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<text> <title> Growing Friction in U.S.-Chinese Trade Relations </title> <article> <hdr> CRS Review, February-March 1992 Growing Friction in U.S.-Chinese Trade Relations </hdr> <body> By Wayne M. Morrison, analyst in international trade and finance with the CRS Economics Division. A growing U.S. trade deficit with China and increasing trade disputes threaten to diminish trade between the two nations. In recent years China has emerged as one of the most contentious bilateral trading partners for the United States. The growing U.S. trade barriers, alleged violations of U.S. intellectual property rights, the purported use of prison labor for Chinese exports, and illegal Chinese textile transshipments have been raised in the current debate over the renewal of China's most-favored-nation (MFN), or nondiscriminatory, trade status. Legislation (H.R. 2212) is currently pending in Congress to tie China's continued MFN status to certain conditions involving trade, weapons proliferation, and human rights. The Bush Administration has opposed legislation to terminate or condition China's MFN status, but has pledged to take steps to address congressional concerns. Disputes over trade (and other issues) could ultimately lead to diminished trade between the two nations. U.S.-Chinese Trade U.S. trade with China has risen rapidly since the two nations began to establish normalized trade relations in 1979. Total trade between the two nations rose from $4.8 billion in 1980 to $20.0 billion in 1990--making China the tenth largest U.S. trading partner (1990). However, the U.S. trade deficit with China grew significantly from $10.0 million in 1985 to $10.4 billion in 1990. Trade data for the first ten months of 1991 indicate that China has become the second largest deficit trading partner of the United States behind Japan. Trade Barriers Many trade analysts attribute the growing U.S. trade deficit with China to Chinese restrictive trade practices and trade barriers instituted in recent years to limit foreign imports and improve China's trade balance. Beginning in 1988, the Chinese government instituted or expanded a number of restrictive trade barriers, including higher tariffs, increased import bans, an expansion of restrictive import regulations and license requirements, tighter controls over foreign exchange, and currency devaluations. The use of import restrictions helped China turn its 1988 world trade deficit of $7.7 billion into an $11.1 billion surplus in 1990. Such restrictions contributed to a sharp reduction of U.S. exports to China, especially in 1990. U.S. officials have since held negotiations with China regarding U.S. concerns over China's growing protectionist measures. In July 1991 the Administration announced that it would hold a special round of market access negotiations with China and pledged that a Section 301 (unfair trade practice) investigation would be initiated if such talks failed to yield progress. Trade talks were subsequently held, but failed to produce an agreement. On October 10, 1991, the United States Trade Representative (USTR) initiated a Section 301 investigation of four major Chinese trade barriers, including product- and sector-specific import prohibitions; restrictive import license requirements; technical barriers to trade, such as standards, testing, and certification requirements; and failure to publish regulations pertaining to restrictions on imports. The USTR will decide within one year on whether to retaliate. Violations of U.S. Intellectual Property Rights Section 182 of the Trade Act of 1974, as amended by Section 1303 of the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418), requires the USTR to identify "priority foreign countries" that violate U.S. intellectual property rights, including patents, copyrights, trademarks, and trade secrets, or deny fair and equitable market access to U.S. firms. Under this provision, also known as "Special 301," the USTR is required to initiate a Section 301 investigation of such practices and must determine within six months (extendable to nine months) whether to retaliate. In April 1991 the USTR designated China as a priority foreign country and initiated a Section 301 investigation on May 26, 1991. The USTR noted that China failed to enact legislation extending adequate protection to trademarks, patents, and trade secrets. China was cited as the only major U.S. trading partner that failed to provide product patent protection for pharmaceuticals and other chemicals or provide copyright protection for U.S. works. The USTR also argued that lack of adequate protection and enforcement of U.S. intellectual property rights by China had led to widespread piracy resulting in significant losses for U.S. firms. On November 26, 1991, the USTR determined that insufficient progress had been made in resolving Chinese intellectual property rights violations. The USTR extended the investigation and ordered to be printed in the Federal Register a draft list of Chinese products subject to possible retaliation. The USTR later noted that the United States would retaliate if an agreement was not reached by January 16, 1992. On January 16, 1992, the USTR announced that China had agreed to make significant improvements in its patent, copyright, and trade secret laws. As a result, the USTR decided to terminate the investigation. Prison Labor The use of forced labor is believed to be a long-standing and widespread practice in China. Recent evidence suggests that China may be utilizing forced labor on a large scale to boost its exports, a large portion of which may be targeted to the United States. The importation from any country of commodities produced through the use of forced labor is prohibited by U.S.law, although obtaining proof of actual violations for specific imported products is difficult. Chinese officials, while admitting the use of prison labor, have denied that products of forced labor have been exported to the United States, but have pledged on several occasions to take steps against Chinese firms that might be engaged in such practices. The Administration has pledged it would take steps to stop imports of Chinese products that utilize prison labor. In October and November 1991 the U.S. Customs Service banned the release of certain imported Chinese-made wrenches and steel pipes and planing machine tools suspected of being produced by convict or forced labor, until the method of production could be determined. Some Members of Congress have argued that these steps do not go far enough in halting prison-made imported products. Some have proposed banning all imports of a certain product when a determination has been made that any imported products were made utilizing forced labor. The Administration is currently attempting to negotiate a memorandum of understanding with China that would enable the United States to investigate the origins of certain products alleged to have been produced using forced labor, including on-site inspections of certain factories. Textile Transshipments The U.S. Customs Service has found evidence that China attempted to circumvent U.S. textile quotas, which were voluntarily agreed to under a bilateral accord, mainly through transshipments of Chinese products through other countries to the United States using false country-of-origin labels. Customs also has held that China mislabeled certain textile products to avoid product-specific quotas. Charges by the U.S. Customs Service of illegal transshipments by China led the Administration in December 1990 to reduce China's 1991 textile and apparel quotas on specified products by $85 million. On August 13, 1991, the Administration announced reductions in China's quotas on certain textile and apparel products in 1991-92 worth $14 million because of transshipments. O