 hina's trade with the world rose dramatically in 2002, up 21.8 percent over the preceding year. Exports and imports both rose more than 20 percent, leaving China with a $30.4 billion trade surplus, up by more than a third over the surplus in 2001 (see Table 1). Solid export gains came as a welcome surprise to Chinese officials who predicted, at the start of 2002, that import growth would outpace export growth as a consequence of China's entry into the World Trade Organization (WTO). US-China trade topped $140 billion in the first 11 months of 2002, according to the US Department of Commerce.
PRC trade forecasts for 2003 remain positive, but project somewhat slower growth rates, as the world economy remains sluggish. China's strong export performance is likely to continue into 2003. Most Western analysts forecast growth of between 15 and 20 percent, while Chinese estimates are more conservative. China's ExportsChina's rate of export growth was higher than any other economy's in 2002 and China became the world's fourth-largest manufacturing exporter. Intraregional trade was the principal contributor to China's steady export growth throughout 2002, with Japan topping the list of overall trade partners.China's exports to other Asian nations increased as companies from around the region moved their lower-end manufacturing processes to China. To use just one example: China's two-way trade with Malaysia jumped more than 50 percent in 2002, propelled by a 54 percent rise in PRC exports. Electronics and power generation equipment composed almost 60 percent of China's total exports to Malaysia. Composition of exports Exports of electronics accounted for nearly 37 percent of China's total exports. As shown in Table 2, China's exports of harmonized schedule (HS) code 84, which encompasses a wide range of power generation equipment, machinery, mechanical appliances, computer parts, and telecommunications equipment, shot up 51.3 percent in 2002. This far exceeded the Ministry of Foreign Trade and Economic Cooperation's (MOFTEC) goal of increasing mechanical and electrical exports by 10 percent in 2002.
China also recorded strong toy exports in 2002, making it China's fourth-largest export commodity for the first time. According to the China Toy Association, 95 percent of China's toy exports were processed for foreign companies The fact that China's export mix is weighted predominantly toward lower-end goods meant that PRC exports sold well in the United States and other slow economies in 2002. Exports from China also benefited somewhat from the weakening value of dollar against the euro and other currencies, as the RMB is unofficially pegged to the US dollar. There has been significant debate over the appropriate value of the renminbi, but several Chinese officials have stated that it is highly unlikely the PRC will revalue its currency (see China's Economy). Major exporters Exports from China's nonstate firms rose 27.6 percent in 2002, another contributing factor to China's overall export growth. In a sign of the important role foreign-invested enterprises (FIEs) play in China's export performance, 52 percent of China's exports in 2002 came from FIE manufacturers, according to the PRC General Administration of Customs (Customs). Of China's total exports, 42.1 percent came from FIEs engaged in processing trade, further evidence of the degree to which foreign manufacturers have integrated China into their global manufacturing operations. Government rebates A final contributor to China's strong export growth in 2002 was a sizeable jump in government export rebates, budgeted at RMB 100 billion ($12.1 billion) in 2002. In 2002, some Chinese exporters received tax breaks as high as 15 percent. According to the State Council's Development Research Center, exports could slow in 2003 if the government budget for export rebates does not increase. But Liu Deheng, deputy director of general affairs of the State Economic and Trade Commission has stated that the government cannot afford to earmark more funds for export rebates in 2003. Chinese domestic exporters are also concerned about the availability of funds as more and more exporters apply for rebates. The China Securities Journal notes that if funds do not rise, about half of those who applied for rebates in 2002 will not receive them in 2003. China's ImportsAlmost all of China's traditional import commodities saw double-digit growth in 2002 (see Table 3). PRC imports of autos and steel were of particular interest to foreign firms.
