China's Trade Performance
Published April 2006
Summary
- After tripling in 2005 to $101.8 billion, China's trade surplus in the first quarter of 2006 remained stubbornly strong, reaching $23.3 billion.
- Export growth was 26.6 percent in the first quarter, slightly slower than the 28.4 percent export growth of 2005.
- China became a net steel exporter for the first time in 2005 and may continue to export more than it imports in 2006 as the economy continues to feel the effects of domestic over-production and stagnant imports from last year.
- The April 2006 Joint Commission of Commerce and Trade (JCCT) resulted in measured progress on key issues. Concerns about the political fallout in the United States and Europe of China's large trade surplus led PRC policymakers to encourage imports in 2006.
- In 2005, the Philippines bumped Hong Kong from the list of top 10 import suppliers for the first time in decades, thanks to Philippine exports to China of more than $12 billion. This shift reflects a broader trend of rising PRC imports from Southeast Asia.
China's Rising Trade Surplus
The large expansion in China's trade surplus, which hit $101.8 billion in 2005, was a lead headline in China's trade story for much of 2005. The surplus is dramatically larger than trade surpluses for 2001-04, when China's global surplus averaged $27.6 billion. Most analysts cited slowing import growth as the key factor in China's rising trade surplus because the export growth rate for 2005 was actually 7 percentage points below export growth during 2004, according to statistics from the PRC's General Administration of Customs. Many trade analysts attributed stagnant imports in 2005 to a combination of excess domestic capacity in key sectors such as steel and weak investment demand in key sectors such as construction, raw materials, electronics, and machinery. The government attempted to slow excess investment in these overheated sectors last year; import growth picked up in the second half of 2005 as these sectors recovered from the government's credit clampdown.
During the first quarter of 2006, though domestic consumption was up, import demand for heavy industrial chemicals and metals was still slack. UBS cites this weakness as the main reason China's first quarter trade surplus was so high.
China's Exports
Growth slows but still faster than expected
China's exports grew 26.6 percent to $197.3 billion in the first quarter, after reaching $762 million in 2005, 28.4 percent over 2004. The 2005 growth in exports, though smaller than the 35.4 percent export growth in 2004, greatly surpassed Ministry of Commerce (MOFCOM) expectations in early 2005 of annual export growth of between 16 and 18 percent. While export growth was lower for some of China's largest product categories, such as power generation equipment and electrical machinery, export growth rose significantly for lower-value products such as footwear and toys. Elsewhere in the economy, the PRC government's efforts to curb over-investment in sectors such as property construction and heavy industry lowered domestic demand. This prompted domestic producers of related goods (such as steel) to look overseas for markets for excess supply and led to the large jump in the overall trade surplus.
Steel
China is the world's largest manufacturer and consumer of steel. New capacity in the domestic industry led to large output increases and prompted the government's clampdown on the industry, which weakened domestic demand by mid-2005. As a result, domestic producers turned to global buyers to offload their surplus and China became a net exporter of iron and steel for the first time last year.
In the long term, China's consumption of raw materials such as steel will affect global prices to the extent that China's production keeps pace with domestic demand. If domestic demand outstrips Chinese production, global prices of such materials will rise as China imports more to meet demand, and China will remain an important market for the raw materials of resource-rich countries. If domestic demand for commodities such as steel does not materialize, however, China will remain a net exporter of steel, and its trade surplus may not decrease. Possibly signaling weaker domestic demand and overcapacity, domestic profit margins fell 74.6 percent during the first two months of 2006 and are expected to ease throughout the year.
High-tech goods
Exports of high-tech products (a general term Customs uses that includes a variety of products such as computers, electronics, aerospace technology, and telecom equipment, among others) grew 31.8 percent in 2005, accounting for 28.6 percent of all of China's exports. In February 2006, China announced that from 2006-20 it would increase research and development (R&D) spending to 2.5 percent of GDP (in 2004, R&D made up 1.23 percent) in an effort to reduce reliance on foreign technology and ensure that China ranks among the world's top five patent-holding countries. It is too soon to tell whether this government effort will translate into even greater exports of these technologies.
