AMERICAN ENTERPRISE INSTITUTE 1

Amid rising populism, the US-China economic

relationship has become a major issue in the 2016

election. There are good reasons: the People’s

Republic of China (PRC) is a poor partner in

multiple respects. But the troubles caused by

Chinese behavior and the economic relationship

are not what most people think or what most

candidates rail against.

It is frequently asserted, and more frequently

during election years, that the large US trade

deficit costs jobs. The next sentence is often that

the sizable bilateral deficit with the PRC costs

American jobs. The main culprit is then said to be

Beijing’s exchange rate policy. None of those

claims stands up well—the statistical relationship

is very weak between the overall trade deficit and

bilateral deficit on one side and unemployment

on the other. The same is true for the exchange

rate, with the kicker that China’s currency may

have become too expensive over the last two

years, not too cheap.

The PRC, however, deserves other, important

criticisms. Politicians often vilify competition, but

it is the key to prosperity. The problem is not too

much competition in the US, but not enough

competition in China. While cheap imports

benefit American consumers, the PRC protects its

home market, blocking American exports and

hurting workers and companies. China not only

infringes on intellectual property (IP), but also is

the world’s biggest IP thief—again to make

American and other non-Chinese companies less

competitive, especially in manufacturing.

It used to be stated merely in passing that the

PRC’s government and firms are opaque. The

growing Chinese impact on the world and events

in 2015 and 2016 make clear the opacity

endangers the PRC’s partners and in some cases

infringes American law. All this adds up to a far

more accurate description of the trouble in Sino-

American economic relations: China’s protections

at home, IP theft, and lack of transparency have

undermined US gains from China’s membership

Fixing US-China Trade and Investment By Derek Scissors April 2016

KEY POINTS

The election-driven diatribes about the US-China economic relationship are correct that there are

serious problems but wrong about what the problems actually are. The most basic evidence shows

trade deficits do not cause US unemployment. Neither does the dollar-yuan exchange rate.

China’s accession to the WTO did considerable harm to US manufacturing employment 15 years ago.

The main problems now are that American comparative advantage is being blunted by China’s intense

protection of state-owned enterprises and equally intense theft of intellectual property.

Diagnosing the wrong ills will lead to the wrong cures. The US should not try to balance the trade

deficit or sanction China for having the wrong currency policy. Instead, the US should sanction

Chinese firms that benefit from stolen intellectual property, postpone a bilateral investment treaty, and

not grant market economy status until China becomes a much better partner.

AMERICAN ENTERPRISE INSTITUTE 2

in the World Trade Organization. Such Chinese

actions argue overwhelmingly against granting

the PRC market economy status or completing a

bilateral investment treaty.

Misdiagnosing an illness leads to the wrong cure.

The US should not fall victim to trying to correct

past problems, much less false ones. It should

instead target Chinese actions that genuinely

affect the American economy right now, using

carrots and sticks to encourage better behavior.

Otherwise, the Sino-American relationship may

change, but it will not get any better.

Direct Impact: Trade

The common view is that the PRC’s main

economic impact on the US is through trade.

Beijing manipulates the value of the Chinese

currency, contributing heavily to a huge bilateral

trade deficit and thus stealing American jobs.

This common view is mostly wrong.

The first mistake extends well beyond China: a

trade deficit does not mean America lost jobs in

total to any country. A look at the trade deficit

and unemployment from 1975 to 2015 does not

show a statistically significant relationship. This

applies to a set of results including the raw trade

deficit figure and the deficit as a percentage of

gross domestic product (GDP) and for trade and

employment measures during the same year and

trade in one year and unemployment the next.

Such simple correlations ignore variables such as

domestic productivity or income growth that

would explain both trade and job results and are

just the first step in trying to establish that trade

deficits represent lost jobs. The first step fails.

When jobs are plentiful and wages rise,

Americans buy more of everything, including

imports. When the economy is weak, Americans

buy less of everything, including imports. Because

the US is the world’s largest economy, changes in

the US matter much more than changes in any

partner economies. Nonetheless, the same

principle applies to them: if trading partners are

doing poorly, their people and companies buy

fewer American goods and services.

Combining the two, when the American economy

is stronger than its partners, as in 2014 and 2015,

the trade deficit tends to rise.1 Going back a few

more years, the overall trade deficit fell by $325

billion in 2009, a terrible year for the economy.

Of course this did not create or protect millions of

jobs; it happened precisely because jobs were lost

and consumers spent less. The highest trade

deficit on record was in 2006.2 Unemployment

ended that year at 4.4 percent.3

Protectionists might argue that boom times could

be even better and down times not as bad if

imports were somehow produced in the US. For

most imports, this is a fantasy. America’s

dependence on imported crude oil may be coming

to an end—no thanks to any protectionist trade

barriers. Prior to the boom in domestic energy

production, though, cutting off crude oil imports

would have killed millions of jobs, not created

them.