Autos China's automobile imports jumped 39 percent in 2002, propelled by deep price cuts because of lower tariffs resulting from China's WTO entry and more financing options for Chinese buyers. Total imports of complete vehicles for 2002 reached 127,000 units, of which more than 70,000 were cars. The value of imported vehicles, however, fell far short of the $7.94 billion quota amount that should have been available to importers in 2002. In 2003, import quotas will rise another 15 percent, and import duties will drop an additional 5.6 percent, in line with WTO obligations. Nevertheless, officials at the China Trading Center for Automobile Imports said in August that foreign automakers should not rely on importing their autos into China as the "government will continue to control vehicle imports and protect local manufacturers." In fact, many ports reported large stockpiles of imported vehicles as a result of the cost and difficulties associated with obtaining an import license. Japanese officials pressed the PRC government throughout 2002 to be more transparent in allocating import rights for autos. Automobile quota allocation was first delayed and then distributed in an opaque manner that prevented importers from obtaining the necessary import licenses. Steel A boom in the construction industry and a surge in auto production pushed China ahead of the United States to become the world's largest steel importer in 2002. Analysts expect China's steel consumption to grow 15 percent annually in the next three to five years. China's position as a steel importer has caused it to take steps to protect domestic producers: In November 2002, China announced safeguard measures that called for three years of import tariffs as high as 22 percent on five categories of steel products. The economies most affected by the tariffs include the European Union, Japan, Russia, and Taiwan. Japan was particularly hard hit as China is its largest steel market; it responded by requesting consultations through the WTO. China's domestic endusers also lodged complaints against the safeguard provision, which threatened to raise the cost of steel inputs. MOFTEC responded by rescinding some of the safeguard tariffs instituted on the five categories of steel products. China's Trade PartnersUS-China tradeChina's trade with the United States grew more than 18 percent in the period January-November 2002, with US exports to China up 15.2 percent to $20 billion (see Table 7). The United States remained China's largest export market and second-largest trade partner. The strong growth in US exports to China represents the largest growth figure for any US export market in 2002. Significant increases in the export of aircraft, fertilizers, and organic chemicals contributed significantly to the growth of total exports. (The 94.4 percent increase in US exports of fertilizer to China in the January-November 2002 period can be attributed to a relatively low base of comparison in 2001.)
US imports from China increased 19.3 percent in January-November 2002 over the same period in 2001, exceeding $121 billion, according to US statistics. US imports of power generation equipment grew substantially. The "power generation equipment" category is misleading, however, as it includes automatic data-processing equipment (HS 8471), which was the single-largest US import from China in the first 11 months of 2002. Imports from this category were up 50.6 percent. Imports of parts and accessories for office machines, (HS 8473), the United States' fourth-largest import commodity from China, rose 28.6 percent. PRC-Taiwan trade China's trade with Taiwan also leapt 38 percent over 2001, making Taiwan China's fourth-largest trading partner. As part of its WTO commitments, Taiwan relaxed restrictions on 1,225 consumer, agriculture, and industrial products from the mainland. In addition to exports of electronics and power generation equipment, which composed 47 percent of the PRC's exports to Taiwan, the PRC exported large amounts of textiles, iron and steel, plastics, and chemicals to Taiwan. Whereas the United States faces a very large merchandise trade deficit with China, Taiwan enjoys a massive merchandise trade surplus, as it moves componentry and semifinished goods to mainland factories for processing and ultimate export, as PRC exports, to overseas markets including the United States.
Issues to Watch in 2003Throughout the first half of 2002, Chinese policymakers worked on key issues to alter China's trading system under the WTO. But as China completed its first year in the WTO, several areas of concern emerged for 2003.Trading rights In its WTO accession documents, China committed to extend trading rights to all FIEs in which the foreign investor has a minority stake by December 11, 2002. As of early February 2003, however, no policies existed to allow an application for such rights. It is not clear whether MOFTEC will draft rules to clarify the rights or issue rules only after year three, when trading rights must be phased in fully. The lack of regulatory clarity in the application for and allocation of trading rights prevents FIEs from taking full advantage of China's WTO commitments. Genetically modified organisms In October 2002, Chinese officials decided to extend until September 20, 2003 the interim import regime it imposed on agriculture products with genetically modified organisms (GMOs) at the end of 2001. If China's permanent GMO implementing rules had come into effect as originally scheduled on December 20, 2002, exporters of agricultural commodities to China said they would have faced a serious market disruption. Although exporters were initially pleased that the implementation date was delayed, many concerns surrounding certification, safety inspections, and labeling of imported GMO products remain to be settled before September. Furthermore, the