US-China Economic Relations | PIIE
Sustaining the Canada–US economic relationship ranks as one of , China has displaced Canada as the largest exporter to the US while. US-China economic issues: Implications for US policy, testimony before the House permanent normal trade relations (PNTR) to China to avoid being frozen out of . Japan, Australia, Canada, and the European Union, as well as many other. Economic relations across North America have prospered and . Trade Deficits: Unlike with China, the U.S. is not accusing Canada and.
Thus any attempt to put the size of the Chinese economy into international perspective is subject to enormous uncertainty. With this caveat, an estimate of the Chinese share of world output derived from purchasing power adjusted data reported by the United States Central Intelligence Agency is reported in Table 1.
The remaining columns show China's share ten years hence under various scenarios. The bottomline is that even under the slow growth scenario, China clearly emerges as the world's second largest economy in the next decade. This conclusion is further reinforced if the figures for Hong Kong's share of output are added to China's. China's participation in international trade also has grown rapidly during the period of reform, and its share of world trade has risen from 0.
Chinese economic reforms not only spurred an enormous growth in trade, but the reforms have transformed the commodity composition as well, aligning China's pattern of trade more closely with its true pattern of comparative advantage Table 2. Between andthe share of exports accounted for by the light manufactures of SITC 8 rose from 16 percent to 47 percent. Similarly, imports of capital equipment SITC 7 rose from 25 percent to 42 percent during this period.
In addition to its rapid emergence in goods markets, China has also become a major player in international capital markets. China is now the leading developing country destination for foreign direct investment. Firms with foreign equity participation accounted for two-thirds of the increase in Chinese exports in and With regard to portfolio investment, external debt does not appear to be a problem: Much of Chinese finance is intermediated through Hong Kong, however, and a crisis of confidence surrounding the transfer of sovereignty or Chinese policy and administration in its aftermath could greatly complicate the situation for China and the region as a whole.
China is a major recipient of multilateral and bilateral official lending. The US appears to be isolated on this issue, though Japanese attitudes may be changing in light of its dispute with China over nuclear testing. Environmental issues are likely to play an increasingly prominent role in China's economic relations. Already the US Exim Bank has refused to grant export finance to participate in the Three Gorges Dam project because of environmental concerns.
China is also predicted to emerge as a major source of hydrocarbon emissions in the 21st century due to its rapid growth and reliance on dirty coal for energy. If there were to be an international tax on hydrocarbon emissions, it would presumably fall heavily on China.
It is not difficult to imagine China insisting on enhanced multilateral and bilateral concessional financing or increased access to developed country markets as quid pro quos for adherence to a strict anti-emissions regime.
US-China Economic Relations The rapid integration of China into the global economy has posed particular problems for high income countries, including United States. China has a rapidly growing aggregate bilateral trade surplus with the US, even according to Chinese data, and even when the miscounting of re-exports through Hong Kong are taken into account Table 3. Nor can this growing Chinese surplus be explained away as a function of the relocation of production from Hong Kong and Taiwan to China as was conceivable a few years ago Table 4.
These imports are almost wholly labor-intensive manufactures, and economic theory suggests that this exerts downward pressure on the wages of import-competing domestic low-skilled labor, if production in such activities is actually carried out domestically.
With respect to exports, as shown in the top panel, the industrial sector with the greatest dependence on exports to China was agricultural pesticides which exported 40 percent of domestic production to China. It was followed in turn by phosphatic fertilizers 33 percentstructural metal parts 16 percentwelding apparatus 14 percentnoncellulosic man-made fibers 12 percentand vitreous plumbing fixtures 10 percent.
The sectors listed in the upper panel of Table 4 might be described as mostly chemicals and capital goods. The import figures in the bottom panel of Table 6 are both larger, and in a sense, more systematic. Sectors in which imports from China account for more than half of domestic consumption include dolls 75 percentrubber and plastic footwear 66 percentnarrowly defined miscellaneous manufactures which includes a laundry list of items such as cigarette lighters, umbrellas, and wigs percentleather wearing apparel 53 percentand leather gloves 51 percentall of which are simple light manufactures.
Canada–US Economic Relations | The Canadian Encyclopedia
The Department of Commerce's survey of foreign direct investment provides a considerable amount of detail on US investment in China. Most of this activity was in the petroleum sector, wholesale trade, machinery and chemicals sectors. Unfortunately most of the data on intra-firm trade and the destination of sales is not reported to avoid disclosure of data for individual firms.