After the shale boom, the biggest US trade deficit

by product is consumer electronics—goods run

through a global supply chain, most of them

ultimately assembled in the PRC.4 The end-of-

the-line assembly jobs are mind-numbing and

poorly paid; most Americans would not take

them without far higher compensation, which

would send the price of the goods soaring. If cell

phones were made entirely in the US, sales and

production would plunge, and far fewer workers

would be hired. Jobs would not come back to the

US; they would simply disappear.

Since the trade deficit as a whole is not connected

to unemployment, it is highly unlikely the

bilateral deficit with China is truly connected.

Bilateral trade numbers are misleading in two

respects: (1) the supply chain phenomenon

means the PRC gets credit for the full value of

consumer electronics and textile exports to the

US when it is only involved in final assembly, and

(2) a change in a bilateral deficit typically means

production moved among America’s partners,

rather than left or returned to the US.

Illustrating this, the biggest percentage increase

in the Sino-American trade deficit was in 2004.

According to protectionists, this should have been

a poor year for the US labor market. Yet

unemployment fell.5 Nor was there a delayed

effect; unemployment fell again in 2005. The

bilateral deficit becomes sizable in 1985. From

1985 to 2015, there is again no statistically

significant correlation between the bilateral trade

deficit and unemployment, either in absolute

AMERICAN ENTERPRISE INSTITUTE 3

terms or as a percentage of GDP. The trade deficit

continuously gets bigger once the US begins

trading with China, while unemployment

fluctuates.

Two other indicators, however, seem to support

critics of Sino-American trade. Labor force

participation and manufacturing employment do

see a set of statistically significant correlations

with the bilateral trade deficit from 1985 to 2015.

The simple correlation with labor force

participation is not particularly strong. And labor

force participation is a function of many factors,

with domestic forces more important than

international forces. Given the flaws in any

bilateral balance as a representation of trade,

labor force participation is far better explained by

demography, automation, and the like.

The correlation between the bilateral trade deficit

and American manufacturing employment is

stronger. In addition, the pronounced rise of

Chinese manufacturing makes an international

impact on the US more likely. This important

connection is explored further below.

Finally, jobs could be falling victim to the dollar-

yuan exchange rate. On the charge of currency

intervention, Beijing is guilty in the first degree,

But the Communist Party directs the currency to

remain pegged because it is obsessed with

stability, not trade advantage, and the results are

not what protectionists claim.6

Compared with most exchange rate fluctuations,

the yuan barely moves against the dollar, and it is

highly unlikely that its values over time would

prevail without intervention. For years, the PRC

amassed enormous sums of foreign reserves in

part because it was buying foreign exchange to

keep the yuan from rising. This process began to

reverse in late 2014, with Beijing selling foreign

exchange to keep the yuan from falling.7 If the

simple accumulation or expenditure of foreign

exchange represents valuation, the yuan has been

overvalued for nearly two years.8

A more sophisticated view is that the severity of

distortions in the financial system makes it

impossible most of the time to determine what

the yuan’s value should be.9 If permitted today,

Figure 1. US Trade Deficit vs. Unemployment Rate, 1975–2015

Sources: US Census Bureau, “U.S. Trade in Goods and Services,” February 5, 2015, http://www.census.gov/foreign-

trade/statistics/ historical/gands.pdf; and US Bureau of Labor Statistics, “Labor Force Statistics from the Current Population

Survey,” March 28, 2016, http://data.bls.gov/timeseries/LNS14000000.

AMERICAN ENTERPRISE INSTITUTE 4

ordinary people would likely send money out of

the PRC, and the yuan would drop. But if

domestic banks actually lent for commercial

reasons and financial markets became more

transparent, money would flow into China, and

the yuan could rise. Claims that the yuan was 30

percent undervalued five years ago or is 10

percent overvalued now are usually based on a

market standard that has little meaning for the

PRC.

Moreover, the exchange rate does not have

anything like the relationship with the US labor

market that protectionists believe. Employment

conditions in the US improved immediately after

the PRC’s large 1994 devaluation, contrary to

what currency critics would insist. Even from

1995 to 2015, the dollar-yuan exchange rate

seems to have the opposite impact critics expect:

the yuan generally appreciates, yet measures of

the labor market generally weaken. The

ostensible result is driven largely by yuan

appreciation from 2005 to 2008 in the context of

deteriorating US labor conditions.

This is not a meaningful finding. While the

surprisingly reversed correlations are statistically

significant, they are not economically significant.

There is not enough variation in the yuan’s value,

and there are too many other plausible factors.

Still, the idea that the dollar-yuan exchange rate

is costing American jobs has no support at all.

Attacks on the yuan’s value and other aspects of

Chinese trade policy usually focus on its cheap

exports, which at least benefit American

consumers. Meanwhile, China has been defended

as a source of growing demand for US exports. In

fact, the latter is where most of the problem lies.

