China's Trade Performance

Summary

• China became the world's third-largest trading nation in 2004; the United States displaced Japan to become China's number-one trading partner.
• Though China posted a trade surplus at the end of 2004, many analysts predict that China's future import growth will outpace export growth.
• China's typical export product mix remained unchanged last year, though growth in exports of mineral fuels and steel was surprisingly high in light of strong domestic demand.
• Growth in China's raw material imports for construction and fixed-asset investment slowed in the second half of 2004, but growth in agricultural imports expanded, causing China to post a sizable agricultural trade deficit.
• Overall US-China trade expanded by the largest margin in a decade.
• Although the overall US trade deficit with China increased, US exports of services and agricultural items posted large surpluses.

China's total foreign trade volume surpassed $1 trillion in November 2004, making China the world's third-largest trading nation, up from fourth place at the beginning of 2004 (see Table 1). The coming year promises to be similarly strong for China trade.

China posted a $20.8 billion trade surplus for the first 11 months of 2004, turning around a $6.8 billion trade deficit from the first half of the year. Several developments likely account for the shift. First, a large portion of China's substantial oil imports came when the cost of oil was at its highest level. Falling oil prices in the second half of the year lowered the value of China's imports. Second, the central government introduced several policies mid-year that aimed to tighten domestic production. These policies helped to reduce imports of key inputs such as chemicals, metals, and other raw materials in the second half of the year.

Nevertheless, China's overall export growth lagged import growth for the second consecutive January-November period. Lower tariffs and stronger demand for a broader array of goods, especially construction materials and petroleum, fueled import growth. Many analysts, including those at the National Bureau of Statistics and the PRC Ministry of Commerce (MOFCOM), predict that import growth for 2005 will be between 18 and 22 percent, while export growth will be between 16 and 18 percent. But some observers speculate that export growth will dramatically outpace import growth in 2005. These analysts believe that China's slowing import growth will continue for several months, and export growth will rise because of increased textile exports.

China's Exports and Imports

Exports

PRC exports grew by more than 35 percent from January to November year-on-year, significantly outpacing official MOFCOM 2004 forecasts of 8 percent export growth and other analysts' predictions of 15 percent to 20 percent export growth. No new products entered China's list of top 10 export commodities, though exports of footwear and toys increased more slowly for the second consecutive year-on-year period (see Table 2).

• Iron and steel The 86 percent increase in China's iron and steel exports from January to November was surprising, given China's voracious domestic demand for commodity products throughout 2004. Although China continues to run a deficit in iron and steel trade, that deficit has been shrinking in recent years, and steel exports are growing at a faster rate than imports. In fact, November marked the first month in which China was a net exporter of steel. Most of China's current iron and steel exports are of low quality, in contrast to the higher-quality material that has been in short supply in China throughout 2004. This trend may be a short-term one, however: Chinese steel mills are ramping up capacity for high-grade steel. Some analysts are concerned that increased production at Chinese mills will result in a global supply glut in two to three years because many governments are trying to promote domestic steel production to take advantage of perceived Chinese demand for iron and steel imports.
• High tech Although the PRC General Administration of Customs does not break down high-tech products into a separate trade category, MOFCOM stated that PRC export categories that include high-tech products such as biotech goods, integrated circuits, laptops, and telecom equipment, grew 57 percent from January to November over the same period in 2003. In a move to further encourage information technology (IT) exports, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly increased value-added tax (VAT) rebate rates for 2005 from 13 percent to 17 percent on five categories of exported IT products: integrated circuits, semiconductor discrete devices, mobile communication equipment, computer and peripheral products, and numerical control machine tools. This helps counteract the losses many IT companies endured in 2004 when MOF and SAT lowered the VAT rebate by 3 percent on many products. The rebate increase will not only significantly reduce the costs of manufacturing IT products for export, thus increasing company competitiveness in the global market, but it will also attract further IT business to China. International IT and telecom manufacturers that operate in China and export to the global market will also benefit from the rebates.
• Mineral fuels China continued to export high levels of mineral fuels, although it ran a fuel trade deficit overall. China exports primarily refined petroleum products such as kerosene to Southeast Asian nations where it is used in power generation. The value of fuel imports, however, was more than triple the value of exports.

Imports

China's imports rose more than 37 percent from January to November year-on-year, led mostly by substantial growth in imports of agricultural goods, refined petroleum, raw materials, motors, and generators (see Table 3). China was increasing its petroleum reserve in 2004 during a period of high world oil prices, which boosted the value of its imports for several months last year.