China's Imports
Growth picks up in first quarter—but not enough
Import growth of 24.8 percent in the first quarter of 2006 was 12.6 percentage points above the rate registered in the first quarter of 2004. But, at $174 billion, import demand was not strong enough to offset exports. It appears that the 2005 trends--particularly weak demand for metals and industrial chemicals--have not yet fully played themselves out.
Last year, import growth of 17.6 percent was less than half of the import growth registered in 2003 and 2004, when imports increased at 39.9 and 36 percent, respectively, year on year. Among China's top 10 imports by value, the commodities that saw the highest growth in 2005 were base minerals used in smelting, and mineral fuel and oil. Chinese imports of ore, slag, and ash commodities rose by 50.6 percent in 2005. Mineral fuel and oil commodities increased by 35.5 percent. The fact that these commodity groups saw the largest amount of growth over the past year indicates that they are increasingly important to China's economy. At the same time, growth rates of both of these commodities slowed from 2004 levels, when spikes in demand established a high basis for comparison.
PRC officials have already implemented most of China's World Trade Organization (WTO)-mandated tariff reductions; the overall import tariff level dropped to 9.9 percent on January 1, 2006. The average import tariff for manufactured goods is 9 percent this year; the average import tariff on agricultural products is 15.2 percent. Thus, lower import tariffs are unlikely to affect the level of imports significantly in the future.
China's Trading Partners
The countries on China's list of top 10 trading partners remained unchanged in 2005. Last year Russia surpassed the Netherlands to become China's ninth-largest trading partner, largely because of Russia's increased imports from China. Growth rates declined for most partners as a result of weaker Chinese demand. The Philippines knocked Hong Kong from the list of top 10 import suppliers for the first time in decades because of increased Philippine exports to China, chiefly in electronic machinery and power generation equipment exports. This trend may continue through 2006 in light of the Philippines' participation in the Association of Southeast Asian Nations (ASEAN)-China Early Harvest Program, which allows agriculture shipments from the Philippines to enter China directly, circumventing Hong Kong. (Under the ASEAN-China Free-Trade Agreement [FTA], tariffs for the majority of normal trade products exchanged among the countries will be eliminated by 2010.) Overall, China's increasing ability to import goods directly is diminishing Hong Kong's role as an import conduit for goods entering China.
China pursued numerous FTAs in 2005. In May, Australia and China launched FTA negotiations, and Australia designated China a market economy for purposes of evaluating trade disputes. Negotiations are expected to be controversial, however, and could last up to five years. FTA negotiations with New Zealand continued in 2006 with the sixth round of talks taking place in March. The seventh round is tentatively scheduled to take place in New Zealand on May 15. Negotiators are reportedly hoping that China and New Zealand can work out a comprehensive deal by year's end although no deadline has been set. In October of last year, China concluded negotiations with Chile to establish an FTA, the first nation in Latin America to establish an FTA with China, as well as recognize it as a market economy. The FTA covers tariff reductions in goods trade, although many exceptions were granted for sensitive products such as rice. Both countries will launch the tariff reduction process in the second half of 2006. January 1, 2006 saw the first stage of implementation of the Early Harvest Program between China and Pakistan. The program will phase out tariffs on various products over a three-year period, eventually bringing tariffs on certain products to zero by January 1, 2008.
US-China Trade
Overall US-China trade topped $285 billion in 2005, expanding 23.3 percent year on year. US imports surpassed $240 billion, although no single product category dominated US imports. Import growth was fairly even across major product categories of appliances, machines, recording devices, and communications equipment. US imports of textiles and apparel grew 56.8 percent, significantly higher than in previous years, mainly because global textile quotas expired on January 1, 2005. Because of significant political pressure in the United States, China reached an agreement with the United States in November that establishes annual quota increases for 34 categories of textiles and apparel. While the US textile industry was moderately satisfied with the deal, textile importers were less enthusiastic. Since not all product categories were included in the agreements, textiles could lead to trade tensions in 2006.
Imports of steel from China jumped 31 percent from 2004 to 2005, resulting in complaints from US industry. In October 2005, the US International Trade Commission (ITC), acting on a petition from US steel pipe producers, determined that imports of steel pipe from China had caused market disruption and voted to approve limits on imports. On December 30, President George W. Bush overturned ITC's decision. Washington also recently initiated a steel dialogue with China that seeks to resolve industry complaints without resorting to trade remedy procedures.