The PRC’s policy choices deliberately suppress

imports of American (and other countries’) goods

and services. With unwise policy now also

harming China’s own growth, American exports

to the PRC actually shrank in 2015.10

The policy that most harms American exports is

Beijing’s subsidization of state-owned enterprises

(SOEs).11 Even with hefty financial subsidies,

SOEs are not competitive exporters aside from

occasional bouts of steel dumping due to massive

overcapacity. At home, however, SOEs are

Figure 2. US–China Trade Deficit vs. Labor Force Participation Rate, 1995–2015

Sources: US Census Bureau, “Trade in Goods with China,” accessed March 25, 2016, https://www.census.gov/foreign-

trade/balance/c5700.html; and US Department of Labor, Bureau of Labor Statistics, “Labor Force Statistics,”

http://www.bls.gov/data/#employment.

AMERICAN ENTERPRISE INSTITUTE 5

essentially guaranteed market shares by

government decree. 12 This unavoidably caps US

import share, especially in services, where

American firms would quickly drive many SOEs

out of business if permitted. Unlike with cheap

Chinese goods increasing the buying power of

ordinary Americans, there is no balance of cost

and benefit to blocked American exports—there is

only cost. This is the biggest trade problem.

Direct Impact: Investment

Because of the flawed claims about job losses due

to imports, trade receives the bulk of the

attention in Sino-American economic relations.

But investment flows matter as well. Trade and

investment were bound together in the accession

of China to the World Trade Organization (WTO)

at the end of 2001.

Manufacturing employment has not seemed to

respond negatively to the yuan devaluation in

1994 or a rising aggregate trade deficit. As noted,

2004 saw the biggest percentage rise in the

bilateral trade deficit. Labor market indicators,

including manufacturing employment, held their

ground in 2004 and 2005. In stark contrast,

neither the aggregate trade deficit nor the Sino-

American deficit grew in 2001. The dollar-yuan

exchange rate was stable. Yet in 2001 American

manufacturing jobs experienced by far their

sharpest plunge, and unemployment jumped

from 3.9 percent to 5.7 percent. Without

question, some of the reason for this was the

domestic business cycle. There is also a China-

driven explanation.

The main international economic event of 2001

was China’s formal WTO accession late in the

year. This was basically guaranteed in the US by

the results of the 2000 elections, so the impact

began to be felt the year before formal accession.

The US was required to remove the annual review

of China’s most favored nation status, which

enabled a shift in trade and investment patterns.

American and other companies that had been

unsure they could invest and produce in China

Figure 3. Manufacturing Employment, 1990–2015

Source: US Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey,” March 28, 2016,

http://data.bls.gov/timeseries/LNS14000000.

AMERICAN ENTERPRISE INSTITUTE 6

and then sell back to the US got the permanent

green light.

On the American side, transformative benefits

from this helped make some clothing and

consumer electronics much cheaper and more

widely available than they otherwise would have

been. It also caused a considerable dislocation in

manufacturing due to sharply increased China-

based competition. In return, the Chinese market

was supposed to open far wider to American

trade and investment.13 The range of subsidies for

SOEs, especially, has prevented that.

The combined result has been competition

intensifying more in the US and elsewhere than

in the PRC. The lack of competition helped create

the ongoing Chinese problem of excess

investment and production to serve other

markets compared with inadequate internal

consumption due to unnecessarily high prices

and low quality—macroeconomic imbalances. On

the other side of the Pacific, this limited new

opportunities in the Chinese market for American

manufacturing and services firms.14 An ultimately

unbalanced Chinese WTO accession meant the

US quickly lost manufacturing jobs and did not

receive equivalent economic opportunities even

as a number of years passed.

In particular, in addition to blocking American

exports, the immunity of SOEs to competition

ultimately limited direct American investment in

China. After grandiose pronouncements of an

investment boom with WTO membership, the

Bureau of Economic Analysis puts the stock of

American investment in China at just 1.3 percent

of total investment abroad through 2014.15

Chinese figures put new investment from the US

at barely $2 billion in 2015.16

A more recent phenomenon has been noticeable

Chinese investment here, which has set a string of

records since 2012 and is on the way to another.

Chinese firms recorded 29 investments of $100

million or more in the US in 2015.17 The annual

total was close to $19 billion and will easily break

that in 2016.18 While the stock of Chinese

investment in the US is tiny as a percentage of

American wealth, the potential for it to jump to a

new level was illustrated by a record-shattering

(for the PRC) $43 billion bid for Swiss firm

Syngenta by ChemChina in February. This might

still pale against the size of the American

economy but can be vital to individual

communities that see new businesses open or old

ones remain in operation due in part to Chinese

money. Mayors and governors travel to the PRC

and welcome Chinese delegations for good

reason.19

Chinese investment in the US is largely beneficial,

but there are two policy considerations. The

home market for Chinese firms is not subject to

the rule of law.20 As more and more Chinese firms

operate in the US, the chances of illegal activity

rise. The other risk is specific to SOEs: the level of

state support they receive can undermine

commercial competition. No Chinese company

yet has a large enough share of any meaningful

American sector for anticompetitive activity to be

a major concern, but that is a growing possibility

if not monitored.

