” Boston Globe, September 19, 2011.
154 AMSC, Press Release, April 23, 2015, available at http://ir.amsc.com/releasedetail.cfm?ReleaseID=908308.
155 Motion Picture Association of America, 2015 Theatrical Statistics, April 2016, available at http://www.mpaa.org/
wp-content/uploads/2016/04/MPAA-Theatrical-Market-Statistics-2015_Final.pdf.
156 Such restrictions are mainly imposed to protect China’s domestic film industry from foreign competition.
157 The White House, Press Release, February 17, 2012, at http://www.whitehouse.gov/the-press-office/2012/02/17/
united-states-achieves-breakthrough-movies-dis,pute-china.
158 China also allows 30-40 imported foreign movies into the country on a flat fee basis and foreign firms can coproduce movies in China or provide films for TV or online viewing. See, China Briefing, Navigating Restrictions in
China’s Film Industry, December 2015, available at http://www.hollywoodreporter.com/news/china-box-office-growsastonishing-851629.
159 Bloomberg, China Could Beat Hollywood by 2017, February 25, 2016.
160 The Hollywood Reporter, China Box Office Grows Astonishing 48.7 Percent in 2015, Hits $6.78 Billion, December
31, 2015, available at http://www.hollywoodreporter.com/news/china-box-office-grows-astonishing-851629.
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Technology Transfer Issues
When China entered the WTO in 2001, it agreed that foreign firms would not be pressured by
government entities to transfer technology to a Chinese partner as part of the cost of doing
business in China. However, many U.S. firms argue that this is a common Chinese practice,
although this is difficult to quantify because, oftentimes, U.S. business representatives appear to
try to avoid negative publicity regarding the difficulties they encounter doing business in China
out of concern over retaliation by the Chinese government.161 In addition, Chinese officials
reportedly pressure foreign firms through oral communications to transfer technology (for
example as a condition to invest in China), so as to avoid putting such requirements in writing in
order to evade accusations of violating WTO rules.
A 2010 study by the U.S. Chamber of Commerce stated that growing pressure on foreign firms to
share technology in exchange for market access in China was forcing such firms to “anguish over
balancing today’s profits with tomorrow’s survival.”162 In 2011, then-U.S. Treasury Secretary
Timothy Geithner charged that “we’re seeing China continue to be very, very aggressive in a
strategy they started several decades ago, which goes like this: you want to sell to our country, we
want you to come produce here. If you want to come produce here, you need to transfer your
technology to us.” A 2012 AmCham China survey reported that 33% of its respondents stated that
technology transfer requirements were negatively affecting their businesses.163
U.S. officials continue to press China on this issue. A U.S. Commerce Department fact sheet from
the December 2014 U.S.-China Joint Commission on Commerce and Trade (JCCT) meeting
stated
China clarified and underscored that it will treat IPR owned or developed in other countries
the same as domestically owned or developed IPR, and it further agreed that enterprises
are free to base technology transfer decisions on business and market considerations, and
are free to independently negotiate and decide whether and under what circumstances to
assign or license intellectual property rights to affiliated or unaffiliated enterprises. 164
Following President Obama’s meeting with President Xi in September 2016, the White House
issued a fact sheet that said that the two sides committed “not to advance generally applicable
policies or practices that require the transfer of intellectual property rights or technology as a
condition of doing business in their respective markets.”165 Technology transfer issues have also
been raised over a number of new Chinese laws and regulations that advance “secure and
controllable technology” (discussed below).
161 China denies that public officials exert such pressure and that any technology transfers that do occur in China are the
result of commercial agreements between companies.
162 U.S. Chamber of Commerce, China’s Drive for ‘Indigenous Innovation’ - A Web of Industrial Policies, July 29,
2010.
163 AmCham China, 2012 China Business Climate Survey Report, March 2012, available at
http://www.amchamchina.org/businessclimate2012.
164 U.S. Department of Commerce, U.S.-China Joint Fact Sheet on 25th Joint Commission on Commerce and Trade,
December 29, 2014, available at https://www.commerce.gov/news/fact-sheets/2014/12/us-china-joint-fact-sheet-25thjoint-commission-commerce-and-trade.
165 The White House, Fact Sheet: U.S.-China Economic Relations, September 4, 2016, available at
https://www.whitehouse.gov/the-press-office/2016/09/04/fact-sheet-us-china-economic-relations.
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Cyber-security Issues
Cyber-attacks against U.S. firms have raised concerns over the potential large-scale theft of U.S.
