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Annual Report Critical of Chinese Economic and Trade Actions

Tuesday, December 03, 2013
Sandler, Travis & Rosenberg Trade Report

The U.S.-China Economic and Security Review Commission has released its 2013 report to Congress on the national security implications of the trade and economic relationship between the U.S. and China. The Commission uses a broad interpretation of “national security” in evaluating how this relationship affects the economic health and industrial base of the U.S. and the state of U.S. economic and security interests and influence in Asia. As a result, this report covers issues such as China’s proliferation practices, the qualitative and quantitative nature of economic transfers of U.S. production activities to China, the effect of China’s development on world energy supplies, the access to and use of U.S. capital markets by China, China’s regional economic and security impacts, U.S.-China bilateral programs and agreements, China’s compliance with its World Trade Organization accession commitments, and the implications of China’s restrictions on freedom of expression.

As has typically been the case, the report casts a critical eye on Chinese policies and practices and makes a number of recommendations for responsive action by the U.S. government.

Findings

- Trade data for 2012–13 show that Chinese exports are again growing at a higher rate than imports, signaling a continued reliance on exports to fuel economic growth and a reversal in reducing China’s trade surplus.

- China’s trade surplus with the U.S. in goods was a record $315 billion in 2012 and $178 billion for the first seven months of 2013, also a record.

- China has concluded 13 trade agreements and is in the process of negotiating six more . Among these are the Regional Comprehensive Economic Partnership, an initiative to link ASEAN member states and preferential trade agreement partners to form the world’s largest trading bloc. Formal negotiations on the RCEP began in May 2013 and are scheduled to conclude by the end of 2015.

- Chinese foreign direct investment in the U.S. continues to grow, though from a very low base. In 2012 the U.S. attracted $174.7 billion of global FDI, of which $219 million came from China. Chinese investors have primarily targeted those sectors where China lacks know-how and technology, and the sectors that have received the most investment include energy, services and high-end manufacturing.

- For the past three years, China has been the largest export market for U.S. agricultural goods, but “trade is far from free and enormous opportunities are being withheld.” Agricultural demand in China is beginning to outstrip supply and the U.S. is well-positioned to meet that demand, as U.S. farmers enjoy a comparative advantage in resources, productivity and quality, particularly in meat production. However, China has erected a series of nontariff barriers to agricultural trade that include state trading, excessive domestic subsidies and stockpiling of commodities, discriminatory taxes, antidumping duties and slow approvals of biotechnology applications for U.S. crops.

- China accounts for a large share of the fruits, vegetables, fish and processed foods that Americans consume but China’s own food safety regulation is still ineffective in spite of recent efforts to consolidate agencies and improve legislation.

Recommendations

- Congress should ensure that the Food and Drug Administration makes it a priority to increase the number of physical inspections of Chinese food imports at the border; increase the rigor of those inspections to include testing for pathogens and chemical, pesticide and drug residues and processed food ingredients; and conduct more frequent and thorough inspections in food facilities in China. Congress should also urge the Department of Agriculture to permanently assign inspection personnel to China so that exporting plants receive regular visits by USDA inspectors.

- Congress should direct the Department of Commerce to develop a comprehensive, ongoing inventory of Chinese FDI in the U.S. and update it annually. The inventory should identify the ownership structure of the entity engaging in the investment. DOC should also prepare a comprehensive annual report to Congress that identifies FDI by Chinese entities in the previous calendar year and indicates those investments that received any assistance from the “Select USA” program. DOC should also identify, on an ongoing basis, the lines of commerce that each of the investments are engaged in.

- Congress should require the USDA and the U.S. Trade Representative to conduct a comprehensive review of China’s agricultural subsidies, discriminatory taxes, state trading and procurement practices, take account of the damages incurred by U.S. farmers and downstream industries and suggest appropriate remedies.

- Congress should direct the Interagency Trade Enforcement Center to conduct a review of the selective use of value-added tax rebates by China and determine whether they have a trade-distorting effect and whether the selective use of VAT rebates is consistent with the original intent of the General Agreement on Tariffs and Trade provision allowing for VAT rebates. The ITEC should prepare a report for USTR and the relevant congressional committees of jurisdiction and identify what steps should be taken to address any GATT inconsistencies.

- Congress should direct the USDA to negotiate with China to synchronize approvals of biotechnology, prepare an annual report on competitive factors in the pork industry, and prepare a report identifying those organic food products being imported into the U.S. from China as well as the different methodologies used to certify that a product is organic.

- Congress should evaluate whether a requirement that U.S. food importers purchase insurance against food-borne illnesses and pathogens from Chinese imports would improve food safety. Such a program would involve private sector risk insurance with insurance companies evaluating the safety of various sources and charging risk-based premiums based on the methods employed by Chinese exporters to address food-borne illnesses and pathogens.

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