PROSPECTS FOR US-CHINA TRADE

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• Document Creation Date: December 27, 2016
• Document Release Date: September 7, 2010
• Sequence Number: 2
• Publication Date: October 1, 1984
• Content Type: REPORT

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virectorate or
Prospects for
US-China Trade
EA 84-10178
October 1984
COPY 4 8 7
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Prospects for
US-China Trade
China Division, OEA~
Office of East Asian Analysis. Comments and queries
are welcome and may be directed to the Chief,
This paper was prepared byl
Secret
EA 84-10178
October 1984
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Prospects for
US-China Trade' 25X1
Key Judgments The United States is now China's third-largest trade partner and a major
Information available source of the technology, investment, and services needed for Chinese
as of 15 August 1984 economic development. While China constitutes a major market for future
was used in this report.
sales of US goods and services, our judgment is that Beijing's prospects for
expanding exports to the US market remain limited.
Textile products continue to dominate Chinese exports to the United States;
through midyear they accounted for nearly half of total sales. Because of
tightening restrictions on textile trade in the United States and other
developed countries, China is trying to diversify its exports but has not yet
been very successful. Exports of oil, oil products, and pharmaceuticals have
increased substantially, but sales of most other goods have been less dra-
matic.
Chinese purchases of US goods have changed character. Once they were
predominantly raw materials-textile fibers, grain, wood, chemicals-but
an increasing share is now industrial machinery and other finished manufac-
tures, technologies, and services.
We expect much of the growth in bilateral trade for the next few years to
stem from expansion in joint ventures and other cooperative and investment
relationships. China has taken several steps to open its economy to increased
foreign participation. We estimate that US investment in joint ventures,
offshore oil exploration, and other projects already totaled nearly $0.5
billion at the end of last year. Since then, the investment pace has probably
picked up, bolstered by an active campaign by the Chinese leadership to
encourage investment and by the exchange of visits by President Reagan
and Premier Zhao early this year.
We believe that over the next decade and more, US long-term investment in
China will generate sales of US machinery, raw materials, and services, as
well as purchases of Chinese or jointly made goods. Some Chinese products
may displace US exports to third-country markets, but few will have major
impact on US firms. Although China will continue to try to expand the
variety of its exportable commodities and to find alternative markets, we
believe that textiles will still be China's principal source of foreign exchange
and the OECD its principal market.
iii Secret
EA 84-10178
October 1984
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This means, in our view, that trade barriers will continue to plague the Sino-
US relationship, making market access the preeminent economic issue to be
faced in the next few years. Unless bilateral relations deteriorate consid-
erably, we do not believe Beijing will elevate trade disputes to a level that
could affect overall relations. But Chinese exports will persistently test any
trade barriers, and US moves to limit Chinese exports could spark selective
embargoes of US products. In addition, limits on textile trade have led
China to join with other textile-exporting nations to challenge US and
European protectionism; this will almost certainly cause further diplomatic
tensions.
China will also continue to press for loosening of US limitations on the
technologies available to it. Even though those limitations were liberalized
last year, China has felt obliged to turn from US to European suppliers for
some technologies. Their search for alternative suppliers also is motivated by
the present inability of the United States to compete with concessional loans
available from France, Belgium, Japan, and others.
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Contents
Key Judgments
Evolving International Trade Ties 5
Diversifying Imports 8
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Figure 1
China: Highlights of Trade With the United States, 1972-84
Long-term grain
agreements signed
quadruple
jump
drop
Crude oil shipments
resume
Relations are
normalized
shipments surge
Chinese leadership
struggle I
China gets
MFN I
200 China buys
Export controls
lifted aluminum Crude oil
shipments
Wheat sales
fluctuate
US imports
US exports
Data from US Department of Commerce shows both
exports and imports on an f.o.b. basis.
Grain deliveries
end
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Prospects for
US-China Trade
The United States and China have enjoyed a trade
relationship for nearly 13 years. During that time, the
value of two-way trade has multiplied nearly 50-fold,
pushing the United States into third place among
China's trade partners (see table 1). When two-way
trade peaked in 1981 at $5.5 billion (see figure 1 and
table 2), the United States accounted for about 14
percent of China's total, but the share slipped to 10.4
percent in 1983. China ranked 20th among US
customers and 23rd among suppliers in 1983.