IPR and its economic implications for the United States. A 2011 report by McAfee (a U.S. global
security technology company) stated that its investigation had identified targeted intrusions into
more than 70 global companies and warned that “every conceivable industry with significant size
and valuable intellectual property has been compromised (or will be shortly), with the great
majority of the victims rarely discovering the intrusion or its impact.”166 Many U.S. analysts and
policymakers contend that the Chinese government is a major source of cyber economic
espionage against U.S. firms. For example, Representative Mike Rogers, chairman of the House
Permanent Select Committee on Intelligence, stated at an October 4, 2011, hearing that
Attributing this espionage isn’t easy, but talk to any private sector cyber analyst, and they
will tell you there is little doubt that this is a massive campaign being conducted by the
Chinese government. I don’t believe that there is a precedent in history for such a massive
and sustained intelligence effort by a government to blatantly steal commercial data and
intellectual property. China’s economic espionage has reached an intolerable level and I
believe that the United States and our allies in Europe and Asia have an obligation to
confront Beijing and demand that they put a stop to this piracy.167
A 2011 report by the U.S. Office of the Director of National Intelligence (DNI) stated, “Chinese
actors are the world’s most active and persistent perpetrators of economic espionage. U.S. private
sector firms and cyber-security specialists have reported an onslaught of computer network
intrusions that have originated in China, but the IC (Intelligence Community) cannot confirm who
was responsible.” The report goes on to warn that
China will continue to be driven by its longstanding policy of “catching up fast and
surpassing” Western powers. The growing interrelationships between Chinese and U.S.
companies—such as the employment of Chinese-national technical experts at U.S.
facilities and the off-shoring of U.S. production and R&D to facilities in China—will offer
Chinese government agencies and businesses increasing opportunities to collect sensitive
US economic information.168
On February 19, 2013, Mandiant, a U.S. information security company, issued a report
documenting extensive economic cyber-espionage by a Chinese unit (which it designated as
APT1) with alleged links to the Chinese People’s Liberation Army (PLA) against 141 firms,
covering 20 industries, since 2006. The report stated
Our analysis has led us to conclude that APT1 is likely government-sponsored and one of
the most persistent of China’s cyber threat actors. We believe that APT1 is able to wage
such a long-running and extensive cyber espionage campaign in large part because it
receives direct government support. In seeking to identify the organization behind this
activity, our research found that People’s Liberation Army (PLA’s) Unit 61398 is similar
to APT1 in its mission, capabilities, and resources. PLA Unit 61398 is also located in
precisely the same area from which APT1 activity appears to originate. 169
166 The report did not identify China (or any country) as the source of the intrusions. McAfee, Revealed: Operation
Shady Rat, An Investigation of Targeted Intrusions Into More Than 70 Global Companies, Governments, and Nonprofit
Organizations During the Last Five Years, 2011.
167 House Permanent Select Committee on Intelligence, Chairman Mike Rogers Opening Statement at the Hearing on
Cyber Threats and Ongoing Efforts to Protect the Nation, October 4, 2011.
168 DNI, Office of the National Counterintelligence Executive, Foreign Spies Stealing U.S. Economic Secrets in
Cyberspace, Report to Congress on Foreign Economic Collection and Industrial Espionage: 2009-2011, October 2011.
169 Mandiant, APT1: Exposing One of China’s Cyber, Espionage Units, February 19, 2013, p. 2.
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On March 11, 2013, Tom Donilon, then-National Security Advisor to President Obama, stated in
a speech that the United States and China should engage in a constructive dialogue to establish
acceptable norms of behavior in cyberspace; that China should recognize the urgency and scope
of the problem and the risks it poses to U.S. trade relations and the reputation to Chinese industry;
and that China should take serious steps to investigate and stop cyber-espionage.170 Following a
meeting with Chinese President Xi Jinping in June 2013, President Obama warned that if cybersecurity issues are not addressed, and if there continues to be direct theft of United States
property, then “this was going to be a very difficult problem in the economic relationship and was
going to be an inhibitor to the relationship really reaching its full potential.”171
On May 19, 2014, the U.S. Department of Justice issued a 31-count indictment against five
members of the Chinese People’s Liberation Army (PLA) for cyber-espionage and other offenses
that allegedly targeted five U.S. firms and a labor union for commercial advantage, the first time
the Federal government has initiated such action against state actors. The named U.S. victims
were Westinghouse Electric Co. (Westinghouse); U.S. subsidiaries of SolarWorld AG
(SolarWorld); United States Steel Corp. (U.S. Steel); Allegheny Technologies Inc. (ATI); the
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union (USW); and Alcoa Inc. The indictment appears to indicate a high
level of U.S. government concern about the extent of Chinese state-sponsored cyber commercial
theft against U.S. firms.172
China strongly condemned the U.S. indictment and announced that it would suspend its
participation in the U.S.-China Cyber Working Group, established in 2013. Some Members of
Congress have called on the USTR to initiate a case against China in the World Trade
Organization (WTO). Others have called for new measures to identify foreign governments that
engage in cyber-espionage and to impose sanctions against entities that benefit from that theft.
For example, in the 114th Congress H.R. 3039 would have authorized the President to impose
certain penalties on state-sponsors of cyber-attacks. Some analysts warn that growing U.S.-China
disputes over cyber-theft could significantly impact commercial ties. The Obama Administration
sought ways to enhance U.S. commercial cyber-security at home, develop bilateral and global
rules governing cyber-theft of commercial trade secrets, strengthen U.S. trade policy tools, and
promote greater cooperation with trading partners that share U.S. concerns.
