TABLE A-11.-CHINA: FINANCIAL BALANCE WITH NON-COMMUNIST COUNTRIES, 1970-76

1 Net total of estimated transport costs, overseas remittances, downpayments for plants, and foreign aid. From table A-10, principal and interest.

* From table A-10, includes short-term and medium-term supplier credits.

THE SINO-AMERICAN COMMERCIAL RELATIONSHIP

BY MARTHA AVERY AND WILLIAM CLARKE

Since 1975, trade has continued to be an active element in the Sino-American relationship. The absence of normalized relations, however, and the unresolved nature of the linked claims and assets issues, the continued tariff discrimination, and the inability of the PRC to utilize Export-Import Bank facilities should they wish to do so, have all hampered the fuller development of trade and commerce. Despite these constraints, trade will grow in 1978 and the increased exchange of trade delegations augurs well for further development of the commercial relationship as called for by the Shanghai communique. During his term in office, President Ford reconfirmed U.S. support of the Shanghai communique and normalization of relations. He traveled to Peking in December 1975. In February 1977, President Carter affirmed the new administration's support of the communique and the desirability of normalization. In pursuit of this objective, the President sent Secretary Vance to Peking in August 1977.

In January 1975, passage of the Trade Act of 1974 brought into law a variety of requirements that had the potential for affecting the newly developing Sino-American trade by adding to the requirements the PRC would have to meet if full normalization of the commercial relationship were to occur. Extension of most favored nation (MFN) tariff treatment and availability of Export-Import Bank loans are controlled by the requirements of the act. At this time, it seems unlikely that the PRC would discuss these requirements, at least prior to negotiations over full normalization.

Trade, which had peaked in 1973 and 1974, was down to more modest levels in 1976 and 1977. The United States ran balance-of-trade deficits with the PRC in both these years. A gradual and generally steady growth in levels of both Chinese exports and U.S. exports of nonagricultural commodities, however, points to a commercial relationship moving forward at a realistic pace. The resumption of agricultural sales in 1977 bodes well for further increases. Two-way trade in 1978 should reach $1 billion, up nearly 270 percent from 1977; the U.S. surplus should reach $300 to $400 million.

At times the export by China of various commodities has held a potential for disrupting the U.S. market with a resulting U.S. imposition of quotas. Chinese textile exports in late 1975 reached levels that raised calls for quotas, but shipments dropped in 1976 and no actions were taken. In late 1977, the first test case of market disruption under the Trade Act of 1974 occurred when a petition alleged disruption caused by export of cotton work gloves to the United States. The International Trade Commission ruled against the petition in March 1978.

Another development that has gained momentum since 1975, particularly since the arrest of the Gang of Four in late 1976, has been the technical seminar type of trade delegation. Both associations and individual firms were invited to Peking in increasing numbers during 1977. For the Chinese, the seminar provides information on the latest technology while the Americans view the seminar as a selling technique. The number of these visits appears to be increasing as the PRC moves toward more purchases of Western plant and technology to support their drive for the modernization of industry.

In the use of the seminar and in other ways more U.S. firms are introducing their products to China and laying the foundation for a continuing and mutually beneficial exchange of trade. While a sober appraisal of progress to date shows that trade has been less spectacular and more difficult than expected, it is also recognized that more U.S. businessmen are traveling to China each year and more Chinese delegations are arriving here as the process of expanding commerce in accord with the Shanghai communique continues.

B. COMMERCIAL RELATIONS: CONTINUED

Relations Resumed

President Nixon's trip to China in February 1972 was the culmination of an American initiative begun in 1969 to reopen a relationship interrupted in 1950 by the Korean hostilities. Step-by-step American moves selectively removing passport restrictions, 'removing certain

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minor controls on trade, and amending certain bunkering restrictions during 1969 and 1970 were precursors of the more significant actions of 1971. In that year, the United States removed all restrictions on travel to China, removed controls on the use of dollars in transactions with the PRC, extended bunkering authorizations, and in April 1971 announced an intention of ending the 21-year-old embargo.

The first Chinese response to our 1969 overture was Peking's invitation in April 1971 to the American ping pong team. Subsequently the United States terminated the embargo, placing a large number of commodities for export to the PRC under general licensing requirements. In July 1971, the President announced his intention of visiting China and in October the United Nations voted to seat the People's Republic of China.