The relationship has not been painless. China has had
to compromise many long-held principles in order to
establish economic ties to the West. It has moved
from a philosophy of isolated self-reliance to one of
cautious cooperation. The Chinese reaction to in-
creased openness has ranged from euphoria-high-
lighted by a multibillion-dollar buying spree in 1977-
78-to a sullen but more realistic evaluation in 1979
of China's economic capabilities. The latest plan of
development for the rest of the century proposes to use
Western technology, investment, and trade to help
stimulate domestic economic growth.
The past few years have seen many firsts for China:
first foreign loans, first joint venture, first enterprise
wholly owned by foreigners. Attempts to expand
exports to the United States as rapidly as possible
have yielded additional, less rewarding firsts: first
antidumping complaint, first countervailing duty case.
China has shown remarkable ability to marshal re-
sources to take advantage of export opportunities;
unfortunately, these have been restricted generally to
narrow categories of extractive and light industries
and their volume has generated trade friction. A
greater diversity in its exports would alleviate some of
these frictions, but will require many years of eco-
nomic expansion and technological development. This
paper provides a status report on recent US-China
trade, a review of trends toward greater trade diversi-
ty, and a discussion of near-term prospects for further
trade frictions.
China's Exports to the United States
US purchases of Chinese goods increased steadily
from 1972 to 1982 and contracted slightly in 1983.
Planning Minister Song Ping told the National Peo-
ple's Congress in May that total trade would fall 5
percent in 1984, but preliminary statistics indicate
unexpectedly strong growth in sales to US markets.
The United States absorbs about 10 percent of Chi-
na's total exports, ranking third behind Hong Kong
(25 percent) and Japan (20 percent). Textiles and
apparel dominate China's sales to the United States
(see figure 2); they averaged 37 percent of total sales
in 1978-82, jumped to 45 percent in 1983, and hit 46
percent in the first half of 1984. The United States is
the second-largest importer of Chinese textile prod-
ucts, surpassed only by Hong Kong.
Beijing has tried to diversify its exports in response to
world restrictions on trade in textile products. So far,
however, diversification of exports to the United
States has been largely within the textile and apparel
sectors-from sensitive categories to those not yet
restricted-rather than into other industries. Plans to
increase textile export value by selling higher value
products have not been successful; the average price
per unit has fallen steadily from 1981 through mid-
1984. Only oil and oil products have gained signifi-
cantly since 1978 and last year represented 19 percent
of US imports (see table 3).
Because of increases in sales of textiles, apparel, and
oil products, China's exports to the United States
have actually become more concentrated ` among
' Lorenz curve techniques permit an evaluation of China's trade
diversity. For exports, three-digit SITC commodities were ranked
in terms of the amount of the foreign exchange earned by them, and
cumulative earnings shares are measured on the vertical axis. A
diagonal across the Lorenz box would indicate that an equal
amount of foreign exchange was earned by each three-digit com-
modity group. For imports, foreign exchange expenditures were
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Table 1
Trade Partner Rankings, 1983
1
Hong Kong
5.8
1
Japan
4.9
2
Japan
4.8
2
Hong Kong
2.5
3
United States
2.3
3
United States
2.2
1
Canada
37.0
1
Canada
52.1
2
Japan
21.6
2
Japan
41.2
3
United Kingdom
10.3
3
Mexico
16.8
9
South Korea
5.7
9
France
6.0
10
Belgium/Luxembourg
4.9
10
Italy
5.5
11
Taiwan
4.4
11
Indonesia
5.3
15
Spain
2.9
15
Saudi Arabia
3.6
16
Switzerland
2.7
16
Algeria
3.6
17
Venezuela
2.7
17
Netherlands
3.0
18
Hong Kong
2.5
18
Singapore
2.9
19
Brazil
2.5
19
Switzerland
2.5
20
China
2.2
20
Sweden
2.4
21
South Africa
2.1
21
Belgium/Luxembourg
2.4
22
Egypt
2.1
22
Netherlands Antilles
2.4
23
USSR
2.0
23
China
2.3
a Chinese data are from IMF statistics; US data are from UN
bilateral commodity trade statistics.
goods sold in large volumes (see figure 3). Yet for low-
volume goods, China's exports to the United States
are becoming more diverse as China enters new
product markets. Even so, US purchases are still more
concentrated overall than those of China's major
European trading partners. Germany, France, and
England buy fewer textile and oil products and more
foodstuffs, tools, and traditional Chinese products.