PRC Ministry of Agriculture is delaying approvals for several GMO crop varieties for several months. US negotiators have expressed strong displeasure at China's decision to require additional field tests and new tests to determine the effects of GMOs in food. Such moves would make it extremely difficult for US exporters to recoup lost market share and for China to develop a permanent GMO approval regime by September 2003. According to the China National Grain & Oils Information Center, China will most likely be forced to lift GMO import restrictions because it desperately needs soybeans, most of which are genetically modified. In 2002, imports of soybeans dropped by more than 2 million tons, likely a direct result of GMO legislation. Tariff rate quotas As mentioned above, China's allocation of TRQs for auto imports was inefficient and opaque in 2002. And although China has issued 2003 TRQs for agricultural commodities and fertilizer that meet the minimum WTO commitments, China's procedures are opaque and were not issued in a timely manner. In December 2002 USTR requested that China make public the list of recipients of quota allocations; that China allocate the quota in commercially viable quantities and end the process of allocating TRQ shares to entities that process commodities for re-export; and improve overall transparency of the licensing process. Dumping and safeguards In 2002 China was the most popular target of dumping investigations launched worldwide, with the United States and India initiating the largest number of investigations. Twenty percent of all US-initiated dumping investigations involved Chinese companies. But the United States has found that many of the offending imports either come from companies backed by American investors or help sustain US-based downstream industries and endusers, thus making the imposition of quotas or fines commercially undesirable. Such trends are likely to continue in coming years. US firms are likely to make increasing use of the product-specific safeguard for China, otherwise known as Section 421 of the US Trade Act of 1974 (incorporated as a result of the passage of the legislation that granted China permanent Normal Trade Relations status). The US law mirrors the Transitional Product-Specific Safeguard contained in China's WTO Protocol of Accession and allows US companies to request US safeguard action against China if a Chinese import causes or threatens to cause market disruption to domestic producers of like or directly competitive products. China took advantage of its dumping and safeguard laws to launch nine of its own dumping investigations in 2002, mostly against chemical products from Japan and South Korea. The coming year will be sure to see more such cases. MOFTEC also enacted a rule similar to the US Section 301 law, which allows MOFTEC to protect the interests of Chinese exporters after Chinese products encounter difficulties entering the US and European markets. The rules allow domestic companies to apply to MOFTEC to request a trade barrier investigation when they have evidence that a foreign country has imposed trade barriers that hinder their market access. Revisions to VAT policies In addition to the auto and fertilizer quota problems mentioned above, agriculture-related value-added tax (VAT) policies remained an area of likely contention between China and its trading partners. China appears to give preferential VAT treatment to PRC corn and wheat and to discriminate against imports. The US Trade Representative has complained on behalf of US grain producers about the use of TRQ allocations as a nontariff barrier. In September 2002, Customs changed its VAT rebate policy for imports intended for foreign-invested projects in the "permitted" category in the Catalogue Guiding Foreign Investment in Industry. Now foreign investments in the permitted category that qualify for tax exemption by exporting all of their products must pay applicable tariff and VAT for imported equipment. These investments may, however, receive rebates of 20 percent each year for five years after an official examination shows that the equipment was imported. The Ministry of Finance and the State Administration of Taxation issued a circular in December 2002 that gives more tax breaks to the integrated circuit (IC) industry. According to the new policy, IC product manufacturers that have paid 17 percent VAT will receive a rebate for all but 3 percent of the VAT paid (an 11 percent rebate was allowed under a September 22, 2000 circular). The preferential tax treatment for IC product manufacturers in China has reportedly caused concern among foreign chip makers and trade associations, because it weakens the price competitiveness of imported IC products, which have a 17 percent VAT imposed on top of import tariffs. Overall, China's continuation of preferences for domestic enterprises or special treatment for export-oriented enterprises conflicts with China's WTO commitments on national treatment. Licensing China's trade authorities released a number of revised catalogues that reflect its WTO commitments to phase out quotas and licensing regulations for certain goods by January 1, 2003. Despite the catalogues, China's import licensing and registration system remains opaque and restrictive. China maintains a complex matrix of rules governing the licensing of such imports as general commercial goods, mechanical-electrical (M/E) products, goods subject to designated trading, and technology products. Catalogues have up to four classification categories: free import (no restrictions); automatic licensing; restricted; and prohibited. Further breakdowns distinguish goods according to their type and use. In the fall, the US government sought clarification of China's licensing and registration requirements--with only limited success--through the first transitional review mechanism