China Center for International Economic Exchanges

Zhang Xiaoqiang: Promoting a Healthy Development of the US-China Economic and Trade Relations
Date:Nov 10,2017    Source:CCIEE

 

Speech at the U.S.-China Dialogue on the Global Economic Order

30th October, 2017

China is the world’s biggest developing country and the second largest economy, while the US is the biggest developed country and has the largest economy. In 2016, the two countries accounted for 39% of the global GDP (China 15%, the US 24%); the energy consumption accounted for 40% (China 23%, the US 17%); and the R&D investment accounted for 54% (China 21%, the US 33%).The two countries also ranked the first and the second in goods trade, and the goods trade between them amounted to $558 billion, increased by 2.64 times compared to 2005. According to incomplete statistics, in 2016, the total sales value of the US companies in China reached $550 billion, and General Motors was certainly the winner as it sold one car in every eight seconds. In the first three quarters of 2017, the companies sold 2.71 million cars in China, 25.3% more than it sold in the US market. Over recent years, Chinese companies’ investment in the US has experienced a rapid growth, $15 billion in 2015 and $45 billion in 2016. With a reserve of $1.3 trillion US treasury bills, China remains to be the largest foreign holder.

The data above shows the importance of the two countries in the world economy and the close economic and trade relations between them. Such kind of importance and closeness is the outcome of the economic globalization development, the WTO regulations, bilateral and multilateral framework and the open policies of the two countries. Specifically, their complementary advantages and the benefits the two countries have gained made the bilateral relations closer.

The US is China’s largest exporting market and creates huge demand for China as it accounted for 16% of China’s export. The 7 million US companies operating in China has not just brought capital, technologies, advanced management and huge tax revenue to China, but also created more than 2 million jobs locally. In 2016, China imported approximately 34 million tons of soybean from the US, China would need 15 million hectares of arable lands if it planted them by itself, accounting for 12% of China’s arable land. The US is the world’s financial center, the biggest capital market and by February 2017, 130 Chinese companies made their IPO through the Nasdaq stock exchange and more than 70 Chinese companies are traded on the New York Stock Exchange. In 2014, China’s Alibaba made the world’s largest IPO in the US history. All these will not just help Chinese companies to raise fund, but also enhance their global visibility and promote their corporate reform and governance.

For the United States, China is the largest export market outside North America and one of the fastest-growing markets. Over the past decade, the annual growth of the US exports to China was 11%, well above the annual growth of the US total export, 4%. This figure is also much higher than the annual growth of China’s export to the US over the same period, which was 6.6%.From January to September this year, the US exports to China reached $113.6 billion, a year-on-year growth of 19.8%, while China's exports to the US rose by 11.5%, to $309.1 billion. In total, the US exported 62% of its soybean, 25%of its Boeing aircraft and 17% of its cars to China. In 2016, China imported 51 American movies, bringing the US $16 billion in revenue. The massive import of goods with super quality and competitive price from China not only helps the US to keep a low inflation rate, but also increases the real purchasing power of the American people. In 2015, the trade with China saved an average of $850 for every household in the United States, according to a research completed by the US-China trade relations commission. According to China's statistics, between 2006 and 2016, the US export of services to China increased from $14.4 billion to $86.9 billion, with a surplus of $56 billion. In 2016, the number of Chinese students in the United States exceeded 350,000, accounting for 34% of the total number of international students in the United States. According to the US Department of Commerce, it contributed about $16 billion in revenue to the United States. The Chinese tourists to the US reached almost 3 million, an increase of 15%, and spent $33 billion, increased by 9%. Chinese visitors accounted for 3.9% of the total visitors to the US last year (76.5 million, a year-on-year decrease of 2%) and the money they spent in the US accounted for 13.4% of the total spending made by foreign visitors in the US. ($244.7 billion, a year-on-year decrease of 1%)

China and the United States have different development stages, economic structures and resource endowment. Each of them has its own comparative advantages, which formed the basis for economic complementarities and realizing mutual benefit. For example, China's manufacturing industry accounts for more than 25% of the global manufacturing, China has the largest production for 220 of the 500 major industrial products. As can be seen, a large scale and comprehensive industrial system has become an important source of China's trade competitiveness. Taking the electronics manufacturing as an example, several cities in China such as Shenzhen, have formed the largest industrial supply chain with the best cost competitiveness in the world. Among the more than 700 suppliers of Apple's mobile phones and computer products, nearly half of them are located in China. China's highways, railways, ports, power generation and power grids are the best in the developing world. Furthermore, it has the world's largest, well-qualified and relatively low-cost labor resources. According to international statistics, China has a labor force of approximately 900 million, more than the combined labor force in Europe and the United States, which is about 700 million. It is estimated that in 2016, the blue-collar workers in the United States were paid eight times higher than the Chinese workers.