Some Chinese investors have less interest in

operating in the American market than in buying

technology. Sensitive purchases are screened by

the Committee on Foreign Investment in the

United States (CFIUS), and it is easier to find

examples of less sensitive technology being

blocked than of more sensitive technology being

sold.21 While the review process is not perfect and

surging Chinese investment means it is under

Figure 4. Chinese Investment in the US

Source: China Global Investment Tracker.

AMERICAN ENTERPRISE INSTITUTE 7

scrutiny, the loss of advanced technology through

legal sale has not been an issue to this point.

The issue is theft. The most important US

competitive advantage is in innovation. American

entrepreneurs and companies of all shapes and

sizes spend enormous sums on everything from

new drugs to simpler web billing procedures. IP

theft is not limited to violating patents or

siphoning technical data from servers; it includes

any attempt to steal information or brand value

from competitors. China steals the most

American IP of any country.22 Its size means

broad disrespect for IP constitutes an attack on

one of the foundations of the American economy,

in a way that equivalent or even worse behavior

by Costa Rica, for example, cannot match.

The expectation has been that China will better

protect IP because it increasingly has its own IP

to protect. This expectation is being dashed, in

part by the ease of cybertheft and in part by

China’s increasingly targeted attacks on foreign

IP in particular.23 For the foreseeable future the

US will face a large number of Chinese

enterprises that prefer stealing over trying to

create. This is the most harmful impact the PRC

has on the US, far worse than Americans running

up a trade deficit by buying and benefiting from

cheap Chinese goods.

Indirect Impacts: Global Stocks and More

A third class of Chinese effects is less important

but still claimed headlines over the past year:

impacts through third parties. The US has less

direct exposure to the PRC’s policies and

performance than most countries because the size

of the American economy means foreign trade

and investment matter less in general.24 Despite

endless hype, Chinese consumption has not

materialized as important to the US economy as it

has for commodities producers, for instance.

Chinese production matters to the entire world

but less so for richer countries that can afford

goods from higher-cost substitutes, such as

Mexico and Vietnam.

The very fact that the PRC matters more to other

countries, however, suggests it can affect the US

through those countries. On the positive side, the

drop in global commodities prices, featuring

more than a 50 percent drop in West Texas

Intermediate crude in just three years, has

reduced the cost of living for most Americans and

is partly due to slower growth in China.25

Against that, the deterioration in the PRC

economy is one cause of global weakness.

Countries from Angola to Zimbabwe became

reliant on unsustainable growth in Chinese

commodities demand and largesse in lending and

investment. Brazil may be the best example. It

rode high on the supercycle of rising commodities

prices, ignoring needed reforms. The crash Brazil

seemed to avoid in 2009 was merely delayed and

is occurring now. Unsurprisingly, US goods

exports to Brazil in 2015 were 25 percent below

their 2013 peak.26 Globally, American goods and

services exports fell 5 percent in 2015. Exports of

goods alone fell below their 2012 levels.

One Chinese policy in particular had sharp, short-

term effects in 2015 and 2016. The yuan’s peg to

the dollar meant it mirrored the dollar’s rise

against most currencies starting in mid-2011.

This prompted Beijing to try to weaken the yuan

in August 2015, but it did so without

communicating clearly how far the yuan would

fall. Fear of competitive devaluations and the

destabilization of trade relationships caused

regional stock markets to immediately plunge.

The S&P 500 held up for a few days, then

dropped 9 percent in 2 weeks.27 In January 2016,

Beijing did the exact same thing, and the S&P

dropped nearly 7 percent in 10 days. These were

not trade events—the yuan only dropped a few

percent.

It may be surprising that there is little discernible

connection between the large movements in the

yuan and American jobs, but a clear connection

between small movements and American stocks,

if only over a brief period. The main explanations

are volatility and transparency. Long-term

changes in the yuan’s effective exchange rate give

the especially flexible American economy time to

adjust, even if the yuan’s value is highly distorted.

The US has more difficulty adjusting to surprise

movements, whether justified by market forces or

not, but most economies find it nearly impossible

to adjust, causing immediate tremors in what are

AMERICAN ENTERPRISE INSTITUTE 8

often shallow local financial markets and indirect

pressure on the US.

