2002 was a year that witnessed continuing rapid growth in trade and investment between China and the United States. And the pace of this growth was up on the year before.

According to the latest data from the China’s General Administration of Customs, the overall volume of China-US trade reached some US$78.4 billion during the first ten months of 2002. Making up this total, Chinese exports to the United States stood at US$56.5 billion with imports of US$21.9 billion from the US.

Experts forecast that when the final figures are in for the full year, China-US trade for 2002 will hit a record high of about US$92 billion, well up on the US$80.5 billion seen in 2001. These statistics would mean that Chinese exports grew by some 23 percent last year and are showing a faster growth rate than American exports to China.

However according to US Department of Commerce figures, China-US trade volume reached US$118.8 billion in the first ten months of 2002. Whichever data are used, China has retained its place as the fourth largest trading partner of the United States and it is trade with China that produces the US’s largest bilateral trade deficit.

In 2002, China attracted the largest amount of foreign direct investment (FDI) of any country in the world. For the third consecutive year it was the US that led this foreign investment. American investment in China has risen in terms of the numbers of projects funded, total contract value and actual expenditure.

From January to August 2002, American companies invested in 2,066 projects in China, an increase of some 25 percent on the corresponding period in the previous year. Contracts signed amounted to US$7.1 billion, up over 30 percent and actual expenditure at US$3.5 billion was also up over 30 percent.

Over the years, contracts involving direct inward investment from the United States would add up to as much as US$75.3 billion with accumulated actual expenditure running at US$38.4 billion.

Several factors contributed to the expansion in China-US economic and trade relations during 2002. The rapid growth of the Chinese economy set against a background of WTO entry and the opening up of domestic markets has done much to strengthen the confidence of international investors in China.

Over 300 of America’s top 500 companies now have investments in China. A poll of members of the American Chamber of Commerce in China showed 80 percent of US-funded companies believing that China’s WTO accession will either “positively” or “very positively” increase their business opportunities in Chinese markets. Some 79 percent of these enterprises plan to expand their total investment and the number of their business locations in China.

Positive signs of recovery in the US economy were another helpful factor. The US economy performed better than in 2001 and growth in consumption fuelled the demand for imports from China.

The value of US dollar remained high. One spin-off from this was the affordability of good quality imports from China, helping to mitigate the social and political pressure caused by high US unemployment rates.

The terrorist attack of September 11 marked a watershed in political and security relations between the United States and China. The tragic event was to be followed by significantly strengthened political and security relations. These were followed in turn by strengthened commercial links. This analysis is borne out by the sequence of events. In the aftermath of the tragedy, the US and China moved into a new phase of increased dialogue and closer engagement. 2002 was a year marked by Sino-US Head of State exchange of visits while government offices conducted a series of senior level consultations.

All this high-level interaction was to bring confidence to the business communities of the two countries. On the eve of Chinese president Jiang Zemin’s visit to Texas in October 2002, Chinese and American companies signed procurement contracts, mergers, acquisitions and joint stock ventures valued as high as US$4.7 billion.

US Secretary of Commerce Don Evans visited China in April to co-host the 14th meeting of the Sino-US Commerce and Trade Commission. The end of June saw a visit to Beijing by US Secretary of Agriculture Ann Veneman.

The year also saw some new trends coming to the surface in US-China economic and trade relations. Mutual market penetration and commercial cooperation accelerated significantly within the manufacturing and service industries of the two nations. A good example of this was in the new levels of cooperation to be found in the automobile industry.

China’s Shanghai Automobile Company and General Motors (GM) of the United States are collaborating to develop both light and heavy automobile models. Together they aim to be the giants of the Chinese market. Their cooperation also served to further promote the internationalization of China’s automobile industry.

With GM assistance, the Shanghai Automobile Company now holds 10 percent of the stock of the GM Daewoo Automobile Technology Company based in South Korea. And what’s more, the Shanghai Automobile-GM joint venture has plans to export high performance engines to Canada as early as the end of 2003.