The United States has the world's largest consumer market and is the leader in science and technology. It has competitive advantages in the areas of power, natural gas, land, logistics and financing. Moreover, the United States is at the forefront of the world in aviation, electronic information, biotechnology, high-end equipment manufacturing and materials. The integrated circuit and related manufacturing equipment, electrical machinery, chemical equipment, high-grade machine tools and other products are popular among Chinese users. Among the world's 15 largest technology companies, released by Forbes in 2016, 10 of them have their headquarters in the United States. The United States topped the list of the world's top 1,250 universities, published on October 24 by the U.S. news and world report. All these are the comparative advantages of the United States.

Complying with the laws of the economic globalization development and making the best of their comparative advantages have helped the US-China economic and trade relations to overcome difficulties and achieve win-win results. Admittedly, some problems remain in the US-China economic and trade relations, some of which have existed for many years, while others occurred in recent years. I would like to take this opportunity to discuss my personal views on the three main areas of frictions, namely, trade deficit, two-way investment and market opening, scientific and technological innovation and intellectual property rights (IPR).

The first major area of friction is the US trade deficit with China.

First, in terms of service trade, China has a big deficit with the US, while the US has a large deficit in the trade of goods. However, the statistics from both sides are very different from each other. In 2016 alone, the statistical difference in trade was $112 billion, China recorded $254 billion but the US figure was $366 billion. In previous years, a joint study on statistical differences conducted by the China and US Ministry of Commerce showed that from 2008 to 2014, the US statistics overvalued the trade deficit by an annual average of 19%.

Secondly, under the international division of labor, China’s trade surplus is closely related to the global industry deployment of transnational companies, and can be attributed to the more gradient international division of labor. China’s current trade surplus with the US can be mainly seen as a surplus transfer from Japan, South Korea, Hong Kong SAR, China Taiwan and other east Asian countries and regions. From 2001 to 2016, the US trade deficit with China rose from 20% to 47% of its total deficit, but the U.S. trade deficit with Japan, South Korea, Hong Kong SAR and China Taiwan fell from 23% to 11%, according to US statistics. It should also be noted that about 45% of China's total exports belongs to the foreign-funded enterprises, including the U.S. companies. For example, 80% of the mobile phones, laptops and tablets, produced by large US corporations such as Apple, HP and Dell, are assembled in China and then shipped to America and the rest of the world. The key parts come from Japan, South Korea and China Taiwan, and the US companies provide the key technology and charges patent fees. According to the investigation completed by third party organization, the lowest selling price of an iPhone7 is $649, assembled in China, the cost is $238, nonetheless, Chinese enterprises only take $9 from the profits, with $6 as processing costs and $3 for the battery supplied by a company. $200 of the profit is distributed to the patent fee and components supplied by a number of foreign companies. Apart from the production cost, the rest of the profit goes to tax, transportation, importers, retailers and so on, Apple company has the biggest slice, with a profit of $200 per phone. Therefore, it will not tell us the whole story if we just look at the amount of Chinese exports to the US.

Thirdly, the export restrictions imposed by the US government on high-tech exports to China have adversely affected the performance of American enterprises. In 2001, U.S. exports of high-tech products to China accounted for 16.7% of China's imports, but this figure decreased to 8% in 2016, which does not match with the US status as the world's leading technology powerhouse. From integrated circuit products, manufacturing equipment, advanced CNC machine tools, advanced materials, advanced biotechnology products, to civil aviation aerospace equipment and technology, there are a good variety of complex control systems. China has appealed to the US over many years. In 2010, the US government announced to launch reforms on export control, a few years later, however, it had eased export restrictions on its Allies only, but has done little to help China. In 2016, China imported $275 billion of integrated circuit, while imports of oil, natural gas, soybeans and iron ore totaled just $252 billion. If the US can relax its excessive restrictions, it will significantly increase its exports of high-tech products to China, thus greatly reducing the U.S. trade deficit. According to a report undertaken in April by the Carnegie Endowment for International Peace, if the US were to liberalize its export barriers against China to the same level as those applicable to Brazil, US trade deficit with China would decrease by 24%; if liberalize to the same level as those applicable to France, the deficit would decrease by 34%.

The second major area of friction is the two-way investment between the US and China.