As a consequence it is impossible to tell how much of affiliate output is exported back to the US, or conversely what share of US exports to China are from parents to Chinese affiliates. What the data that is reported indicates is that for majority owned affiliates, 20 percent of output is sold to related parties, which is slightly lower than the average for US majority owned affiliates worldwide 75 percent. In other words, intra-firm trade is probably somewhat less important in the case of US trade with China than with other countries.
Production by majority owned affiliates is exported to third countries at a noticeably lower rate 16 percent than the worldwide average 23 percent. The overall picture that emerges is for a pattern of investment which is probably a bit more geared to serving the needs of the host market, China, than is the case with other US direct investments around the world.
A corollary is that intra-firm trade is probably not a big contributor to the bilateral trade imbalance. US Policy Toward China The outside world has limited abilities to affect the development of the Chinese economy-the outcomes of the major economic policy issues that China faces will largely be determined internally.
To give but one example: If the political leadership in China began to fear that centrifugal forces were pulling the country apart, there might well be a retrenchment of economic reform, and the Chinese government would become less responsive to the interests of foreigners and to fulfilling international obligations.
In such circumstances there would probably not be a whole lot that foreigners could do to reverse such a tendency. Contrary to recent calls to "contain" China, the overarching goals of US economic policy toward China are to promote political and economic liberalization within China which the Clinton Administration explicitly views as linkedintegrate China into global institutions, and pursue US commercial interests which the Administration largely identifies as exporters' interests.
The US also has strategic and political goals which may at times conflict with economic interests though there appears to be a lack of consensus in the domestic foreign policy establishment about prioritizing among these possibly conflicting goals as well as the effectiveness of alternative strategies and tactics to achieve them in the post-Cold War world. Policy is also influenced by the demands of a variety of domestic special interests import competing sectors, exporters, human rights activists etc.
As a consequence, US policy toward China is probably best regarded as a manifestation of competing interests in which no single goal predominates, and special interest groups may hold sway on particular issues.
This sometimes gives the impression of an inconsistent policy, but to a certain extent this is probably inherent in the structure of the US political system and the lack of domestic consensus over goals, strategies and tactics in the post-Cold War world. In the economic sphere, relations with China are played out in bilateral, regional, and global fora, and involve both trade and financial issues. There is obviously interrelationships between these different modalities, but for expository reasons, it is probably simplest to consider them separately in turn.
The first is proactively through US policies to encourage economic reform in China, and China's responsible integration into the international economy. The Administration regards technical assistance as the primary channel through which it can influence economic reform in China and by extension encourage political liberalization. Among the avenues of technical assistance which have recently been created or revitalized has been the US-China Joint Economic Committee led by the Treasury Department, with working groups on financial reform and the foreign exchange system.
The Securities and Exchange Commission has a group that works on securities regulation, and the Treasury and the Federal Reserve Board have a group to provide assistance on banking regulation and the implementation of monetary policy. Private nongovernmental organizations such as the American Bar Association also engage in institution building. The primary channel of economic cooperation is private business trade and investment, though.
Similarly, bilateral intergovernmental relations are dominated by a second track of reactive trade conflict, largely a function of China's rapid growth, partially reformed economic system, and the complainant driven US trade policy making system. However, the potential for Sino-American economic conflict is likely to worsen. Table 7 reports the shares of US trade accounted for by different trade partners, and projections of how these shares might change obtained by plugging the Table 1 figures, estimates of per capita income, measures of distance and other factors into a gravity model of bilateral trade.
Most Favored Nation Status Under the Jackson-Vanik Amendment to the Trade Act ofmost favored nation MFN status can be extended to nonmarket economies only if the President grants a waiver certifying that the country does not impede emigration.
The law was originally passed to encourage the Soviet Union to permit the emigration of Soviet Jews. President Clinton exacerbated this tendency, first by criticizing then-President Bush during the campaign, and then in by tying renewal of MFN explicitly to immediate improvements in human rights in China.
The Executive Order signed by President Clinton in to extend MFN untilincluded a laundry list of human rights objectives as conditions for future renewal. Relations between the two countries continued to be rocky in Despite this, economists and business leaders successfully argued that revoking China's MFN and the ensuing retaliation would only hurt American exports while doing little or nothing for human rights.
