U.S. – China Trade Deficit — A Balancing Act

21 October 2010 Publication
Author(s): James F. Ewing


By Patricia Wu and James F. Ewing, Foley & Lardner LLP

This article is part of our Fall 2010 edition of Legal News: China Quarterly Newsletter, Eye on China.

With a fast-growing economy and more than 1.3 billion people, China continues to represent a huge market for U.S. exports and investments. The total U.S. – China trade during the past three decades has risen sharply, reaching $366 billion in 2009, according to the U.S. government. China now stands as the second-largest U.S. trading partner and an extremely important market for U.S. exports. The rapid expansion of U.S. – China economic ties also has created tension between the two trading partners, since U.S. imports from China are growing at a much faster rate than its exports to China. In 2009, the United States had a trade deficit with China of $227 billion.

The unbalanced nature of the U.S. – China trading partnership escalates trade friction and complicates the bilateral relationship between the two partners. Despite China’s recent economic and legal reforms, the United States is increasingly concerned about a number of issues, including discriminatory government procurement policies (such as requirements for "indigenous innovation"); inconsistent market access; and inadequate enforcement and protection of U.S. intellectual property rights (IPR).

Since China’s accession to the WTO in 2001, China has made great efforts to improve its IPR regime, including revising its intellectual property laws, training judges and law enforcement officials, and implementing measures to ensure long-term IPR enforcement. Despite these improvements, the IPR protection regime in China still offers inadequate protection and poses significant obstacles for many U.S. businesses in China.

The problem of China’s export-driven economy is further complicated by its increasingly protectionist tendencies. In an effort to achieve a rapid transition from a major manufacturing country to a major global source of innovation, the Chinese government has implemented many policies and invested huge research and development funds to promote the development of critical industries, including renewable energy and space programs. For example, the newly proposed "Indigenous Innovation Product Accreditation" system likely will give preferential treatment to locally developed technologies in government procurement and has met with strong criticism from U.S. companies. U.S. Trade Representative Ron Kirk stated in the 2010 Special 301 Report: "We are seriously concerned about China’s implementation of ‘indigenous innovation’ policies that may unfairly disadvantage U.S. IPR holders. Procurement preferences and other measures favoring ‘indigenous innovation’ could severely restrict market access for American technology and products. Creating an environment that nurtures innovation and entrepreneurship is a worthy goal, but China must maintain a level playing field."

Nevertheless, China’s transition from a centrally controlled economy to a more market-oriented economy occurred only recently, and the nation’s IPR literacy on average is still rather low. Thorough IPR enforcement at the local level will not occur overnight. In addition, as China undertakes the transition toward becoming a center for innovation, the Chinese government’s apparent tolerance of IPR piracy could be seen as reflecting the government’s desire to help Chinese companies acquire advanced technology.

Further, the Chinese government is alarmed by the recent deficit increase in services trade. According to the Xinhua News report, at the recent IPR summit run by the Brand China Industry Union (BCIU) in Beijing, Chinese commerce official Wu Guohua called for creating indigenous brands to curtail China’s trade deficit in intellectual property. Wu said, "Despite China’s surplus in commodity trade, the nation suffers a huge deficit in services trade."

Driven by their mutual economic and diplomatic needs, the United States and China are becoming increasingly intertwined economically. Faced with their own domestic priorities and global challenges, both countries need to seek policies that will rebalance the sources of their economic growth to help ease the global economic crisis.

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