On April 1, 2015, President Obama issued Executive Order 13964, authorizing certain sanctions
against “persons engaging in significant malicious cyber-enabled activities.”173 Shortly before
Chinese President Xi’s state visit to the United States in September 2015, some press reports
indicated that the Obama Administration was considering the imposition of sanctions against
Chinese entities over cyber-theft, even possibly before the arrival of President Xi, which some
analysts speculated might have caused Xi to cancel his visit. This appears to have prompted
China to send a high-level delegation (headed by Meng Jianzhu, Secretary of the Central Political
170 U.S. Asia Society, Complete Transcript: Thomas Donilon at Asia Society, New York March 11, 2013.
171 National Public Radio, Chinese Cyber-Hacking Discussed At Obama-Xi Summit, June 9, 2013, available at
http://www.npr.org/sections/thetwo-way/2013/06/09/190058558/chinese-cyber-hacking-discussed-at-obama-xisummit.
172 U.S. Department of Justice, at http://www.justice.gov/iso/opa/resources/5122014519132358461949.pdf.
173 A copy can be found at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/cyber_eo.pdf. The
EO was extended for an additional year by President Obama on March 29, 2016.
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and Legal Affairs Commission of the Chinese Communist Party) to Washington, DC, to hold four
days of talks (September 9-12) with U.S. officials over cyber issues.174
On September 25, 2015, Chinese President Xi and President Obama announced that they had
reached an agreement on cyber-security. The agreement stated that neither country’s government
will conduct or knowingly support cyber-enabled theft of intellectual property, including trade
secrets or other confidential business information, with the intent of providing competitive
advantages to companies or commercial sectors.175 They also agreed to set up a high-level
dialogue mechanism (which would meet twice a year) to address cybercrime and to improve twoway communication when cyber-related concerns arise (including the creation of a hotline). The
first meeting of the U.S.-China High-Level Joint Dialogue on Cybercrime and Related Issues was
held in December 2015 in Washington, DC. The two sides reached agreement on a document
establishing guidelines for requesting assistance on cybercrime or other malicious cyber-activities
and for responding to such requests. They decided to conduct a tabletop exercise in the spring of
2016 (held in April 2016) on agreed-upon cybercrime, malicious cyber-activity and network
protection scenarios; pledged to develop the scope, goals, and procedures for use of the hotline
for the next dialogue; and agreed to further develop case cooperation on combatting cyberenabled crimes (including child exploitation, theft of trade secrets, fraud and misuse of
technology, and communications for terrorist activities).176 The second Cyber Dialogue was held
in Beijing in June 2016. The two sides agreed to begin implementation of a cyber-hotline
mechanism (which reportedly became operational in August 2016);177 continue to strengthen
cooperation in network protection; enhance case investigations and information exchanges;
prioritize cooperation on combatting cyber-enabled IP theft for commercial gain and cooperate in
law enforcement operations; and agreed to create an action plan to address the threat posed from
business email compromise scams.178
The first session of the U.S.-China Law Enforcement and Cybersecurity Dialogue (established by
President Trump and President Xi in April 2017 as part of the U.S.-China Comprehensive
Economic Dialogue) was held in October 2017. On cyber issues, the two sides pledged to
continue cooperation based on the 2015 agreement, including based on five main commitments to
give timely responses should be provided to requests for information and
assistance concerning malicious cyber activities;
ensure that neither country’s government will conduct or knowingly support
cyber-enabled theft of intellectual property, including trade secrets or other
174 The White House, Press Release, September 12, 2015, available https://www.whitehouse.gov/the-press-office/2015/
09/12/readout-senior-administration-officials-meeting-secretary-central.
175 The November 2015 meeting of the G-20 countries (which includes China) included language in its communiqué:
“In the ICT environment, just as elsewhere, states have a special responsibility to promote security, stability, and
economic ties with other nations. In support of that objective, we affirm that no country should conduct or support ICTenabled theft of intellectual property, including trade secrets or other confidential business information, with the intent
of providing competitive advantages to companies or commercial sectors.”
176 U.S. Department of Justice, First U.S.-China High-Level Joint Dialogue on Cybercrime and Related Issues
Summary of Outcomes, December 2, 2015, available at https://www.justice.gov/opa/pr/first-us-china-high-level-jointdialogue-cybercrime-and-related-issues-summary-outcomes-0.
177 Cyber Administration of China, Sino-US High-level Joint Dialogue Hotline on Combating Cybercrime and Related
Matters, August 28, 2016, available (in Chinese) at http://www.cac.gov.cn/2016-08/28/c_1119466923.htm.
178 U.S. Department of Justice, Second U.S.-China Cybercrime and Related Issues High Level Joint Dialogue, June 14,
2016, available at https://www.justice.gov/opa/pr/second-us-china-cybercrime-and-related-issues-high-level-jointdialogue.
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confidential business information, with the intent of providing competitive
advantages to companies or commercial sectors;
make efforts to further identify and promote appropriate norms of state behavior
in cyberspace within the international community;
maintain a high-level joint dialogue mechanism on fighting cybercrime and
related issues; and
enhance law enforcement communication on cyber security incidents and to
mutually provide timely responses.179
Agreement on Cyber-security Issues at the September 2015 U.S-China Summit
Neither country’s gov
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