In spite of China's reliance on textile and oil products,
its exports to the United States generally are more
diversified than those of India, Argentina, Yugosla-
via, and other countries at roughly comparable stages
of development (see figure 4). In 1983, the variety of
Chinese sales to the United States was about the same
as that of South Korea.
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Table 2
China: Trade With the United States, 1972-84 a
Total Trade
Exports
Imports
Trade Balance
Cumulative Trade
Balance
-707
-148
32
-541
1979
2,318
594
1,724
-1,130
-3,135
1980
4,814
1,059
3,755
-2,696
-5,831
1981
5,478
1,875
3,603
-1,728
-7,559
1982
5,187
2,275
2,912
-637
-8,196
1983
4,425
2,252
2,173
79 b
1984
Jan-Jun
2,644
1,482
1,162
320
a Data are from UN bilateral commodity trade statistics.
b Chinese customs statistics show a deficit in 1983.
China's Imports From the United States
Chinese purchases from the United States have fluc-
tuated more than sales. They peaked at $3.8 billion in
1980, or 20 percent of China's total imports. By last
year, US sales had dropped to $2.3 billion (see table
2), or 12 percent of China's total. The drop is largely
due to declining purchases of US wheat, cotton, and
textile fibers. Major trade items over the past decade
have been grains, textile fibers (cotton and synthetic),
fertilizers, wood, and plastics. In recent years, China
increased purchases of US industrial machinery, of-
fice equipment, and commercial aircraft (see table 4).
China's imports of US goods have diversified consid-
erably through early 1984 but still are much more
concentrated than those of comparably developed
countries-only East European imports, as illustrated
by Yugoslavia in figure 5, are less varied. Because
agricultural products are so dominant in Sino-US
trade, China's imports of US goods also tend to be
more concentrated than imports from Western Eu-
rope or Japan, which feature wide varieties of metal-
lurgical products and manufactured goods.
Trade Balances
Bilateral trade imbalances are important to policy-
makers in both Washington and Beijing. Chinese
purchases have exceeded sales to the United States in
all but a few years. While both sides view the bilateral
relationship in the context of overall trade, China
presses the United States for balanced trade and has
urged US officials to rectify the deficit. Trade and
Finance Minister Chen Muhua raised the issue in
May at the Joint Committee on Commerce and Trade
meetings in Washington. She claimed a cumulative
bilateral trade deficit of $12 billion for 1972-83;
according to US trade statistics, the figure is closer to
$8 billion (see table 2). One reason for this discrepan-
cy is that the Chinese include some services and
software in their trade statistics that do not register in
US merchandise trade data. In addition, China lists
imports c.i.f., thus including insurance and freight
fees that are not included in the analogous US f.o.b.
export data.
Lower level trade officials periodically argue that
continued deficits could force them to reduce imports
of US goods in order to balance bilateral trade. We
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Figure 2
China: Exports to the United States, 1978-83
believe that the Chinese try to use the deficit issue
primarily to pressure commercial interests to buy
more Chinese goods and political interests to reduce
restrictions on Chinese exports. However, because
China maintains offsetting trade surpluses with other
countries, the deficit argument itself carries little
Table 3
Highlights of China's Exports
to the United States, 1983 a
Value
(million
US $)
Share
(percent)
1,025.8
45.7
57.7
2.6
Crude oil
78.6
3.5
Intermediate manufactures
390.4
17.4
Textile yarn and fabrics
240.7
10.7
Crude materials
97.4
4.3
Barium sulfate and carbonate
26.2
1.2
Down and feathers
7.7
0.3
Machinery, transport equipment
42.2
1.9
Miscellaneous
10.2
0.5
Beverages and tobacco
4.2
0.2
Beer
2.4
0.1
a Data are from US Customs Bureau; totals may differ from IMF
and UN data in tables 1 and 2 due to differences in exchange rate
conversions and commodity coverage. US imports are valued on a
free alongside ship (f.a.s.) basis.
economic merit.
Indeed, the Chinese are quite willing to use trade as
leverage in economic disputes and have become in-
creasingly skillful in manipulating American industry
pressure on Washington policymakers. For example,
in 1983 they embargoed a few US products in
retaliation for US import restraints on Chinese tex-
tiles.' At the same time, Chinese buyers privately told
US traders in the forest products, agriculture, and
possibly other sectors that those products were vulner-
able as well. The resulting outcry from those indus-
tries complemented China's diplomatic opposition to
the demands of US textile and apparel producers for
tighter quotas.