• Raw materials China's demand for raw materials was stronger during the first 11 months of 2004 than in the corresponding period a year earlier, though the central government took steps to slow construction and heavy industrial manufacturing, which may be dampening demand as 2005 begins. The country has consumed an average of 20 percent of the world's copper supply over the past two years. Imports of copper, nickel, and aluminum increased almost 50 percent, with imports of ore, slag, and ash soaring 146 percent over January-November 2003. In addition to imposing macroeconomic controls to slow economic growth and thus demand for those materials, MOF and SAT jointly announced in late December the cancellation of export VAT rebates on 17 metals, including aluminum and ferroalloys, beginning January 1, 2005. MOF also announced that China would begin imposing export tariffs on aluminum, nickel, and copper beginning January 1. According to the China Daily, China will impose tariffs of 5 percent on aluminum exports, 2 percent on nickel exports, 10 percent on blister and scrap copper exports, and 5 percent on refined copper exports. These materials were in short domestic supply throughout 2004 and the imposition of an export tariff will likely increase domestic supply—thereby reducing reliance on imports.
• Autos On January 1, 2005, MOFCOM removed the import quota limit on vehicle and auto parts imports in line with China's World Trade Organization (WTO) commitments, and tariffs dropped to 30 percent from their 2004 rates of 34.2 to 37.6 percent. Both actions could boost auto imports in 2005. But not all analysts agree, citing 2004 import growth numbers as a precedent for future years. Auto imports rose only 12 percent in the January-November period, a significant drop-off in growth from the 85 percent growth rate for 2003. Some analysts believe that this drop-off occurred because the vast majority of people who could purchase imported cars did so in the first two years of China's WTO membership. The price of gasoline also soared, a scenario that could be repeated in 2005. Furthermore, domestic autos are growing in popularity because of their lower cost and improved quality. Thus, auto importers potentially face a more price-sensitive market in which consumers could wait until 2006—when tariffs are bound at 25 percent—to purchase an imported vehicle, if consumers choose to buy an imported car at all.
• Agriculture China posted a record $7.4 billion agricultural and aquaculture trade deficit in the January-November period, with more than 20 percent of these imports coming from the United States. Substantial increases in imports of soybeans, wheat, cotton, rice, and rapeseed oil accounted for the bulk of China's aqua- and agriculture trade deficit. Ke Bingsheng, a researcher at the Ministry of Agriculture's (MOA) Research Center for the Rural Economy, has argued that aqua- and agriculture trade deficits are compatible with plans to help China's farmers plant more cash crops and are no reason for concern. Nevertheless, PRC officials disagree over whether China should expect a deficit in aqua- and agriculture trade as reforms continue. Han Yijun, a researcher at the MOA Research Center for the Rural Economy, thinks the agricultural trade deficit is unsurprising in light of China's WTO commitments to lower tariff barriers and believes that China will probably have such trade deficits in the future. On the other hand, Wang Zhanlu, division director of MOA's Trade Promotion Center, thinks the aqua- and agriculture trade deficit is a temporary aberration resulting from government moves to restock grain supplies.

China's Trade with the World

The United States passed Japan to become China's top trade partner in the January-November period (see Tables 4-6).

Hong Kong remains China's third-largest trade partner, although most of this trade is in mainland exports through Hong Kong. Hong Kong exports to the mainland dropped for the third straight year, and Hong Kong slipped to ninth from seventh on the mainland's list of top import suppliers, reflecting China's growing ability to import directly under WTO. Both sides expanded the Hong Kong-China Closer Economic Partnership Arrangement (CEPA) in mid-August, increasing to 713 the number of "Made in Hong Kong" goods that could be exported to the mainland duty free. Some analysts speculate that the expansion was an attempt to help boost Hong Kong exports to the mainland.

China continues to run a deficit with most of its trading partners in East and Southeast Asia, except for Hong Kong. In Southeast Asia, Malaysia is China's largest trading partner, racking up an $8.5 billion surplus through the sale of power generation equipment, mineral fuels, and animal fats. In East Asia, Taiwan maintains the largest trade surplus with the mainland, prompting some PRC leaders to be concerned about Taiwan's leverage in this area. In contrast, South Koreans are worried about their $28 billion surplus with China. The Korea International Trade Association warned in December that the South Korean economy could slump if China experiences a slowdown: Twenty percent of that country's exports head to China.

Russia continues to be a large supplier of mineral fuels, forestry products, and iron to China but is not a significant player in China's overall trade picture. That may change, however, when Russia joins the WTO—likely within the next few years. China concluded its WTO market access negotiations with Russia in 2004, and MOFCOM officials hope that once Russia joins the trade body Chinese goods will have better access to Russian markets, perhaps eliminating China's trade deficit with Russia.

US-China Trade

Overall US-China trade easily surpassed $200 billion in the January-November period, expanding 28.2 percent year-on-year, the largest growth margin in the past decade (see Tables 7-9). Imports grew slightly faster than exports. US imports topped $191 billion, spurred by substantial increases in US imports of computers, radio and television signal transmission equipment, and video recording devices. Even with the imposition of antidumping duties against certain Chinese furniture exports, US imports of Chinese furniture grew slightly more than 20 percent, possibly because none of the items in the US list of top furniture imports was included in the dumping investigation.