According to the calculation based on stock, the US is China’s largest investor, while China's investment in the US has been growing rapidly in recent years. The recent problem is that the US considers China market is not open enough and China sees the security review mechanism of the committee on foreign investment in the US (CFIUS) as a serious impediment.

Firstly, China has fulfilled all the provisions of the agreement, as it promised to the WTO. For example, the restrictions on currency, geographical and customer scope of foreign Banks have been cancelled. Over recent years, many European and American countries hope that China could be more open, and reduce restrictions on areas and share capital of foreign investors, especially in the financial and cultural industries. To this end, the Chinese government has made it clear that it will further open its economy and gradually implement the pre-entry national treatment and the so-called negative list management of foreign capital, which has already been introduced in some of the free trade zones. The new edition of the catalogue for guidance of foreign investment, released in the past August, has reduced the number of "restricted categories" by 30, to 63. However, there will definitely be a small number of sectors/industries on the "negative list", which is an international practice, and the point is how many categories will be on the negative list? This will be determined by the Bilateral Investment Agreement (BIT) negotiations. The US and Europe stress reciprocity, but China emphasizes equality. In the financial sector, for example, China will not allow it to be as open as the financial market in the UK due to its low level of management and the active international speculative capital. China does not allow private companies to operate telecommunications and TV stations, while the US and Europe allow foreign investors to do so. This requires a negotiated settlement, not a simple "equivalence". Regarding the US foreign capital security review system, China believes that the system is not transparent enough and discriminates against Chinese enterprises, especially the state-owned enterprises. On the contrary, the US reckons that it should be stricter on China's state-owned enterprises. From 2012 to 2014, China led foreign countries represented in CFIUS reviews, with 68 projects in total, but Chinese investment accounted for less than 10 percent of all the foreign investment in the US. According to incomplete statistics, the amount of Chinese enterprises that have been blocked due to the security review has exceeded $50 billion. Even if they have been approved by the US government eventually, they are required to sign a stringent “mitigation agreement", putting limitations on enterprise management and business scope, for example, Chinese investors need to inform the US government agencies 15 days in advance if they want to have a site visit, sometimes they are even not allowed to present at operation site.

Solar power is a clean energy project, the Chinese private companies were rejected for making investment and acquisitions in the US, but Canadian companies have been approved, even if they want to invest in the same field. Under the CIFUS framework, it is generally described as “a security review is needed when foreign companies want to invest in important infrastructure, and high-tech enterprise", but it never lists the specific industries. President trump has repeatedly spoken of upgrading the existing infrastructure by increasing investment, and Chinese companies have extensive experience in areas such as roads, high-speed railways and airports. Nonetheless, it will be difficult for the US to attract Chinese investment with the PPP model unless the security review of foreign investment improves its transparency dramatically.

Thirdly, scientific and technological innovation and IPR protection.

Both China and the United States attach great importance to scientific and technological innovation. The US remains to be the world’s leader in this field and China is making rapid progress. China and the US are fully aware of that they have to rely on themselves to improve their technological capability, not on any other foreign countries. At the same time, both countries put great emphasis on attracting outstanding scientists and talents and learning advanced technologies from other countries. Unfortunately, the US believes that China steals advanced technology from other countries or forces American companies to transfer secret technology to China. "Our contribution to China is our technology, we had no choice but to give the innovative technologies that are essential to American capitalism to China", said Mr. Bannon when he was working for the White House. The US trade representative, Robert Lighthizer once said, "the CEO of the US companies complained that they were forced to transfer technology to their Chinese partners and requested an investigation into China's IPR theft problem according to the "section 301" of the US trade law." In response to those accusations, the Chinese government has already made its position clear, I am here to express my opinions according to my personal and working experience with the US.

First of all, the technology imported by China from the US is not free of charge, they are paid by Chinese companies. For instance, China spent hundreds of millions of dollars to buy the complete set of technology for coal power generating from the GE company in the 1980s. In the 1990s, China introduced the program-controlled telephone and mobile phone technology of MOTOROLA to China. In recent years, Chinese companies have paid a large amount of technical fees and patent royalties to Qualcomm for mobile communications chips and mobile phones, account for 57% of the company's total revenue. Many American companies have the best management and operation in the world, I know many of the CEOs of big US corporations, and I have to say that none of them sold their sophisticated technology to China at a low price.