2 The Chinese selected the embargoed categories-synthetic fibers,
cotton, soybeans, and, later, wheat-carefully. They already had
ample supplies of most of the affected products, had already
reduced purchases of cotton, believed US wheat prices were too
high anyway, and could fill any remaining requirements from other
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Figure 3
Changes in the Diversity of China's
Exports to the United States, 1980-83
Percent share of exportable commodities
80 60 40 20
High-volume: reduced diversity
Low-volume: increased diversity
1980
1983
China is becoming more active in the world economic
scene, expanding its trade and investment linkages
and participating more in international economic or-
ganizations. Its higher profile has attracted the inter-
est of foreign firms and forced, albeit very slowly,
Chinese accommodations to standard international
business practices. We believe a prime area of poten-
tial trade growth over the next decade will be that
evolving from direct ties between foreign and Chinese
firms, such as joint ventures, coproduction, and coop-
erative project development. These arrangements gen-
erate both imports-technology, materials, and equip-
ment-and exports.
Over the past five years the Chinese have undertaken
several steps to increase foreign participation in their
Table 4
Highlights of China's Imports
From the United States, 1983 a
Value
(million
US $)
Share
(percent)
2,173
100.0
235
10.8
Construction, mining equipment
52
2.4
Office equipment
54
2.5
Food
541
24.9
536
24.7
354
16.3
168
7.7
Plastics
92
4.2
Crude materials
300
13.8
Conifer logs
228
10.5
Manufactures
220
10.1
a Data are from US Customs Bureau. US exports are valued on a
free on board (f.o.b.) basis.
economy through trade and investment:
? Opened 19 coastal sites to foreign investment, offer-
ing more liberal business terms than offered else-
where in China.
? Passed laws governing taxation, liability, patent
protection, trademarks, and investment procedures
for foreign firms.
? Expanded the array of products of joint Chinese-
foreign firms that may be marketed within China.
? Held many investment conferences to publicize
hundreds of projects for which the Chinese want
Western technology, equipment, capital, manage-
ment, and marketing.
? Negotiated tax, investment, and other cooperation
accords with several countries to clarify such issues
as expropriation policy, arbitration procedures, re-
patriation of profits, and labor compensation.
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Figure 4
Selected Countries: Comparison of the Diversity
of Imports From the United States
Percent share of importable commodities
80 60 40 20
Argentina
India
Yugoslavia
China
US Investment in China
US firms have established nearly two dozen joint
ventures, one wholly owned subsidiary, and countless
cooperative arrangements (licenses, compensation
trade, assembly or processing accords, and buy-back
deals) in China since 1979. According to the Ministry
of Foreign Economic Relations and Trade, US invest-
ment in equity joint ventures was about $85 million at
the end of 1983.3 In addition, US firms are involved
extensively in China's search for offshore oil, with
contracts costing US companies about $300 million.
Together with cooperative arrangements, we estimate
that US investment in China now totals approximate-
ly $500 million. By contrast, Occidental's contract,
signed this spring, to develop coal mines at Ping-shuo
will cost the participating US firms about $350
million.
' Statistics vary depending on the source of funds, the type of
venture, the exchange rate, and whether one is measuring commit-
Figure 5
Selected Countries: Comparison of the Diversity
of Exports to the United States
China
Argentina
Yugoslavia
India
More than 150 American companies now have offices
in Beijing, Shanghai, or Guangzhou. Many firms are
reluctant to become more deeply involved, however,
largely because of the fluid nature of Chinese laws
governing-and protecting-foreign investment. In
addition, potential new entrants may not be willing to
accept the early losses some firms have taken in order
to better take advantage of future business opportuni-
ties. Finally, firms already engaged in business in
China discourage others with tales of poor business
and residential facilities, bureaucratic confusion,
higher-than-expected costs, and arbitrary assessment
of customs duties. Although such complaints
generally are valid, we suspect some businessmen
exaggerate them to dishearten potential competitors.
Percent share of exportable commodities
80 60 40 20
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Over time, operating conditions will improve as China
gains experience with Western business practices and
refines its legal and bureaucratic structures and as
Western businessmen adjust their expectations. Ac-
cording to press reports, more than half of all of
China's equity joint venture contracts were signed in
1983, suggesting that investor confidence had in-
creased. An active campaign by the Chinese leader-
ship to encourage foreign investment appears to have
helped. The exchange of visits by Premier Zhao
Ziyang and President Reagan early this year under-
scored the positive bilateral relationship and reassured
the American business community. Nonetheless, the
level of new US investment in China this year remains
to be assessed.