The Chinese, for their part, made a number of superficial concessions on human rights while cultivating the support US business. Despite an outcry from many Congressmen, human rights activists and the press, the Administration decided to announce that China had met the minimum requirements necessary for renewal. The Administration's adopted the new line that encouraging China's economic liberalization and integration into the world economy would be the best way to pursue US foreign policy objectives of democratization, development and economic reforms in China Economic Report of the President, Although the renewal of MFN in was correct substantively, the apparent climbdown from the earlier statements of explicit conditionality made the President appear unsteady.US shouldn’t pick a trade fight with Canada: Ben Stein
Soon after the MFN renewal, the US designated China as a priority foreign country under the Special intellectual property rights protection provision. Several reports were released criticizing China's human rights policy; the American public was particularly outraged when China imprisoned but later released human rights activist Harry Wu, a US citizen. China also conducted large-scale military exercises off the coast of Taiwan in an effort to intimidate voters before the island's first democratic elections in which Lee Teng-hui scored a resounding victory.
Evidence was uncovered that Chinese firms had sold Pakistan magnetic rings that could be used to enrich nuclear fuel which could be then used in the production of nuclear weapons, and were involved in smuggling illegal weaponry into the US. And just as the intellectual property rights IPR dispute was reemerging as a hot political issue, it was time to renew China's MFN status for another year.
MFN renewal in passed with little fanfare, but as tension on the trade, human rights, IPR and proliferation fronts increased, the debate over renewal in has become yet another forum for addressing American concerns. As could be expected, the President announced that he would certify China's MFN status for another year, and the Administration has strenuously resisted Congressional efforts to link the MFN debate with human rights, the IPR issue, and proliferation concerns.
Even South Carolina Senator Ernest Hollings, a long-time opponent of China's MFN status, announced that he would switch his vote and support MFN extension on the grounds that the yearly Washington debate serves only to increase tension and harm US-China relations without accomplishing anything positive. Indeed, what is truly striking about the trade politics in the US is how MFN policy has been driven by exporters and investors, not import-competing interests.
Historically, the focal point of trade tensions has been protectionist demands by US light manufacturers. To cite one example, China's share of the US bicycle market increased from China circumvents its bilateral textile and apparel quotas, mainly by transshipping products through third countries which are also covered by bilateral quotas. In other words, the Chinese substitute their products for the unfulfilled quotas of third countries. The main transshipment points are the high wage locations of Hong Kong, Taiwan, Macau, and Singapore.
In other words, the Treasury figure implies that nearly 25 percent were transshipped. A bilateral agreement on this issue was signed in January Government sources indicate that the problem appears to be getting worse, however. Even allowing for high re-export markups, these discrepancies are huge.
The US Customs Service found that half of the 36 fastest growing apparel suppliers to the US market had no significant domestic production for export, but report a significant increase in imports from China. Kenya, for example has recently experienced a percent growth rate in apparel imports from China, and a percent growth in exports to the US.
Other countries, including Belize, the Czech Republic, Ecuador, and Qatar, exhibit similar triple-digit growth rates. Transshipping is currently subject to criminal prosecution, and Customs and the Justice Department have launched a major campaign to prosecute transshippers.
There was recently a major conviction involving a Chinese state-owned firm. In May the US cut China's cotton underwear quota by 35 percent and also reduced some other quotas because firms were illegally transhipping textiles though Hong Kong, mislabeling them as video rewinders and metal furniture.
To investigate this question a constant market share CMS analysis was undertaken. The CMS approach is based on the idea that a particular country's share of world production is a function of its "competitiveness" where s denotes share, q production quantity, and c "competitiveness"; lower case letters indicate reporting country values, upper case world values.
Thus, in Equation 2changes in the reporter country's production are decomposed into two terms-the first indicating what the country's production would have been if it simply maintained its share of world production, and a second indicating gains or losses due to changes in share competitiveness. Production, in turn, is also a function of the pattern of domestic consumption, exports, and imports, and changes in production will be affected by the commodity and geographical market partner composition of trade.
So for example, countries specializing in exports to rapidly growing product markets or partner countries would experience faster export growth than competitors concentrated in slowly growing markets for a given level of relative competitiveness.
Their shares in those markets, however, would be constant as long as the underlying competitiveness factors remained unchanged. Thus a more sophisticated model can be constructed by decomposing production into consumption, exports, and imports, and redefining the relationships in Equations 1 and 2 in terms of commodity- and geographic-specific markets 3 4 where i and j indicate product and partner respectively.
The first term on the rhs of Equation 4 is the CMS rate of consumption growth-the rate of production growth which would have occurred if the country simply maintained its market share in domestic consumption in each commodity market.
