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 ([email protected]) 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.
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