PRIOR TO THE FOUNDING of the People's Republic of China (PRC) in 1949, the U.S. was China's principal trade partner for many years. In 1936, the U.S. accounted for 22% of China's exports and 20% of its imports. The Korean War in 1950-53 and the subsequent embargo toward the PRC caused a sharp decline in U.S.-China trade relations. In 1972, the American share of China's total trade accounted for only 1.6%.
China's economic reform and open-door policy in the late 1970s and early 1980s resumed a steady growth of U.S.-China trade. Between 1990 and 2000, according to U.S. Customs records, total trade rose from $20,030,000,000 to $116,320,000,000. By 2000, America became China's second-largest trade partner, behind Japan. China was also the U.S.'s fourth-largest importer, supplying a wide variety of consumer goods. Moreover, the U.S. is now the PRC's number-two investor, pouring $28,500,000,000 into China, trailing just Hong Kong.
Despite the steady increase in trade, U.S.-China relations have been fraught with friction and disputes. One major point of contention is the growing trade imbalance between the two countries. According to Chinese official data, for instance, in 1998, the PRC enjoyed a trade surplus with the U.S. of $21,000,000,000. However, according to U.S. data, the trade deficit with China reached $56,900,000,000.
Congress believes that the huge deficit is due to China's high tariffs and numerous restrictions on American exports. In other words, China has not opened its door as widely as the U.S. China has argued that the huge deficit figure is mainly derived from different methods used in calculating the numbers. The Chinese export data recorded only merchandise directly shipped from Chinese ports to U.S. ones, excluding those sent to Hong Kong first and then reexported to the U.S. The American figures incorporated both direct exports from China and those reexported from Hong Kong.
Moreover, differences in measuring exports and imports skew the deficit figures as well. American exports are calculated on a free-alongside basis and U.S. imports are measured on a cost, insurance, and freight basis. According to economists Lawrence Lau of Stanford University and K.C. Fung of the University of California, American exports should be adjusted up by one percent and imports down by 10% to achieve equivalent values. With these adjustments, the 1998 U.S. trade deficit with China would amount to $36,900,000,000, including reexports from Hong Kong.
Many economists in the U.S. and China have made efforts to adjust the figures, but found it difficult to convince both sides. For instance, Nicholas Lardy, an expert on Chinese foreign trade now associated with the Brookings Institution in Washington, in a statement submitted to the Senate Committee on Foreign Relations, June 18, 1998, estimated that the U.S. overstated its trade deficit with China from 1988 to 1997 by 37% to 126%.
The dispute over the American trade deficit with China led Congress to withhold its approval to normalize trade relations status with the PRC. Each year, with the White House's persuasion, Congress has reluctantly granted China the status as a Normal Trade Relations (PNTR) country. The annual debate has become a major obstacle for U.S.-China trade relations.
Closely connected with the PNTR issue was the negotiation concerning America's support for the PRC's formal entry into the World Trade Organization (WTO). Although China was an original signatory of the General Agreement on Tariffs and Trade (GATT), the preceder of the WTO, in 1947, China at that time was represented by the Nationalist government, which withdrew from the GATT in 1949. For 13 years, the Chinese government in Beijing applied to resume China's status as a member when WTO was established in 1987 to succeed GATT. The effort was not successful because the U.S. still rejected the Chinese entry. The dispute on the deficit figures, the withholding of granting China PNTR status, and the rejection of the PRC's entry into the WTO were the three major roadblocks to U. …