US exports to China rose 20.5 percent, driven in large part by aircraft exports, which jumped 124.6 percent in 2005. Otherwise, the composition of the US top exports to China remained unchanged. China is still a large consumer of US raw materials: Exports of base metals, ore, slag, and ash all leapt more than 170 percent.
Trade in services
The most recent year-end statistics for US-China trade in services are for 2004. For the first time China, which received $7.2 billion worth of service exports from the United States in 2004, became one of the top 10 export markets for US cross-border trade in services, although it still accounts for only 2.2 percent of US service exports worldwide. The 20.4 percent growth for 2004 is the highest growth rate in US cross-border service exports to China since 2000. US cross-border service imports from China reached $5.6 billion.
While imports of travel, passenger fares, and other transportation services totaled roughly $5 billion and made up the vast majority of US cross-border service imports from China, the largest segment of US cross-border service exports to China came from the provision of financial, telecom, education, and other business services. Exports of those services amounted to about $3.4 billion, roughly 47 percent of total service exports. This is important to note because China has either just opened or has still to open various service sectors under its WTO commitments. For example, China is not scheduled to open its banking sector fully until December 2006. If China fully implements its service commitments in accordance with the spirit of the WTO, US exports to China of the services in which it has a leading edge will likely increase at a healthy rate.
US service exports to China could also increase with better protection of foreign intellectual property rights. Data on cross-border trade in services include the payment of royalties and license fees, which US companies find difficult to collect in China. In 2004, royalties and license fees accounted for just 12 percent of US service exports to China, compared with more than 20 percent for US service exports to Japan and Europe. Year-on-year growth of royalties and license fees paid by China was just 10 percent and declined slightly from the previous year. PRC government efforts to support the development of domestic industry standards and technologies, particularly in information technology and high-tech industries, could further limit the growth of licensing and royalty fees.
Key Trends & Issues
Currency
Although some trade analysts predicted in the middle of 2005 that China's modest currency revaluation might affect China's trade position, others said it would have little effect, and indeed, an export slowdown did not materialize in the second half of 2005. Most trade analysts believe that PRC authorities will avoid making substantive changes to the renminbi's (RMB) value because of the pressure a stronger RMB would put on the export sector. In March, 2006 Premier Wen Jiabao announced that China would not make another one-off administrative revaluation of the RMB. Deutsche Bank predicts that the currency might strengthen 4 percent by the end of 2006 if China's trade surplus continues to expand. Beyond that, analysts generally agree that China will allow the RMB to appreciate only enough to appease critics but not enough to affect its economy or those of its trading partners.
Value-added tax
In August 2005, the State Council issued a notice to alleviate the financial burden on local governments in paying value-added tax (VAT) rebates to exporters by raising the central government's contribution to VAT rebate payments from 75 percent to 92.5 percent. The new notice applies to VAT rebates for products exported on and after January 1, 2005.
The previous 75-25 breakdown for the VAT rebate, which took effect January 1, 2004, had led to unsustainable financial imbalances. Local governments in areas where exported products are made collected the VAT, while the locations of final departure of these goods bore the burden for paying 25 percent of the rebate. Under the current system, exporters must claim the VAT rebate from the local government where they are registered--and not from where the goods are produced or exported.
Some analysts predict, meanwhile, that authorities might introduce a broad-based 3 percent reduction in VAT rebates in 2006 to put inefficient, polluting, or energy intensive industries out of business; these firms operate on very thin or no margins and rely heavily on the rebate. Indeed, the State Council has already eliminated the 17 percent VAT rebate for steel processed in free-trade or bonded areas. It has also revoked the 8 percent import-tariff-exemption on alumina imported for processing trade purposes and canceled the full 17 percent VAT rebate on domestic aluminum exported via export processing.
Export restrictions
In conjunction with several agencies, MOFCOM issued a directive, effective January 1, 2006, that restricts export processing of goods deemed "energy intensive." The government hopes this move will cut energy use and move China away from lower-value added export-processing activities. Specifically, the import and export of raw materials for pesticides, finished pesticides, dyes, timber, animal skins, and waste copper will no longer be permitted.