Perhaps the most subtle way the PRC influences

the American economy is through competition in

third markets. This includes trade, investment,

and contracting within these markets. The

obvious effect is the added competition cutting

into revenue for American companies and

opportunities for American workers, such as

Lenovo’s global computer sales cutting into Dell’s

market share.28 On its own, this is just the way

free markets work. The problem is the nature of

the Chinese competition, which is often

noncommercial.

Chinese lenders and builders in particular make

cut-rate offers because they are often not trying to

make a profit, instead staying in operation

through government support. While many

countries receive at least short-term benefits

from over $500 billion in Chinese-backed power

plants and railways over the past decade,

American entities are priced out of financing and

construction. This has made globalization less

fruitful for the US. In an interesting, recent turn,

with the drop in the PRC’s holding of foreign

currency, the dramatic expansion of

noncommercial Chinese activity around the world

over the past decade is likely to ebb.29 There is no

longer an infinite supply of money enabling

Chinese firms to outbid American and other

rivals.

Better American Policy

There is little evidence that the trade deficit or the

value of the yuan costs American jobs. There is

considerably more evidence that China’s WTO

accession has not brought anticipated benefits to

the US to compensate for manufacturing job

losses, as Chinese IP theft and support for SOEs

harm American companies and workers. It is also

true that many American communities benefit

from Chinese investment. To be effective, US

policy must reflect the actual benefits and costs of

Figure 5. SP 500 vs. Exchange Rate, 2005–15

Sources: Federal Reserve Bank of St. Louis, “China/U.S. Foreign Exchange Rate,” https://research.stlouisfed.org/fred2/series/

DEXCHUS#; and Yahoo Finance, “S&P 500: Historical Prices,” March 28, 2016, http://finance.yahoo.com/q/hp?s=%5EGSPC+

Historical+Prices.

AMERICAN ENTERPRISE INSTITUTE 9

the Sino-American economic relationship. Here’s

how:

1. Do not try to “fix” the trade deficit.

There is no right number for a trade balance. A

large deficit could be due mostly to predatory

behavior or, as in the US case, to a large and

usually outperforming economy lying at the end

of global supply chains. The supposed solutions

to large trade deficits are awful. They would

disproportionately harm the poor through tariffs

or pick winners and losers through what boil

down to tax and subsidy schemes.30 This would

not only elevate one group over others, it would

harm more Americans than it helps. US

policymakers should choose the right policies at

home (see below) and let trade deficits go where

they will.

2. Barring a large devaluation, ignore the

yuan.

The yuan cannot be the basis for American policy.

It was almost surely undervalued in 2008, if by

an unclear amount. It has probably been

overvalued since 2014. If it is properly valued in

2020, it will most likely be accidental. The biggest

driver of the yuan’s value is the PRC’s wildly

distorted domestic financial system, which is

beyond US influence.31 Moreover, the proposed

policy responses to Beijing’s exchange rate policy

are the same as the responses to the trade

deficits: punish tens of millions of Americans in

order to punish China.

3. Do not grant market economy status.

The WTO accession agreement indicates China

should be treated as a market economy for the

purposes of American trade starting in late 2016.

Whatever the legal considerations, the PRC does

not have a market economy or anything close to

it. Its own statements about the state sector make

that clear.32 Pretending Beijing has implemented

the necessary reforms would undermine

American domestic political support for economic

engagement with China and can only make

justified attempts to address noncommercial

Chinese behavior less effective and more

complicated. It would be doubling down on a

flawed WTO decision.

4. Reorient policy to focus on foreign

barriers.

Punishing China (or others) just for selling cheap

goods Americans want to buy is self-defeating.

The US should, however, consider sanctions for

unacceptable barriers to exports. A prime

example is China’s sheltering of SOE from

competition. While Chinese SOEs are not major

exporters, the sectors in which they are most

protected likely experience excess capacity and

dumping, and sanctions in those cases might

encourage reforms that Beijing has failed to

undertake until now.33 Moreover, SOEs want to

invest in the US and can be reasonably restricted

on the grounds they do not operate on a

commercial basis.

5. Sanction the beneficiaries of stolen IP.

Criminal charges against IP thieves do little to

protect American innovation. In contrast,

spending time and resources to track the theft of

brands and technology to final users could be

extremely useful. Depending on the extent of

their complicity, Chinese entities and their

subsidiaries using stolen IP could be subject to

limits on investment in the US all the way to

being barred from any business, including export.

This will not be easy but has been shown to be

possible.34 It has the distinct benefit of shielding

those who respect IP and therefore encouraging

good behavior, which is indispensable for the US

to gain from the economic relationship.

6. Postpone any bilateral investment

treaty.

In light of IP theft and noncommercial operation

by SOEs, the Obama administration’s pursuit of a

bilateral investment treaty (BIT) is odd.35

American regulators need to be able to act freely

against Chinese investors that have broken the

law, and Beijing shows no interest in treating

American firms better.36 A BIT is warranted only

after years of better policy from Beijing. The

American business community should have

learned from WTO accession that the PRC has

many ways to circumvent agreements it does not

like. If the business community refuses to learn,

the US government should recognize that difficult

votes pertaining to globalization should be used

more wisely than on a China BIT.