The second term gives the change in production for domestic consumption due to changes in share-that is, changes in competitiveness. The remainder of the terms in Equation 4 can be defined analogously.
At the sectoral level the data were disaggregated to product categories at the 4 digit SIC level and three geographical markets-the US, China, and the rest of the world-were distinguished.
Applying the Department of Commerce figure for average labor productivity across the industrial sector, this would amount to a loss of less than one thousand jobs. This is not the end of the story, however. Export jobs pay on average 13 percent more than non-export jobs. Applying the export-related wage premium to the jobs figures one finds that the higher pay of the export jobs more than compensated for the slight reduction in total employment, and total compensation in the industrial sector was higher than expected, even with the Chinese competitiveness gains.
At the same time, in bilateral negotiations, each major trading partner, including Canada, was pressured to take additional steps to help the US improve its balance of payments. Canada, for example, was threatened with cancellation of the Auto Pact. A key lesson of the s, culminating in the New Economic Policy, was the vulnerability of Canada to unilateral US actions. A government report, Canada—US Relations: Options for the Future, said Canada should reduce its vulnerability to US policies and pressures through trade diversification.
Canada–United States trade relations
Energy Conflict While Canada had long been viewed in the US as a secure source of oil and gas, access to the American market had not always been easy. InPresident Dwight Eisenhower established the Mandatory Oil Import Program, which imposed import quotas and licenses to stimulate domestic US production, which limited Canadian oil exports. But as US needs rose, the quotas were phased out.
With the sharp increase in world oil prices through the s, Canada imposed an export tax on oil from until under the Petroleum Administration Act. The purpose was to sustain an oil price in Canada below the world price by using revenues from the tax to subsidize more costly oil imports used by refiners in eastern Canada.
This was followed in by the National Energy Programwhich included the goal of 50 per cent domestic ownership of the Canadian oil industry byassisted via a tax policy that favoured oil exploration by Canadian companies. The National Energy Program also sought to increase the Canadian share of engineering services, technology and machinery in oil and gas projects. Foreign multinationals in Canada, it was argued, tended to favour companies and technologies already used by their parent companies, thus depriving Canadian enterprises.
The US vigorously protested these measures, and beginning in they were to a large extent unwound. The subsequent Canada—US free trade agreement see "Free Trade Agreement" below barred the future use of an oil export tax, and provided for equal treatment of Canadian and US companies in developing Canadian resources. ByUS-controlled subsidiaries accounted for 9. In manufacturingfor example, they accounted for In the oil and gas sector they accounted for But in other sectors, such as finance and insurance and construction and utilities, US ownership and control accounted for a much smaller share of industry activity in finance and insurance, for example, just 4.
Free Trade Agreement In the early s, following a severe recession, Canada again turned its eyes south in pursuit of ways to expand economic growth.
This renewed interest in relations with the US was also prompted by growing fears of a resurgence of US protectionism. Based on the success of the Auto Pact, Canada and the US attempted to identify other sectors where they could pursue sectorial free trade. The exercise failed through lack of agreement on new sectors.
As a consequence, Canada decided to seek a comprehensive free trade agreement and in the US agreed to begin negotiations. President Ronald Reagan was open to the idea. InReagan had called for a North American common market. This, it was argued, would encourage innovation and boost productivity, and hence increase employment and raise Canadian living standards.
An agreement was reached at the end ofcoming into effect on 1 January A key Canadian objective — an exemption from US trade remedy laws —was not, however, achieved.
Canada was still faced with punitive actions, such as subsequent US efforts to restrict softwood lumber imports, or US unilateral actions, such as Buy America restrictions in public infrastructure projects.
Even before the heightened border rules that came after the terrorist attacks ofexports from Canada required extensive paperwork to comply with rules of origin in the agreement which set minimum North American content thresholds. Moreover, while proponents argued that the free trade agreement would narrow the productivity gap between the two countries, instead the productivity gap widened.
Softwood Lumber One of the most contentious and ongoing trade disputes — softwood lumber — predated the free trade agreement, was not resolved by it, subsequently became an important test of the agreement and has not gone away. The basic dispute arose in the early s because Canadian softwood lumber producers were gaining market share in the US, with American producers seeking a protectionist solution.
The two countries had different systems of pricing. Most Canadian lumber production takes place on Crown landswith a stumpage fee being charged to collect a royalty, whereas in the US, much production comes from privately owned lands and a market-based auction system is used for pricing.