The President's visit produced the Shanghai communique which remains to this date the foundation of U.S. policy toward China. In further steps during 1972, the United States placed the PRC in the same category as the U.S.S.R. and certain East European countries for export control purposes.1

Trade Expands

Regarding commercial relations the Shanghai communique said:

Both sides view bilateral trade as another area from which mutual benefits can be derived and agree that economic relations based on equality and mutual benefit are in the interest of the peoples of the two countries. They agree to facilitate the progressive development of trade between the two countries.

In 1973, the opening of the U.S. Liaison Office (USLO) in Peking and the PRC Liaison Office (PRCLO) in Washington facilitated commercial relations. At the same time, these relations were also encouraged by the creation of the National Council for United StatesChina Trade.

During 1973 and 1974, trade between the two countries rose very rapidly to $805.1 and $933.8 million, respectively. The United States ran highly favorable trade balances owing to the large sales of wheat and other agricultural products. Also noteworthy at this time were the sales to China of commercial jet transport aircraft, about $150 million, and of eight ammonia (fertilizer) plants, over $200 million.

In 1973, American exporters had shipped $24.2 million in steel scrap to China, but when U.S. short supply controls were imposed on July 2, 1973, the PRC was given only a small allocation based on historical patterns of shipment. These U.S. controls were terminated on December 31, 1974, but scrap imports never recovered to precontrol levels despite the demonstrable requirements of the Chinese steel industry. Shipments in 1976 and 1977 totaled only $4.3 million. Passage of the trade Act of 1974 brought into law a variety of requirements that had the potential for affecting the newly developing Sino-American trade by adding to the requirements the PRC would have to meet if full normalization of the commerical relation was to occur. Under the act, the President is authorized to extend non

1 For a chronology of the events described above see the appendix. For additional detail also see William W. Clarke and Martha Avery, "The Sino-American Commercial Relationship" in Joint Economic Committee compendium on China, China: A Reassessment of the Economy, Washington, D.C., 1975, pp. 500-534.

discriminatory tariff treatment (MFN or most-favored-nation treatment) as part of a bilateral commercial agreement to nonmarket economy countries not currently receiving such treatment. Certain conditions set forth in the Trade Act preclude such a bilateral agreement, however, if the President determines that the country impedes its citizens from exercising the right or opportunity to emigrate. The President is authorized to waive by Executive order these conditions for a period of 18 months if he reports to Congress that the waiver will substantially promote the free emigration objectives. A negotiated bilateral commerical agreement resulting from such a waiver must contain various specific provisions, including safeguard arrangements and consultative mechanisms in cases of market disruption, patent and trademark protection not less than the rights specified in the Paris. convention for the protection of industrial property, copyright protection not less than that afforded by the Universal Copyright Convention, provisions for the promotion of trade, and others. At this time, it seems somewhat unlikely that the PRC would even discuss these requirements, at least prior to negotiations over full normalization of relations.

American Delegations Begin

The year 1975 was marked by the first visits to the United States of delegations from the PRC's foreign trade corporations and by the visit of a delegation from the China Council for the Promotion of International Trade (CCPIT). The CCPIT trip was in return for the National Council's (NCUSCT) visit of mid-1973. The 22-month interval between the two trips, unexpectedly long by early American expectations, probably reflected a reservation on the part of the Chinese about moving ahead too rapidly in the commercial sector without commensurate progress in the political arena. Besides the CCPIT visit, four other Chinese delegations arrived during the year and the first two American technical seminar type trade delegations visited Peking. In December 1975, President Ford traveled to the PRC, where discussions centered on international affairs, although outstanding issue of commerical concern were also reviewed. President Ford reaffirmed the determination of the United States to complete the normalization of relations with the PRC on the basis of the Shanghai communique, which Vice Premier Teng Hsiao-ping described as remaining "full of vitality." According to the Department of State, discussions in Peking significantly promoted the objectives which the United States and the PRC share with regard to both our bilateral relations and the international scene. American exports for the year, however, were only 37 percent of exports in 1974.

Despite the low level of Sino-United States trade in general, during the last quarter of 1975 exports of Chinese cotton textiles to the United States increased so dramatically that strong concerns were voiced by the domestic textile industry, U.S. imports in 1975 were 169 percent over 1974. Since the Chinese, unlike all our other major textile trading partners, do not participate in the GATT Multi-Fiber Arrangement, discussion in the administration during the winter of 1976 centered on the possibility of having to place quotas on certain categories of Chinese cotton textiles. Quotas were not applied, however, because Chinese exports declined significantly in 1976. This was either due to increased prices or to a unilateral PRC decision to reduce shipments to avert triggering the imposition of quotas.