AMERICAN ENTERPRISE INSTITUTE 10

7. Improve the environment for good

Chinese investors.

Chinese firms that obey American laws and

operate on a commercial basis are valuable

investors, and they are becoming more valuable

as Chinese spending in the US soars. At the

federal level, the CFIUS process should sort

investments as quickly as possible into those

requiring an investigation and the rest. In most

cases, this would quickly reduce the uncertainty

that surrounds seemingly every transaction.37

State and local governments will assign resources

to attracting Chinese companies fitting the level

of interest, where even the most basic steps to

provide information about local laws and

regulations will be helpful as less experienced

firms arrive.

8. Enforce existing US laws.

This is less a China problem than an America

problem. Branches of the US government appear

unwilling to hold Chinese firms or firms involved

in China-related business to the letter of

American law, particularly with regard to

disclosure.38 Chinese entities have cited

obligations to their own government as

overriding. If so, the operations of these entities

should not be deemed as meeting regulatory

requirements, and some should be banned from

the US altogether. A looming issue as the Chinese

presence expands is predatory pricing or other

antitrust violations, where the accused may also

seek to void American law.39

9. Seek high-quality trade and investment

agreements with like-minded partners.

A year ago this may have been a vacuous

statement; now it is controversial.40 The quality

of particular agreements and partners is

obviously debatable, but there are two compelling

reasons to at least try to reach sound agreements:

(1) to persuade Beijing that the status quo is

changing and the PRC must change or be left

behind and (2) to help protect friendly countries,

and ourselves indirectly, from questionable

Chinese economic and financial decisions. It

should be a permanent, bipartisan position that

the US will negotiate with any country that truly

embraces open, competitive markets, with the

battles only over which countries qualify.

10. Help make American workers and

firms more competitive.

Because the US economy is so large, policy

choices at home are more important than any

regarding international trade and investment.

This is not a paper on the domestic economy, but

the overarching goal is to make American

workers and firms more competitive. One such

policy change would be replacing the payroll tax

revenue with taxation that does not discourage

working and hiring. American companies are

heavily taxed on domestic activity, and replacing

the payroll tax would encourage production in the

US. It would also reduce the cost of hiring

American workers while actually increasing their

take-home pay. And there are certainly other

possibilities for pro-competitive tax reform.

High Stakes

American manufacturing employment plunged in

2001–03. Popular anger over this seems to be

growing rather than waning as time passes. It will

not return American manufacturing jobs or

assuage that anger to implement policies now

that might have worked before 2001 but no

longer make any economic sense. The US can

improve its commercial relationship with China,

but only by casting aside myths about the trade

deficit and exchange rate and focusing on export

barriers and intellectual property theft, as well as

the benefits of Chinese investment.

About the Author

Derek Scissors (derek.scissors@aei.org) is a

resident scholar at AEI.

Notes

1. Michael Santoli, “Battle of 2015: U.S. Economy

vs. the World,” Yahoo Finance, February 9,

2015, http://finance.yahoo.com/news/u-s--

economy-vs--the-world--which-will-win-

145856893.html.

2. US Census Bureau, “U.S. Trade in Goods and

Services—Balance of Payments (BOP) Basis,”

AMERICAN ENTERPRISE INSTITUTE 11

March 4, 2016, https://www.census.gov/

foreign-trade/statistics/historical/gands.pdf.

3. US Bureau of Labor Statistics, “Labor Force

Statistics from the Current Population Survey,”

March 28, 2016, http://data.bls.gov/

timeseries/LNS14000000.

4. North American Industry Classification System,

https://www.census.gov/foreign-trade/

statistics/country/index.html (unavailable April

8, 2016). Data are normally found at this

website, but have been unavailable for weeks at

the time of writing. Gary Gereffi and Timothy

Sturgeon, “Global Value Chain-Oriented

Industrial Policy: The Role of Emerging

Economies,” in Global Value Chains in a

Changing World, edited by Deborah K. Elms

and Patrick Low, July 2013, http://www.cggc.

duke.edu/pdfs/2013-07_Elms&Low_eds_

GlobalValueChains_in_a_ChangingWorld_

WTO.pdf.

5. US Census Bureau, “Trade in Goods with

China,” February 2016, https://www.census.

gov/foreign-trade/balance/c5700.html; and US

Bureau of Labor Statistics, “Employment,

Hours, and Earnings from the Current

Employment Statistics Survey (National),”

March 28, 2016, http://data.bls.gov/

timeseries/CES3000000001.