Secondly, some US companies claim that they are forced to transfer their technology to their Chinese joint-venture partners, this is true before China's accession to the WTO. At that time, China's "Foreign Investment Law" stipulated that foreign companies need to transfer their advanced technology to their Chinese partners if they want to have their investment approved. This regulation violates WTO rules, therefore, China revised a large number of relevant laws and regulations after its accession to the WTO at the end of 2001. The clause of forced technological transfer was abolished. However, many US companies still accuse China of forcing them to transfer their technology. I asked a few US government agencies if they could provide any evidence of forced technology transfer by China, including the US Trade Representative (USTR), the Department of Commerce, Ministry of Finance and the State Department, they could not provide any evidence. Without evidence, the Chinese authorities could not launch an investigation. Apart from the “forced technological transfer”, some US companies claim that they are pressurized to transfer their technology to their Chinese partners, we need to analyze this from a different perspective. "Joint ventures" is a business practices and both sides want to gain from it.

Chinese enterprises have advantages in the local market, such as human resource, marketing network and industry supply chain, while foreign companies from the US and other developed countries have advanced technology, management and marketing for overseas markets. During a joint venture negotiation, Chinese entrepreneurs want to make more of their advantages, and require foreign companies to bring in advanced technologies at a lower price in order to improve China's investment benefit, but the foreign entrepreneurs take the opposite approach. This is a regular negotiation, a commercial transaction, especially in China, where competition is fierce. All the good entrepreneurs want to negotiate a "joint venture" by maximizing their investment benefit. In addition, I would like to quote a set of data first. In 2015 and 2016, China's actual use of Foreign Direct Investment (FDI), was $252 billion, of which $182 billion are "wholly foreign-owned" enterprises, accounts for 72%. Recently, the establishment of a wholly foreign-owned company has become the trend of foreign companies investing in China as it has no joint venture partner. Without a joint venture partner, how could Chinese enterprises get the technology from their "partner" at a low price or even free of charge? Most of the American companies in China have established their business as the wholly foreign-owned company, this is a basic fact.

With regard to IPR protection, in the past three decades China has gone through more than 100 years of developed countries and made remarkable progress. However, it still lagged behind many advanced countries in terms of legal system, law enforcement and other aspects. China has reached consensus with other countries on advocating innovation culture and strengthening IPR creation, protection and application. China’s goal is not just about being responsible for the international community, but also for the effective implementation of innovation-driven development strategies and the realization of the high quality and sustainable development of China. As China’s science and technology continue to progress, it has become one of the leading players in the IPR and other fields and thus, cracking down on foreign offenders who steal China’s IPR has become an increasingly important work, which also needs strengthened international cooperation.

As the US-China economic ties continue to expand, I deeply feel that the frictions between the two countries are inevitable. To solve these issues, the key is to be rational and realistic, respect each other, adhere to equal consultation, and put forward effective and reasonable solutions. Responding

with protectionism and other simple measures such as unilateral sanctions can only hurt both sides. In today's world, the joint efforts from China, US and the rest of the international community are need to address a number of issues, including strengthening structural economic reform, coordinating fiscal and monetary policy, strengthening financial supervision and minimizing financial risks, promoting international trade and investment cooperation and development, alleviating infrastructure bottlenecks, reducing the huge gap in development and residents' income gap. In order to meet the global challenges of cyber security, climate change, counter-terrorism and the prevention of the spread of pandemic diseases, China, the US and the rest of the international community need to join hand together.

At the 19th National Congress of the Communist Party of China (CPC), which was concluded not long ago, General Secretary Xi Jinping proposed that China should promote a new and comprehensive opening-up. Locking doors against the world will make us lag behind, and only by opening to the outside world can we realize development. China's opening-up will not be closed, it will only grow bigger and bigger. The building of the belt and road will be a key project of China, China will attach equal importance to the strategy of “bringing in” and “going out”, follow the principle of mutual consultation and joint construction, adopt high level of trade and investment liberalization and facilitation, ease market access, further open the service sector to foreign competition, safeguard the lawful rights and interests of foreign investment, support the multilateral trading system, promote the creation of free trade zone, and an open world economy. During the telephone conversation with Chinese president Xi, President Trump said that he pays close attention to important policy information released by president Xi at different meetings and looks forward to meeting with him and exchange views in Beijing. President Xi stressed that China values greatly the development of China-US relations and is willing to work with the US on the basis of mutual respect, mutual reciprocity and mutual benefit. He looks forward to working with the President and making a joint plan for the development of China-US relations and bringing more tangible benefits to the Chinese and American people.

The China-US economic and trade relations is the ballast stone and propeller of the China-US bilateral relations, and a healthy development of this relations will not only benefit the people of the two countries, but also plays an important role in maintaining regional and world peace, stability and prosperity. Therefore, think-tank and experts from both side should work together to make greater contributions.

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