Seeking To Diversify Exports
China's early forays into export expansion have fo-
cused on improving, packaging, and marketing tradi-
tional light industrial products. Early 1984 trade
statistics suggest a growing export capability in such
product groups as toys, collectibles (coins, antiques),
housewares (wicker, china, plasticware), and chemi-
cals. The Chinese, especially through joint foreign-
Chinese firms, are actively searching for additional
marketing opportunities.
There is scant detailed information on China's future
export plans, but information from the press and from
US and other industrialists suggests that China has
expansive long-term goals. Vice Premiers Tian Jiyun
and Li Peng separately announced in July that China
gradually will become an exporter of grains, cotton,
and edible oils.' China has boosted productivity, and
favorable growing conditions already have permitted
sales of cotton and corn. Nevertheless, we believe that
weather-related growing conditions will fluctuate in
the future and that the needs of China's growing
population will work against volume export of unproc-
essed agricultural products
China's long-term economic plans apparently include
substantial growth in machinery and equipment ex-
ports as well. Beijing already exports such machinery
as basic machine tools and small hydropower genera-
tors. Various ministries, corporations, factories, and
provinces have developed at least tentative plans to
upgrade their manufacturing facilities and to improve
output quality in order to become competitive in world
markets within the next five to 15 years. Specific
products include machine tools, automobile parts,
trucks, process controls, chemicals, and nuclear power
plants. China is pushing electronics development in
particular, driving to double by 1990 the output of
semiconductors, communications equipment, comput-
ers, and consumer electronics for both domestic use
and export.
As China's exports expand, they will repeatedly en-
counter trade barriers. US, Japanese, and European
authorities already have imposed extra import duties
or other limitations on some Chinese exports. China's
economic reforms stimulated some of these problems.
Decentralization of trade responsibilities and empha-
sis on profitability thrust factories and local trade
organizations into unfamiliar international trade ac-
tivities. Consequent underpricing of some goods in
world markets resulted in antidumping investigations
and duties.
A tightening of trade authority in early 1984 will help
eliminate some of the confusion. Nonetheless, China
will continue to push into world markets whenever
possible, and increased Chinese exports coupled with
protectionism among major importing countries
promise to produce additional frictions. Even though
China rejects trade restrictions as antithetical to free
trade, the government has reluctantly cooperated with
antidumping investigators. Nonetheless, we expect
Beijing to remain highly sensitive to trade restrictions
and to work with other developing exporters, particu-
larly within the GATT framework, to force less
constrained world trade
To reduce the chances of triggering the protection
mechanisms of importing countries, China tries not
only to diversify its product array but also its markets.
This has been particularly true of textiles and apparel
because they account for such a large share of China's
export earnings that Beijing cannot afford simply to
reduce sales. During the tough textile negotiations
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with the United States in 1982-83, China approached
several nations-including Australia, Brazil, the
USSR, and those in Eastern Europe-for additional
of many imported products, led by fertilizers, synthet-
ic fibers, and steels. Agricultural reforms also were
designed to bolster production and decrease depend-
ence on imports.
textile sales, with only minor success.
We believe China's attempts to expand exports to
alternative markets will not relieve trade pressures
with the United States and other developed importers.
Increased trade with the USSR and Eastern Europe
would be largely on a barter basis. Other potential
customers are developing countries that compete with
China in exporting sensitive categories of goods-
such as textiles or footwear-to OECD markets and
would not import those goods from China. Conse-
quently, the United States and other OECD countries
will continue to be China's main buyers, with all the
potential for friction that entails
Diversifying Imports
China's interests in industrial advancement, export
development, and self-reliance will stimulate new
import patterns. During the next few years, we expect
capital goods and software-designs, blueprints, and
training-to constitute a greater share of Chinese
imports, while the share taken by agricultural prod-
ucts ebbs.
China has more than 300,000 industrial enterprises
that need at least some capital improvements and
massive infrastructural development. More than $16
billion in foreign exchange reserves (excluding gold
holdings) and additional billions in untapped foreign
loans have long suggested an imminent ground swell
in capital imports. However, Beijing is wary of anoth-
er massive surge in plant and equipment purchases
like the 1978 binge that led to contract cancellations
and embarrassment. Thus many projects to upgrade
factories are being undertaken with foreign invest-
ment and advice or under the auspices of Western
assistance programs. Cumbersome decisionmaking
processes, extensive negotiations, unrealistic demands
on foreign firms, and time-consuming feasibility stud-
ies are slowing the expected pace of equipment pur-
chases.
even China's joint venture poli-
cy now calls for projects that stress import substitu-
tion as opposed to exports.