6. Michael Wines, “China’s Obsession with

Stability Can Come at the Cost of Laws,” New

York Times, May 14, 2012, http://www.

nytimes.com/2012/05/15/world/asia/china-

obsession-with-stability-can-come-at-the-cost-

of-laws.html.

7. Jaime McGeever, “China FX Reserve Sell-Off to

Soon Move Beyond U.S. Treasuries: BAML,”

Reuters, January 11, 2016, http://www.reuters.

com/article/us-global-markets-china-

idUSKCN0UP1VI20160111.

8. Fiona Li and Kyoungwha Kim, “China’s

Reserves Retreat from $4 Trillion Mark as

Ouflows Seen,” Bloomberg, October 16, 2014,

http://www.bloomberg.com/news/articles/

2014-10-16/china-s-reserves-retreat-from-4-

trillion-mark-as-outflows-seen.

9. Diego Anzoategui, Mali Chivakul, and Wojciech

Maliszewski, “Financial Distortions in China: A

General Equilibrium Approach,” International

Monetary Fund IMF Working Paper, December

2015, https://www.imf.org/external/pubs/ft/

wp/2015/wp15274.pdf.

10. US-China Business Council, “USCBC State

Export Report: China Third Largest Export

Market for American Goods,” June 16, 2015,

https://www.uschina.org/media/press/uscbc-

state-export-report-china-third-largest-export-

market-american-goods.

11. Office of the United States Trade

Representative, “United States Details China

and India Subsidy Programs in Submission to

WTO,” October 2011, https://ustr.gov/about-

us/policy-offices/press-office/press-releases/

2011/october/united-states-details-china-and-

india-subsidy-prog.

12. Huaxin Zhao, “China Names Key Industries for

Absolute State Control,” China Daily,

December 19, 2006, http://www.chinadaily.

com.cn/china/2006-12/19/content_

762056.htm.

13. David H. Autor et al., “The China Shock:

Learning from Labor Market Adjustment to

Large Changes in Trade,” National Bureau of

Economic Research NBER Working Paper No.

21906, January 2016, http://www.nber.org/

papers/w21906.

14. “Five Features for China’s Economy in 2003,”

People’s Daily, December 24, 2003,

http://en.people.cn/200312/24/eng20031224_

131138.shtml.

15. US Department of Commerce, Bureau of

Economic Analysis, “U.S. Direct Investment

Abroad: Balance of Payments and Direct

Investment Position Data,” March 17, 2016,

http://www.bea.gov/international/di1usdbal.

htm.

16. National Bureau of Statistics of China, China

monthly statistics, January 2016, http://data.

stats.gov.cn/english/easyquery.htm?cn=A01.

17. American Enterprise Institute, China Global

Investment Tracer, January 2016,

https://www.aei.org/china-global-investment-

tracker.

18. Derek Scissors, “Chinese Money Prefers the

US,” American Enterprise Institute, March 14,

2016, https://www.aei.org/publication/

chinese-money-prefers-the-us.

19. Shan Li and Abby Sewell, “Lancaster Mayor R.

Rex Parris Has a Big Business Dream: China,”

Los Angeles Times, October 27, 2013,

http://www.latimes.com/business/la-fi-

lancaster-china-20131027-story.html.

20. Linda Yueh, “Rule of Law v Rule of Party,” BBC

News, October 24, 2014, http://www.bbc.com/

news/business-29754688.

21. Geoffrey Smith, “U.S. Kills Philips’ LumiLEDs

Sale and No-One Knows Why,” Fortune,

January 22, 2016, http://fortune.com/2016/

01/22/u-s-kills-philips-lumileds-sale-and-no-

one-knows-why.

AMERICAN ENTERPRISE INSTITUTE 12

22. Commission on the Theft of American

Intellectual Property, The IP Commission

Report: The Report of the Commission on the

Theft of American Intellectual Property,

National Bureau of Asian Research, May 22,

2013, http://www.ipcommission.org

/report/ip_commission_report_052213.pdf.

23. Joe McDonald, “Foreign Companies Feel China

Targets Them in Investigations,” Phys.org,

February 11, 2015, http://phys.org/news/2015-

02-foreign-companies-china.html; and Jack

Goldsmith, “Disconcerting U.S. Cyber

Deterrence Troubles Continue,” Lawfare,

September 15, 2015, https://www.lawfareblog.

com/disconcerting-us-cyber-deterrence-

troubles-continue.

24. Wells Fargo Securities, “How Exposed Is the

U.S. Economy to China?” August 13, 2015,

http://www.realclearmarkets.com/docs/2015/

08/US%20Exposure%20to%20China%20_

%20Aug%202015.pdf.

25. US Energy Information Administration,

“Petroleum & Other Liquids,” March 28, 2016,

https://www.eia.gov/dnav/pet/hist/Leaf

Handler.ashx?n=PET&s=RWTC&f=D.