on China's WTO entry. It is likely that licensing processes will still present import barriers for foreign companies. Inspections The Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) issued a series of rules to streamline inspection and quarantine activities of imported products. One rule, governing the import of used M/E equipment, adds another layer of red tape to existing MOFTEC requirements by introducing pre-inspection. The rule requires imported, used M/E products that involve state security, environmental protection, and sanitary and phytosanitary issues to undergo pre-inspection prior to shipping to China. In another development, AQSIQ will select products that involve safety, hygiene, and environmental protection, as well as products that have been the subject of complaint or repeatedly involved in accidents, to conduct sample inspections. Though most countries' Customs authorities reserve the right to perform random inspections, some observers are concerned that the new PRC rule reintroduces an arbitrary inspection regime that was recently eliminated when China issued a list of products subject to China Compulsory Certification requirements. Intellectual property rights MOFTEC and the State Intellectual Property Office (SIPO) issued rules in December 2002 to promote intellectual property rights protection in the import and export of goods, services, and technology. According to rules, domestic foreign trade operators in processing trade businesses must require suppliers to present certificates verifying that the suppliers are eligible to export the patented materials or components for processing in China. Shipping Ninety percent of Hong Kong's exports are exports from the mainland. The new US Customs rules aimed at enhancing port security, which took effect February 2, 2003, will likely have a significant impact on US-bound ships. Roughly 600,000 cargo containers set sail for US ports from Hong Kong annually, more than from any other port. Hong Kong shippers and the government have had difficulty preparing for the February deadline for compliance with the new US security requirements, risking problems at US ports. Security at US ports will continue to be a serious issue in 2003, keeping the potential impact on trade uncertain. In another shipping matter, the Ministry of Communications (MOC) released regulations on international maritime transportation. US carriers, shippers, and intermediaries are concerned that the new regulations allow China to control liner service pricing terms--including service contract prices--and appear to impose restrictive licensing and registration requirements on foreign companies. In July, MOC released a draft of the implementing regulations for comment. The rules spell out requirements for the government's processing of applications, but lack detail about options for appeal and re-application if an application is denied. Both of these regulations could have a negative impact on how goods enter Chinese ports. Trade in services Though the most recent statistics available covering trade in services are for year-end 2001, the numbers are worth mentioning as indicators of future trends. China continues to be a net importer of services, having posted rising deficits each year since 1998. In 2001, the service trade deficit was $6.36 billion. Analysts at the State Administration of Foreign Exchange predict that China's service trade deficit may have reached $8 billion in 2002. Most experts agree that PRC service trade deficits will persist as the country phases in its WTO service commitments. One of the prime beneficiaries of any openings in China's services industry will be US services exporters. In 2001, the United States recorded a surplus of $2.2 billion in its services trade with China, up 13.6 percent over 2000. For this reason, the rising number of barriers that China is erecting to foreign participation in PRC service sectors is likely to be a source of friction in the months and years ahead. In financial service sectors like banking and insurance, foreign companies face high capital requirements and cumbersome licensing application procedures (see Foreign Participation in China's Financial Sector). Free-trade agreements China is likely to continue with progress made in 2002 to formalize various trade agreements with its neighbors. In November, China signed a framework agreement with the Association of Southeast Asian Nations (ASEAN) to establish a free-trade area (FTA). Although negotiations--to cover goods, services, and investment--will not begin until this year, the 2002 framework agreement already lays out some specific tariff cuts. The "early harvest package" calls for cuts on selected agricultural goods. Also, tariffs of 5 percent or lower on goods are to be abolished in 2003. The goal is to have the original ASEAN signatories fully implement an FTA with China by 2010. Less developed ASEAN members will have until 2015. Many ASEAN members are concerned that the proposed FTA will not benefit them, as China appears to have most of the negotiating leverage over goods and services. China and Singapore also signed an agreement to allow certain products direct access to each other's markets without requiring duplicate testing procedures. Under the agreement, exports certified in one country do not need to undergo another round of conformity assessment procedures when they enter the other market. The agreement covers electrical and electronics products, rubber goods, medical devices, motor vehicle parts, and telecom equipment. China also has sought a Closer Economic Partnership with Hong Kong. According to MOFTEC Minister Shi Guangsheng, negotiations covering customs, e-commerce, and legal transparency went well in 2002.
Copyright 1996-2008 by the US-China Business Council Last Updated: 23-May-03 |
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