There are plenty other examples of bilateral industrial cooperation. Sinopec and Exxon Mobil moved into a strategic alliance to develop the market for petroleum products in China. Tsingtao Brewery signed a strategic investment cooperation agreement with the world's largest brewer Anheuser-Busch. China’s Shanghai Soap Group acquired the bankrupt Moltech, which produces rechargeable batteries in the United States. Industrial cooperation also saw momentum in other fields, such as household electrical goods, aviation, hi-tech developments and so on. A multi-layered interdependence has been developing between the industries of the two countries.

Increased trade has brought increased risk of trade disputes and causes of friction. However there are also new opportunities for dispute resolution. New multilateral measures are now available in addition to the already well established bilateral mechanisms.

The options available to China for settling trade disputes increased with WTO entry. In March 2002, the Bush administration announced Section 201 safeguard measures on steel imports. China was cited along with the EU nations and Japan as one of the countries whose exports were harming American steel manufacturers.

In order to counter this example of US trade protectionism, China and the EU coordinated their policies within the WTO framework. They joined hands to exert fair pressure on the US. In May 2002, China’s Ministry of Foreign Trade and Economic Cooperation (MOFTEC) released its own “retaliation list” of American imports valued at some US$94 million.

The US has now dropped some steel products originating in the EU, Japan and Australia from the protectionist tariff. China has set out its demands that it should also be freed from the tariff constraints but is still awaiting US confirmation. China has confirmed its intention to maintain negotiation with the US on this matter.

Agriculture has been particularly contentious. Since 1972 when trade relations were normalized, agriculture has occupied an important position in bilateral trade. But with the success of China’s agricultural reform came greatly increased domestic production of grain and reductions in food imports from the United States. In the final stages of China’s WTO negotiations, trade in farm goods became a heated issue between the two countries. The two most controversial issues were market access and agricultural subsidies.

It has been widely predicted that Chinese agriculture will be particularly hard hit by WTO accession. This is especially significant in a country where the majority of the population resides in rural areas. However the opening up of the Chinese agricultural market is both necessary and irreversible.

China’s government agencies needed to offer some transitional protection to domestic farmers and so secure food supplies. It was against this background that China’s government agencies turned to regulations requiring safety reviews of imported genetically modified soybean.

The United States is the world’s largest soybean exporter, with a 34 percent share of the global market. China has become the biggest customer for US soybean with imports running at levels equivalent to the total production of soybean in China.

China argued that a safety review would be justified, rational and in conformity with international agreements. Various soybean interests in the US together with the US Department of Agriculture however have contended that implementing the regulations would increase the risk of market unpredictability for American exporters.

The two countries eventually reached a consensus on the soybean issue through consultation. China postponed implementation of the safety review process and will also streamline the administration procedures involved in applications and approval.

But now China’s agricultural exports (mainly onions) to the US and their impact have caught the attention of the American public. Even though actual volumes of farm trade in 2002 were lower than forecast, it is expected that there are still more disputes to come.

With China’s WTO entry, there has been unprecedented progress in its economic and trade relations with the US. The momentum is already so great as to seem unstoppable. However the two countries will have to take good care when dealing with the more sensitive issues. If not handled properly they could soon be new obstacles to the smooth expansion of bilateral economic cooperation. There is still potential for further trade disagreements between the two countries on issues connected with China’s implementation of WTO obligations.

China made a great effort to meet its WTO obligations during 2002, its first full year of membership. This has evoked a positive response from the WTO itself and also from most individual WTO members.

In December 2002, the Office of US Trade Representative released its annual report as required by Congress. This recognized China’s “significant progress” in living up to its WTO obligations. But the report did emphasize three areas deserving continued attention. These are agricultural trade, protection of intellectual property rights and access to service industry markets.