26. Paulo Trevisani, “Brazil Faces Double Squeeze

of Inflation and Recession,” Wall Street

Journal, February 23, 2016, http://www.wsj.

com/articles/brazil-faces-double-squeeze-of-

inflation-and-recession-1456252525.

27. Chao Deng, “Asia Stock Slump Deepens After

China Devaluation Move,” MarketWatch,

August 12, 2015, http://www.marketwatch.

com/story/asia-stock-slump-deepens-after-

china-devaluation-move-2015-08-12; and

Yahoo Finance, “S&P 500: Historical Prices,”

September 29, 2015, http://finance.yahoo.com/

q/hp?s=%5EGSPC+Historical+Prices.

28. International Data Corporation, “PC Leaders

Continue Growth and Share Gains As Market

Remains Slow, According to IDC,” January 12,

2015, http://www.idc.com/getdoc.jsp?

containerId=prUS25372415.

29. Derek Scissors, “The Double-Edged Sword of

China’s Global Investment Success,” American

Enterprise Institute, January 2016, https://

www.aei.org/wp-content/uploads/2016/01/

Double-Edged-Sword-of-China%E2%80%99s-

Global-Investment-Success.pdf; and Xin Zhou,

“A Trillion-Dollar Question on China’s Forex

Dilemma: Just How Low Should Its Reserves

Go,” South China Morning Post, January 9,

2016, http://www.scmp.com/news/china/

economy/article/1898978/trillion-dollar-

question-chinas-forex-dilemma-just-how-low-

should.

30. Kevin D. Williamson, “What Trump Doesn’t

Understand—It’s a Lot—About Our Trade

Deficit with China,” National Review, January

10, 2016, http://www.nationalreview.com/

article/429510/trade-deficit-united-states-

china-donald-trump; and Louis Uchitelle,

“Subsidies Aid Rebirth in U.S. Manufacturing,”

New York Times, May 10, 2012, http://www.

nytimes.com/2012/05/11/business/subsidies-

aid-rebirth-in-us-manufacturing.html.

31. Derek Scissors, “Beijing Is Forever Blowing

Bubbles,” Barron’s, July 16, 2015,

http://www.barrons.com/articles/beijing-is-

forever-blowing-bubbles-1437011184?

mod=BOL_hp_highlight_4.

32. Qiang Liu, “China Will Increase Farmers’

Property Rights,” China.org.cn, November 14,

2013, http://www.china.org.cn/china/2013-

11/14/content_30599289.htm; and Xinhua,

“CPC Announces Decision on Comprehensive

Reform,” Xinhuanet, November 12, 2013,

http://news.xinhuanet.com/english/china/

2013-11/12/c_132882325.htm.

33. Xinhua, “China to Curb Blind Investment,

Over-Capacity in Steel Industry,” China Daily,

March 11, 2004, http://www.chinadaily.com.

cn/english/doc/2004-03/11/content_

313856.htm; and Rui Fan, “China’s Excess

Capacity: Drivers and Implications,” Law

Offices of Stewart and Stewart, February 2016,

http://www.stewartlaw.com/Content/Documen

ts/China's%20Excess%20Capacity%20-

%20Drivers%20and%20Implications.pdf.

34. Dune Lawrence, “Which Companies Benefited

from China’s Hack Attacks,” Bloomberg, May

22, 2014, http://www.businessweek.com/

articles/2014-05-22/u-dot-s-dot-hacking-case-

suggests-top-chinese-firms-baosteel-chinalco.

35. Cory Bennett and Megan R. Wilson, “President

Quietly Closes in on China Investment Treaty,”

Hill, October 14, 2015, http://thehill.com/

business-a-lobbying/business-a-lobbying/

256845-president-quietly-closes-in-on-china-

investment.

36. Laurie Burkitt, “American Companies Say

Doing Business in China Is Getting Tougher,”

Wall Street Journal, January 19, 2016,

http://www.wsj.com/articles/american-

companies-say-doing-business-in-china-is-

getting-tougher-1453260461.

37. It is worth nothing that the CFIUS link

(https://www.treasury.gov/offices/

AMERICAN ENTERPRISE INSTITUTE 13

international-affairs/cfius/) still provided by

the Department of Commerce is broken.

38. “The SEC Caves on China,” Wall Street Journal,

February 26, 2015, http://www.wsj.com/

articles/the-sec-caves-on-china-1424967173.

39. Christie Smythe, “China Vitamin C Price-Fixing

Verdict Scrutinized by Court,” Bloomberg,

http://www.bloomberg.com/news/articles/

2015-01-29/china-vitamin-c-dispute-sets-up-

clash-over-u-s-antitrust-law.

40. Doug Palmer, “Candidates Weaponize Free-

Trade Issue, Politico, March 12, 2016,

http://www.politico.com/story/2016/03/

clinton-hardens-line-against-tpp-trade-deal-

220674.