US exports grew more than 25 percent from January to November, but fluctuated dramatically as China sought to rein in its domestic growth. Strong growth in US exports of iron, steel, copper, and other metals in 2003 dropped off sharply in 2004, but US exports of ore, slag, and ash jumped more than 200 percent year-on-year.

In agriculture, China's year-end 2003 decision to grant permanent approval to imports of US genetically modified soybeans, which resolved a contentious bilateral trade issue, should have sparked even greater soybean sales in 2004. But the mid-2004 imposition of an opaque import quarantine inspection licensing system has raised the cost of US soybean exports, causing a 17.7 percent drop in America's second-largest export to China by value. Although the import inspection system remains murky, soybean crushers in China are adding 6 to 7 million tons of new capacity in 2005, which could help lift demand for US soybeans.

Despite problems with soybeans, the United States runs an agricultural surplus with China, providing China with 23 percent of its agricultural imports. In fact, US agricultural exports to China in the January to November period increased more than 61 percent. Exports of cotton and wheat, which drove overall US agricultural exports, rose more than 174 percent and 1,207 percent, respectively. Many analysts predict US cotton exports will continue to grow to supply China's expanding textile industry.

Services Trade

The most recent year-end statistics for US-China trade in services are for 2003. But these statistics highlight an important point: the United States consistently posts a growing trade services surplus with China. The United States exported $5.9 billion worth of services in 2003, helping push the surplus to $2.1 billion, up 8.3 percent over 2002.

One factor that could significantly increase US services exports to China is better protection of intellectual property. Services trade includes the payment of royalties and license fees, which companies have a very difficult time collecting in China. Intellectual property accounts for just 14 percent of US service exports to China, compared with more than 20 percent for US service exports to Japan and Europe.

Top Trade Trends and Issues

WTO commitments for 2005

China's average import tariff rate dropped by less than one percent, to 9.4 percent, on January 1, 2005, leaving only a few remaining goods to reach their final bound rate in 2006. Of particular note, tariffs on IT products, such as computers, semiconductors, and telecom equipment, dropped from an average of 13.3 percent to zero; tariffs on auto imports also fell, as noted above. Tariffs on pulp and paper dropped to zero, which could significantly boost China's already-large market for imported paper. Paper is the third-largest PRC import, behind petroleum and steel.

The range and scope of China's service commitments that were to be in place by December 11, 2005 are smaller than in previous years. The most notable change is the large number of sectors that will allow foreign investment in wholly foreign-owned enterprises (WFOEs). This is already starting to occur in some sectors opened under CEPA.

China's commitments on granting foreign companies trading and distribution rights kicked in at the end of 2004, marking one of the most significant openings under China's WTO commitments. Though MOFCOM has yet to release key implementing details, companies in Shanghai and other cities are eager to integrate their manufacturing operations by importing and distributing products without having to go through state-designated partners. Furthermore, the liberalization should make it easier for smaller manufacturers without a China presence to export from their home country without having to set up an office in China.

Textiles

The 30-year-old global trade agreements, which allocated export quota amounts to textile-producing countries, expired on December 31, 2004. At the end of 2004, China accounted for 20 percent of global textile trade, but some analysts predict this could rise as high as 50 percent in 2005 after the quotas are lifted. Members of the US Congress and the global trading community have voiced their concerns about China's potential dominance in this area. In the WTO, smaller textile producing economies failed to establish a formal working group to address their concerns, but plan to raise the issue throughout 2005 in the hope that once China's impact on the global textile trade is fully felt, more countries will want WTO assistance to address the situation.

As part of its WTO entry, China agreed to provisions that could restrict its trade in textiles and clothing. If a WTO member believes that increased textile imports from China are causing market disruption, the member can request consultations with China to limit imports and impose a year-long, 7.5 percent cap on the growth of imports from China. This China-specific textile safeguard is in effect until December 31, 2008. Potential safeguard cases emerged in the United States in late 2004, even before quotas expired. The US Department of Commerce's Committee for the Implementation of Textile Agreements (CITA) in October and November accepted petitions to impose the safeguard on imports of several textile products from China, although the Court of International Trade has challenged CITA's authority to do this.

The European Union established a temporary textile import monitoring system at the end of December and hopes to have a permanent system in place by mid-2005 to track textile imports from China. Both Turkey and Argentina have also already imposed safeguard quotas on several categories of textiles.