Partly because of the agricultural reforms and also
because of good crop conditions, China has enjoyed
four successive years of record harvests that lowered
imports of cotton, wheat, and soybeans. For most
industrial products, however, rapidly expanding con-
sumption or unexpectedly slow completion of new
facilities have frustrated Beijing's attempts at import
substitution. Nonetheless, import substitution has
slashed the growth rate of purchases of industrial
materials. For example, we estimate that by the end
of the decade China's urea output may reach 4 million
tons, about the level of 1983 production plus imports.
Polyester output should at least double the 1983 level
of production plus imports. Although we expect de-
mand to continue rising, import growth should be at
slower rates than during the late 1970s and early
1980s
The Chinese also try to diversify their imports from
the United States and other countries by seeking
alternative suppliers. And Chinese traders play world
markets astutely. Although some orders are placed in
the name of friendship or international good will,
most are based on favorable price, quality, and financ-
ing arrangements. At the same time Beijing wants to
avoid being dependent on one supplier for particular
products. Chinese negotiators show great skill entic-
ing firms to bid on projects and then playing the firms
against one another.
Concessional financing and transfer of know-how are
important criteria in China's selection of suppliers of
capital equipment and industrial processes. The Chi-
nese want the latest technologies and, as senior policy
adviser Huan Xiang indicated last August, they be-
lieve the United States will be the world leader in high
technology for some time to come. Even so, China also
Many of China's more massive development projects
are ultimately aimed at import substitution. Over the
past decade, China has imported plants, equipment,
and technology in order to boost domestic production
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purchases used, less technologically advanced plants,
such as those shut down during the recession of 1982,
and has contracted with international investment
firms to find and buy even more used plants and
equipment (see table 5).
China also seeks commercial ties with newly industri-
alizing countries, both to cement political relations
and to exploit the nascent technical strengths of those
nations' industries. Ties to Brazil, for example, have
increased substantially in the last few years. China
has purchased industrial machinery from Brazil, and
in May 1984 the two countries signed protocols
covering technical exchanges and cooperation in in-
dustrial development, hydropower, and nuclear ener-
gy. China is establishing similar arrangements with
several other Latin American, Middle Eastern, and
Southeast Asian countries.
Prospects for US Firms
Prospects are mixed for long-term involvement in
China by US firms. The Chinese generally prefer US
technology and industrial equipment. But US firms
are handicapped somewhat by the lack of concessional
financing and by delays in agreement on or implemen-
tation of bilateral pacts regarding taxes, investment,
nuclear and other technology controls, and other
pertinent business facilitation accords.
Nonetheless, the outlook for US investment is good.
So far, Chinese officials are disappointed by the
reluctance of American companies to invest in China,
but we expect the pace to pick up, especially once a
bilateral investment treaty is concluded.' Beijing is
authorizing more jurisdictions to negotiate foreign
investments directly, and US firms will doubtless be
involved. Most such projects will likely be relatively
small, however, and may prove profitable but not
lucrative to the average investor.
Table 5
China: Selected Purchases
of Used Factories
Aluminum extrusion plant
Industrial sewing machine plant
Steel products mill
Semiconductor line
Textile dyeing mill
Textile spinning mill
Other deals still under discussion
Fiberboard plant
Ethylene plant
United States
Italy
United States
United States
Federal Republic of Germany
United States
United States
Japan
support; financing acceptable to the Chinese can be
difficult to arrange; and unfavorable market changes
during the prolonged development period can under-
mine plans to export the product. Other events,
though not necessarily directly related, will strongly
influence the prospects for future large projects. For
instance, if oil companies do not find major offshore
deposits within the next few years, their financial
losses will dampen the investment environment.
In addition to increasing potential for US investment
in China, we believe opportunities for sales of equip-
ment and industrial raw materials will also expand.
China has a continuing need for foreign expertise,
technology, and equipment to modernize old indus-
tries and develop new ones. In the wake of last year's
liberalization of technology controls, some observers
speculated that US technology sales could reach $2
billion in 1984 alone. We believe that, although
contracts may reach $2 billion this year, that amount
would not necessarily be reflected in 1984 US trade
statistics because shipments, which could be drawn
out over several years, do not register as exports until
they pass through US Customs.