Import restrictions
The PRC government released new measures that limit the import of electronic products that contain certain hazardous substances. The PRC Administrative Measures for the Prevention of Pollution Caused by Electronic Information Products mandate the reduction or elimination of six substances--including lead, mercury, and cadmium--in electronic products that are manufactured and sold in China, as well as those that are imported into China. Products that are manufactured in and exported from China are exempt. The government had originally planned to put these measures into effect in 2006, but the date was pushed back to March 1, 2007.
What to Watch in 2006
Just before the April Joint Commission on Commerce and Trade (JCCT) meetings in Washington, the US Trade Representative (USTR) initiated WTO action to resolve a dispute with China over PRC import tariffs on auto parts. Because of China's large trade surplus with the United States, Washington is under pressure to scrutinize PRC trade policies. USTR's decision to file a WTO case was likely aimed at demonstrating US resolve to PRC officials in the run-up to the JCCT and responding to critics who believe that USTR has been too slow to bring WTO cases against China.
The JCCT meeting resulted in measured progress in areas that include:
Government procurement
China committed to begin formal accession negotiations for the WTO Government Procurement Agreement by the end of 2007, with preparatory technical discussions to occur before then. US business groups welcomed the setting of a specific date for the start of formal negotiations, though most--including USCBC--had sought an earlier start date. When China joined the WTO in 2001, it had agreed to begin such negotiations "as soon as possible."
Intellectual property rights (IPR)
China highlighted several actions it has taken in recent weeks to strengthen IPR protection. US officials viewed the PRC government's new directive requiring legitimate software to be preloaded on personal computers made and sold in China as an important step to addressing software piracy. US officials also saw signs of progress in the recent closure of 14 illegal optical disk facilities and additional enforcement actions in several major cities. PRC Vice Premier Wu Yi said these efforts resulted in the shutting down of 224 "production lines" and that Xiangyang Market in Shanghai--an area noted for selling infringing goods--will also be closed. China also highlighted the PRC State Council's recent proclamation that only legitimate software may be used on computers owned by the government and state-owned enterprises. US officials indicated that they sought to discuss with their PRC counterparts how this commitment would be verified, but the results of that discussion were not released in the public statement following the meeting. Finally, China also said that the legislative package for PRC accession to the World Intellectual Property Organization's Internet treaties will be submitted to the National People's Congress by the end of June. This would fulfill one of China's commitments made at last year's JCCT meeting.
Transparency
The United States noted improvements in transparency in China's legal and regulatory regimes. The State Council on March 30 issued a notice mandating that all trade-related laws, regulations, and other measures of all government bodies at all levels be published in MOFCOM's China Foreign Trade and Economic Cooperation Gazette. This commitment could help companies closely monitor legal and regulatory developments in China, though it does not address companies' desire for more regularized public comment periods on draft laws and regulations.
Agriculture
US and PRC officials also agreed to sign a memorandum of understanding on sanitary and phytosanitary (SPS) issues. US agricultural exporters have found China's implementation of SPS standards to be a market access barrier. Secretary of Agriculture Mike Johanns said that the signing of such a memorandum is "something we wish we could have with every country."
Other
China also committed to
- Reopen its market to US beef, once technical experts from both sides agree on an import protocol;
- Eliminate duplicative testing and certification requirements for imported medical devices;
- Make "appropriate adjustments" to capital requirements for telecom service providers, according to US statements. In her comments on the JCCT outcomes, however, Wu said only that "consideration would be given" to adjusting capital requirements;
- Adhere to technology neutrality in the issuance of licenses for third-generation mobile communications standards;
- Ensure that the new postal law and other rules will not negatively affect foreign express delivery service companies;
- Address active pharmaceutical ingredients, also known as bulk chemicals, in the work of the JCCT Medical Devices and Pharmaceutical Subgroup;
- Hold the second meeting of the JCCT Steel Dialogue with industry representatives later this year; and
- Establish a dialogue between the PRC government and US direct selling companies to address market access concerns. US government participation is possible in the future, but initial meetings will include only PRC officials and company executives.
Wu Yi surprised US officials when she announced at a press conference following the JCCT session that on April 7 China had submitted to the WTO secretariat in Geneva a report on government subsidies to industry. USTR Rob Portman said the issue had not been discussed at the JCCT and said his team was unaware of the report. USCBC understands that US officials have since been provided with the report, which will be publicized soon in accordance with WTO procedures. China's WTO entry agreement requires the submission of such a report, and at last year's JCCT, China committed to provide such a report by the end of 2005.