In response to pressure from the global community, MOFCOM unveiled new textile export tariffs at the end of December. The export tariffs, which expire December 31, 2007, cover six categories of textile products that contain 148 items, including shirts, underwear, pajamas, overcoats, skirts, and trousers. Duties range from RMB 0.2 to RMB 0.3 ($0.02-$0.04) per piece or set for completed apparel and stand at RMB 0.5 ($0.06) per kg for clothing parts or accessories. The tariff rates seem to prove earlier speculations by US and European manufacturers that the tax would hardly affect China's textile exports, since the tariff rates average only 1.3 percent. Even with MOFCOM's actions to address global concern over China's textile exports, considerable global backlash throughout 2005 over China's dominance in this area is likely.

Free-trade agreements

Throughout 2004 China actively pursued free-trade agreements (FTAs) with trade partners near and far. Tariff reductions on more than 7,000 products agreed to under the FTA signed with members of the Association of Southeast Asian Nations (ASEAN) will take effect July 1, 2005. But observers note that the tariff reductions do not cover the most contentious products, namely sugar, rice, textiles, and auto parts. The China-ASEAN FTA also does not include trade in services or other investment issues, leaving some to question how large an impact the FTA will actually have.

Australia, Chile, and New Zealand are also actively pursuing FTAs with China, in some cases competing against each other to get their deals signed first. Both Chile and New Zealand fast-tracked their feasibility studies, concluding them at the end of 2004; Australia should finish its study in early 2005. This will pave the way for all three nations to begin serious FTA negotiations with China by the second quarter of 2005. From China's perspective, these agreements aim to secure a steady supply of raw materials, namely ore, natural gas, aluminum, forestry products, copper, and pulp.

Finally, China moved outside of its traditional focus on the Asia-Pacific rim with overtures to nations in the Persian Gulf to set up an FTA. Negotiations between China and six Gulf nations (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) are scheduled to begin in January 2005 and will likely focus heavily on petroleum and chemical products in addition to the usual array of manufactured and agricultural goods.

Export and value-added tax rebates

Primarily in response to rising government budget deficits, China in 2004 slashed export tax rebates across a wide array of products and adjusted rebate payment responsibilities between local and central governments. As 2005 began, foreign and domestic companies once again began to complain of delays in receiving their export tax rebates, though this time the problem appears to be at the local level, where governments have had to pay more of the rebate out of their own pockets. The local governments in Guangdong, Jiangsu, and Shanghai are saying they can no longer afford to pay rebates and are contemplating ways to restrict payments, such as only paying rebates for exports that are manufactured in their region, rather than on goods merely exported from their customs area. Such a move might produce a backlash from exporters farther inland and could hurt central government moves to foster export-oriented enterprises in the interior.

Market economy status

Since 2003, senior PRC officials have lobbied other WTO members aggressively to change the way they treat China's economy for purposes of evaluating trade disputes, particularly dumping—selling goods overseas at prices below the cost of production at home. According to China's WTO entry documents, China will hold non-market economy status until December 11, 2016. China's non-market economy status means that economies launching dumping investigations against PRC companies can use third-country cost and price data in place of Chinese data to determine whether dumping has occurred. The Chinese contend that this puts PRC domestic companies at an unfair disadvantage when fighting dumping allegations. China is subject to more dumping investigations than any other economy. Between 1995 and the end of 2003, China accounted for one-seventh of all dumping investigations initiated worldwide.

Argentina, Benin, Brazil, Kyrgyzstan, New Zealand, Togo, and ASEAN member states recognized China as a market economy in 2004. Although PRC government officials have also pressured the European Union and the United States to recognize China as a market economy, neither has agreed to do so. The United States said it wants to see a "substantial rollback" of government control of raw materials and certain economic sectors, as well as more government transparency, before it will consider China a market economy. The European Union reached a similar conclusion, citing the government's large role in managing the economy, poor corporate governance, a discriminatory legal environment, and a lack of adherence to market principles in the financial sector as proof that China is not yet a market economy. China will continue to push the issue until the 2016 deadline comes to pass-as seen in its recent pressure on South Korea to grant it market economy status.

US-China trade deficit

China only accounts for roughly 13 percent of all US imports, compared with the European Union before its expansion to 25 members, which accounted for 19 percent of all of US imports. Nevertheless, growth in 2005 of the US trade deficit with China could potentially lead to more vocal and rancorous calls from within US political circles to restrict trade with China. Issues such as China's poor record on intellectual property rights enforcement, the peg of the renminbi (RMB) to the US dollar, and the debate on the offshoring of US manufacturing jobs (accurate or not) will, at a minimum, stir significant debate within the US Congress, if not prompt Congress to attempt some sort of punitive action. Though China has said it will not revalue the RMB or allow it to float in the near future, monetary pressures may lead it to make adjustments in 2005; currency forward contracts anticipate a 4.7 percent appreciation of the RMB within 12 months. The central government has pledged to implement measures released in December 2004 to enforce intellectual property rights more strictly. It remains to be seen whether this will be sufficient to block calls for a tougher stance on trade.

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Last Updated: 14-Mar-05