In contrast, such large-scale Sino-US projects as the
Ping-shuo coal deal are likely to be few in number.
Because of the size and complexity of this type of
project, China can overestimate its ability to meet
contractual obligations for infrastructure and other
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We believe that China would like to have US assist-
ance or involvement in nearly every economic sector
(see table 6). In addition to outright, one-time pur-
chases, an increasing share of Sino-US trade stems
from long-term or recurrent supply relationships.
Joint ventures and other investments will generate
continuing sales of equipment and raw materials to
China; one American businessman asserts that an
important attraction to China is not the investment
project per se, but the promise of prolonged future
sales.
China also will continue to need certain industrial raw
materials in spite of plans to replace imports by
expanding domestic capacity. American firms are
likely to be a major source of imported phosphate,
urea, and compound fertilizers, for instance, as well as
other chemical raw materials whenever world prices
are depressed. The United States probably will con-
tinue to account for a large share of China's timber
imports.' We expect Chinese imports of US grains to
continue, too, though at a level lower than the 6-
million-ton-per-year minimum of the grain trade
agreement that expires this year.
In our judgment, services will be an important growth
sector in China during the next decade and American
firms will contribute to that growth. Tourism, leasing,
engineering, and project design already are expanding
rapidly. We expect China to contract for additional
consultancies or joint ventures in these and such other
fields as finance, insurance, and market research.
Two other categories will highlight US exports to
China in the coming years. We expect sales of defense
equipment and technologies to gain importance now
that China is eligible for foreign military sales. The
Chinese already are negotiating with manufacturers
for several weapon systems. Finally, shipments of
products from firms in the United States that are at
least partly owned by the Chinese are likely to rise. So
far, China has acquired part ownership of a few small
electronics firms to bolster its technological develop-
ment and has purchased some large stands of timber
to guarantee availability in the event of future tight
markets.
Table 6
China: Sectors With High Potential
for Commercial Links
With the United States
Energy
Oil
Coal
Hydropower
Nuclear power
Transmission
Conservation
Communications
Satellite
Telephone
Fiber optics
Transportation
Air
Rail
Road
Tires, parts
Traffic control
Agriculture
Food processing
Agricultural equipment
Agricultural chemicals
Computers/electronics
Plastics/synthetic materials
Pollution control systems
Although US exporters look forward to increased
sales to China, several have expressed concern that
expanded Chinese exports will compete with US
products in third-country markets. Some firms refuse
to sell technologies to China for fear of creating a
future competitor. We expect China to develop export
capabilities in many products, but generally at neither
the volume nor the level of sophistication available
from healthy Western businesses.
We believe the Chinese will not be able to absorb
technologies fast enough for finished manufactures to
become a significant share of exports within the next
decade or so. China's ability to absorb technologies
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has been circumscribed by a shortage of skilled
personnel, lack of incentives for plant officials and
planners, poor planning and prioritization, and other
factors. We believe that Chinese industries will pro-
gress technologically, but their average technical level
will continue to lag that of the developed world.' F_
It is likely, however, that China will substantially
expand component assembly operations under the
auspices of Western firms. Machine tool sales, partic-
ularly of those tools that are of relatively uncompli-
cated designs and require predominantly hand ma-
chining and assembly, probably will increase. Exports
of such small manufactures as hand tools, spare parts,
and industrial fasteners also are likely to show rapid
growth. Some of these products could displace the
sales of US firms, but no more so than similar exports
already coming from Pakistan, Taiwan, South Korea,
and others.
Beijing is trying to increase the area planted in cotton
and oilseeds, which may cause problems for American
farmers. Since world textile quotas will limit the
amount of cotton products China can export, we
expect raw cotton exports to rise. China already sells a
small amount of cotton and, according to internation-
al traders, offered larger-than-normal amounts for
sale this spring. The Chinese should be able to export
cotton competitively if they can conform to world
standards in terms of quality and bale size. China
may also be able to export more soybeans and soybean
products. Over the next few years, Japanese soybean
importers intend to switch some purchases to China
from the United States in order to diversify their
sources; Chinese soybean producers intend to buy
modern presses in order to produce export-quality
soybean oil and meal. China will likely push sales of
soybean products to Japan as other ex orts, such as
oil, decline
Chinese coal is another commodity generating con-
cern among US suppliers, who worry that Chinese
coal will displace their sales in Japan and possibly
elsewhere in Asia. We expect China to remain a
relatively minor exporter of coal because of the
primary role coal plays in meeting China's energy
needs.' Exports from its joint ventures nevertheless
may displace others in the Japanese market. The
major threat to US coal exports is more likely to come
from Australia, which sells Japan three times as much
coal as the United States and 10 times as much as
China.