Separately, US officials agreed to work toward lifting a ban on imports of cooked poultry from China and facilitating the entry of PRC tourists to the United States via the JCCT Tourism Working Group. They also agreed to establish a US-China High Technology and Strategic Trade Working Group under the JCCT to review export controls and facilitate high-tech trade.
In recognition of the global concern about China's trade surplus, PRC President Hu Jintao, on his visit to the United States, indicated that China would try to pursue more balanced trade policies in 2006. These policies will most likely be implemented in conjunction with the 11th Five-Year Plan, unveiled during the March meeting of the National People's Congress. Under the plan, China hopes to upgrade its industrial structure, develop its service industries, and balance regional development. The State Administration of Foreign Exchange released a paper at the end of November 2005 calling upon the economy to import more high-tech goods to balance trade.
Nevertheless, some analysts do not see China's export-driven growth decelerating much in 2006. Hang Seng Bank forecasts that exports and imports will each grow 25 percent in 2006. Others are more measured in their outlook, citing estimates of 15 to 22 percent export growth and 20 to 24 percent import growth. These estimates are based on the assumption that the global economy will be weaker in 2006; that the transfer of light manufacturing from Europe and high-tech production from the United States will slow because the bulk of the transfer has already occurred; and that rising domestic costs, especially in land, raw materials, and minimum wages, will place significant cost pressures on exporters, which already operate on thin margins. These factors contribute to the general trend of a narrowing gap between the growth of Chinese exports to, and Chinese imports from, the United States.
| Table 1: China's Trade with the World ($ billion) | ||||||
|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
| Exports | 249.2 | 266.1 | 325.6 | 438.2 | 593.3 | 762.0 |
| % change | 27.8 | 6.8 | 22.4 | 34.6 | 35.4 | 28.4 |
| Imports | 225.1 | 243.6 | 295.2 | 412.8 | 561.2 | 660.1 |
| % change | 35.8 | 8.2 | 21.2 | 39.8 | 36.0 | 17.6 |
| Total | 474.3 | 509.7 | 620.8 | 851.2 | 1,154.6 | 1,422.1 |
| % change | 31.5 | 7.5 | 21.8 | 37.1 | 35.7 | 23.2 |
| Balance | 24.1 | 22.5 | 30.4 | 25.5 | 32.1 | 101.8 |
| Note: PRC exports reported on a free on board basis; imports on a cost, insurance, freight (CIF) basis Source: PRC General Administration of Customs, China's Customs Statistics |
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| Table 2: China's Top Trade Partners ($ million) | |||
|---|---|---|---|
| Rank | Country/Region | 2005 | % Change* |
| 1 | United States | 211,625.9 | 24.8 |
| 2 | Japan | 184,443.8 | 9.9 |
| 3 | Hong Kong | 136,708.1 | 21.3 |
| 4 | South Korea | 111,931.2 | 24.3 |
| 5 | Taiwan | 91,234.0 | 16.5 |
| 6 | Germany | 63,252.0 | 16.9 |
| 7 | Singapore | 33,149.1 | 24.2 |
| 8 | Malaysia | 30,703.0 | 16.9 |
| 9 | Russia | 29,103.1 | 37.1 |
| 10 | The Netherlands | 28,802.7 | 34.0 |
| Source: PRC General Administration of Customs, China's Customs Statistics | |||
| Table 3: China's Trade with the United States ($ billion) | |||||
|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | 2004 | 2005 | |
| US Exports | 19.2 | 22.1 | 28.4 | 34.7 | 41.8 |
| % change | 18.3 | 14.6 | 28.5 | 22.2 | 20.5 |
| US Imports | 102.3 | 125.2 | 152.4 | 196.7 | 243.5 |
| % change | 2.2 | 22.4 | 21.7 | 29.1 | 23.8 |
| Total | 121.5 | 147.3 | 180.8 | 231.4 | 285.3 |
| % change | 4.5 | 21.2 | 22.7 | 28.0 | 23.3 |
| US Balance | -83.1 | -103.1 | -124.0 | -162.0 | -201.7 |
| Note: US exports reported on a free alongside ship basis; imports on a general customs value, CIF basis. Sources: US International Trade Commission; US Department of Commerce |
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