In trade actions starting inUS producers charged that the Canadian stumpage system gave Canadian lumber producers an unfair advantage, and that this constituted a subsidy. They said Canadian exports were unfairly causing injury to the US industry and that a penalty should be imposed on Canadian lumber imports. Immense softwood lumber pile in Saguenay, Quebec. But as a result of industry lobbying, a stiff 35 per cent tariff was imposed on Canadian shakes and shingles inwith Canada retaliating with duties on books, computers, semiconductors and Christmas trees.
The same year the US imposed a 15 per cent tariff on all Canadian softwood lumber imports. Later that year, Canada reluctantly agreed to introduce a 15 per cent export tax on softwood lumber exports and the US tariff was withdrawn. This first softwood lumber agreement ran untilwhen Canada decided not to renew it. The next year, the US re-imposed duties on Canadian lumber. In the meantime, various dispute panels reviewed the issue, with Canada in winning major victories.
But the US was not deterred and, inthe two countries reached a new agreement, which allowed duty-free shipments up to a quota ceiling, with a penalty imposed on all exports above the ceiling. The agreement expired in The US remained determined to restrict lumber imports from Canada and in persuaded Ottawa to agree to a seven-year agreement, with provision for a two-year extension.
This replaced US duties with a Canadian export tax, ranging from 5 to 15 per cent. The new agreement was implemented in and extended until October While there have been periodic calls by business groups and think tanks to continue to deepen integration — for example, by means of a customs union or common market, adoption by Canada of the US dollar or a shared new currency — there has been no serious political take-up.
The focus for governments has instead been on efforts to harmonize regulatory barriers. Other changes to bilateral trade rules are more likely to result from successful negotiation of the proposed Trans-Pacific Partnership, which includes Canada, Mexico and the US, or a revived WTO. In the immediate aftermath, the US instituted lengthy border delays, with security trumping trade.
Canada feared not only that American companies would switch to US suppliers, but also that border delays would be a powerful disincentive for companies to invest in Canada if part of planned production was intended for the US. It would be less attractive for US companies to source or locate production in Canada.
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Diverted Aircraft at Halifax Stanfield International Airport, following the terrorist attacks of September 11, Crossing the border into Canada sign. May 20th, Previous Next In effect, border delays threatened to undo the benefits of the free trade agreement unless new accommodations could be made. Working groups were established to ease cross-border trade, including regulation of food health and safety and consumer product safety, as well as liberalized rules of origin.
Inthe agenda was advanced, with an important role for the private sector through a North American Competitiveness Council. A North American Energy Council was also planned. But inthe SPP was wound up after quite limited accomplishments. With growing frustration from business and other groups over ongoing border issues, as well as concern for the future of North American economic growth, Canada and the US in launched the Beyond the Border Action Plan: It highlighted areas of cooperation including trade, economic growth, jobs, infrastructure and cybersecurity.
Canada–US Economic Relations
It included the creation of a Canada—US Regulatory Cooperation Council, linking agencies on both sides to deal with issues ranging from meat inspection and standards for natural gas vehicles to chemicals and toy safety in an effort to reduce regulatory differences as a barrier to trade.
Differences and Mutual Interests Overall, the Canada—US economic relationship, despite great differences in size and power, has worked to the benefit of both countries.
Yet while Canadians and Americans share many fundamental values, including the rule of law, there are important differences. In particular, Canadians tend to see government as a more positive force in the economy, hence the willingness to use public policy tools, including Crown corporationsto develop the economy and industry and to meet broader Canadian needs.
The US Constitution, with its strict separation of powers, is based on a greater distrust of government. The Trudeau government appears to be making good on its promises to engage China.
Most notably, Shenzhen -based Hytera Communications gained approval to purchase Canadian satellite communications company Norsat, which counts US security interests among its clientele. The takeover passed a standard security review, but did not undergo a national security review, despite calls to do so by opposition parties in the Canadian Parliament. Spurred by growing isolationism in the US and Europe, support for an FTA with China has grown from just 36 percent in to 55 percent inaccording to a survey commissioned by the Asia Pacific Foundation.
Canada is rich in natural resources, which dominate its exports to China. Commodities and agricultural goods such as timber, canola, metals, and biotechnology products will continue to be highly sought after by China. Take the artificial intelligence AI industryfor example.
Meanwhile, China only has 50, AI personnel despite its huge population and strong government support for the industry.