Chinese Exports to the United States
We expect Chinese exports to the United States a
decade from now to strongly resemble the current
array. Textiles will continue to be China's principal
source of foreign exchange. If oil production declines,
oil exports may have to be diverted to fill domestic
needs and, together with tightening restraints on
textiles, may slow the rate of growth in China's
exports. The fastest export growth will probably be in
sectors under development now: foodstuffs, chemicals,
small machinery, housewares, consumer electronics,
and metal products-all industries now undergoing
expansion, largely in cooperation with foreign firms.
Much of recent sustained export expansion can indeed
be traced to relations with foreign firms, particularly
compensation trade links established in the late 1970s.
Chinese pharmaceutical exports, for example, have
gone from $4.7 million in 1979 to $25 million in 1983,
an average annual increase of more than 50 percent.
Similarly, sales of toiletries were $6.6 million in 1979
and averaged 23-percent annual growth to reach $15
million last year. These product lines are still
being expanded with additional Western investment
in everything from traditional herbal medicines to
genetic engineering, promising continued strong
growth.
Market Access
We believe that market access will be the preeminent
Sino-US trade issue over the next few years. China
will complain about any real or perceived barriers to
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trade with the United States. However, unless bilater-
al relations deteriorate considerably, we do not believe
Beijing will elevate trade disputes to a level that could
affect overall relations. Still, the Chinese could repeat
the 1983 embargo in reaction to particularly offensive
US actions to underscore their concern about trade
limitations. Nonetheless, Chinese exports will persist-
ently test those barriers. The result will be recurrent
antidumping complaints and consultations on trade
levels and US import duties.'
Among its current complaints, China wants the Unit-
ed States to review its trade laws to eliminate obsta-
cles to closer economic ties. Restrictions on textile
trade have caused considerable diplomatic tension,
and restraints on technology exports, although liberal-
ized, have sent the Chinese to other countries for some
purchases.
In fact, one purpose of Zhao Ziyang's trip to Europe
this year was to encourage technology trade with the
European Community.
In addition to restrictions on textile and technology
trade, China objects to Export-Import Bank (Ex-Im)
provisions restricting loans to Communist countries (a
presidential waiver is required for credit to a Commu-
nist nation and for any loan exceeding $50 million)
and to being excluded from duty-free treatment of
trade under the Generalized System of Preferences.
Changes in US customs procedures, such as the
recategorization of gasoline into a higher tariff classi-
fication, also irritate the Chinese.
Restrictions on Chinese access to US textile markets
will remain a highly publicized irritant. Refinements
in US methods to determine market penetration and
identify country of origin have driven the textile ex-
porting nations, including China, together to press in
international venues for more liberal textile trade.
China now has joined not only the Multifiber Ar-
rangement, GATT's textile trade monitoring body,
but also the new Textile and Apparel Bureau, a group
of exporters who hope to work with consumers and
retailers to pressure US and European policymakers
to relax textile trade constraints. Chinese and US
interests will clash on these issues without mutually
satisfactory resolution for many years.
tions for accession to GATT must be completed.
China also will seek GATT membership, with ex-
panded market access as one goal. While China may
only accept accession terms that conform to its trade
plans, we believe that agreements to control surges in
Chinese exports, to provide trade and economic data,
or to sign GATT nontariff barrier codes are possible.
By acceding to GATT, China would meet the final
legal requirement for US Generalized System of
Preferences (GSP) status. With GSP, China would
qualify for lower import tariffs, thus reducing costs
and enhancing their competitiveness in the US mar-
ket. But first, careful and possibly prolonged negotia-
Financing
US firms seeking entree into the China market will
face strong competition from European and Japanese
firms, which can more readily arrange financing at
concessional rates. The Overseas Private Investment
Corporation (OPIC) has financed feasibility studies
and insured several projects, but OPIC does not
provide large-scale financing. Although Ex-Im loans
can be obtained for Sino-US transactions, the Bank's
rates are not presently competitive with government-
backed loans available from Japan, Belgium, and
others
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