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Threats, Opportunities Highlighted in Annual Report on Trade with China

Monday, November 20, 2017
Sandler, Travis & Rosenberg Trade Report

The U.S.-China Economic and Security Review Commission’s annual report to Congress offers a mixed review of bilateral trade relations. Trade liberalization continues to backslide, the report states, as Chinese government policy contributes to rising protectionism and unfair regulatory restrictions that have left more than three-quarters of U.S. firms responding to a recent survey feeling less welcome in China than they did a year earlier. However, the report also sees opportunities for U.S. companies in the Chinese market.

The report states that the U.S. trade deficit in goods with China, which President Trump has vowed to take strong action to address, totaled $347 billion in 2016, the second-highest on record, and was up 6.2 percent year-on-year in the first eight months of 2017.

On the other hand, the U.S. services trade surplus with China reached a record high of $38 billion in 2016, up from $438 million in 2006. The report states that China’s strong income growth, expanding middle class, and stated plans to rebalance to a more consumption-driven economy should further boost U.S. services trade with China. At the same time, China maintains market access barriers that restrict U.S. services companies, including caps on foreign equity, discriminatory licensing requirements, and data localization policies. In addition, the opening of China’s services sector to foreign participation has been slow and it may thus be increasingly difficult for U.S. companies to become significant players.

The report highlights rapid growth in China’s e-commerce and logistics sectors as presenting opportunities for U.S. companies. China is already the largest e-commerce market in the world, with sales reaching $787 billion in 2016, and demand is strong in areas where the U.S. excels such as high-quality foods and supplements, beauty products, and healthcare-related goods. The e-commerce market does have challenges and risks, however, such as the prevalence of counterfeit goods on Chinese e-commerce platforms and a logistics industry that remains underdeveloped due to China’s historical focus on improving export logistics at the expense of domestic logistics infrastructure.

The report also finds several reasons to be concerned about Chinese foreign direct investment in the U.S. that has “increased dramatically in recent years.” One is that Chinese FDI is targeting industries deemed strategic by the Chinese government, including information communications technology, agriculture, and biotechnology, leading to the transfer of valuable U.S. assets, intellectual property, and technology to China. In many of these sectors, U.S. firms lack reciprocal treatment in China and are forced to disclose valuable technologies and source code to gain access to the Chinese market. A second reason is that some Chinese companies operating in strategic sectors are private only in name, with the Chinese government using an array of measures to influence private business decisions and achieve state goals. Third, some Chinese companies are attempting to invest in sensitive U.S. industries without obeying normal U.S. regulatory procedures through methods such as facilitating investments through shell companies based outside China and conducting cyber espionage campaigns to financially weaken and then acquire U.S. firms.

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