The US congress passed special laws to require the administration to keep a close eye on the implementation of China’s WTO obligations and the opening up of Chinese markets to international exports and investment. To facilitate this the US government has established multi-level monitoring mechanisms with facilities located in Washington DC, Beijing and Geneva.

We can say that in the first year of WTO accession, the measures put in place to open up the markets have had only limited impact on China’s domestic industries. But with phasing out of the permitted transitional protectionist measures, China’s domestic industries will have to face even greater challenges. It is being predicted that full implementation of WTO obligations will undoubtedly trigger further trade disputes between China and the United States.

Trade imbalance has grown more quickly than expected and it is unlikely there will be a correction in the near term. Both Chinese and US administrations will wish to tread carefully in case of a possible backlash in American domestic politics.

According to its own statistics, the United States suffered a deficit of some US$83 billion in its trade with China in 2001. This exceeded even its trade deficit with Japan, which stood at US$69 billion for the year. And the previous year’s figure was overtaken in just the first ten months of 2002 when the US ran up a trade deficit with China of US$83.1 billion. The whole year prediction has been put at US$93 billion.

Many different factors contribute to the huge trade imbalance. The most important of these are linked to the flow of foreign direct investment into China. When major investors move their assembly lines from the US to China, they are also redistributing the balance of trade.

China replaced Japan as the largest single source of trade deficit for the United States several years ago. Throughout the 1990s, various domestic special interest groups in America, including conservative groups, labor and human rights organizations, have united in their efforts to lobby for restrictive conditions to be imposed on China’s access to “normal trade relations” or “most favored nation” status. These groups can be expected to keep up their pressure to politicize and undermine economic and trade relations with China.

In late 2001 on the eve of China’s WTO accession, the US announced its granting of permanent normal trade relations to China. However the problems of the politicization of what are essentially commercial issues is not yet fully settled. The worsening trade imbalance may well prove to be the catalyst for further adverse political consequences back in the US.

Both governments need to work hard to let the public know about the real facts behind the current trade imbalance. As a matter of fact, many American experts have recognized that new imports from China mostly just replace market share previously held by imports from elsewhere. Consequently the overall effect on US domestic industry has actually been fairly neutral.

Besides, well priced but good quality goods from China can have a positive role to play in countering inflationary pressures and helping to ease the financial burden on US consumers, particularly those on middle income levels and below.

Political and diplomatic factors do seem likely to have a role to play in the continuing development of bilateral economic and trade relations. How American foreign policy should react to the new advances in China can be a heated topic of debate. A clear line of demarcation can be drawn between the “containment hawks” and “engagement doves.”

The terrorist attack of September 11 was followed by a toning down of the “hawkish” side of the Bush administration’s policy on China. Nevertheless those of a conservative viewpoint continue to urge vigilance in the face of any potential negative impact of China’s rapid development on US security interests.

Among the “hawks”, the US-China Security Review Commission of the US Congress has been most skeptical about China’s future intentions. Last July, it published its first annual report. This pays particular attention to the so-called “magnetic effect” of the Chinese economy in attracting foreign direct investment. It advises the US government to be vigilant in respect of a drift towards dependence upon Chinese hi-tech exports. And then the report goes on to recommend that the US should adopt a policy of containment towards China’s newfound competitiveness. It holds this should be pursued in coordination with other affected countries in a bid to counter the negative impact of the “magnetic effects”.

To sum up, 2002 was a year that witnessed China-US economic and trade relations grow closer in a quite unprecedented manner as a result of China’s increasingly open markets coupled with rapid economic growth. Trade and investment have been driving forward China-US economic relations. With the phasing-in of China’s full WTO obligations, Chinese markets are set to become more and more open and China-US economic and trade relations will move up a gear. The closer trade and investment links will open a new chapter of stability and promise in the history of China-US relations.

The author is an associate professor at the School of International Studies at Peking University. He is also executive director of the Peking University Center for International Political Economic Research.

(China.org.cn February 11, 2002)