2

中国経済経営研究

第 2 巻第 1 号【特集：競合か協調か：トランプ習時代の米中経済関係を占う】【特集論文】

Issues of US-China Economic Relations in 2017
Eric HARWIT【Keywords】US-China economic relations, trade, intellectual property protection,“One Belt, One Road”, Tesla Inc.
【JEL Classification Code】F51

Introduction

As for Chinese foreign economic issues, the“One Belt, One Road” project is currently aThis article is an overview of current US-

main international economic venture promoted

China economic relations, and considers someand funded by the Chinese government andof the key issues in the ties between theseother Chinese sources. The article discusses

two countries. It begins by discussing the

progress and developments in this area.

large trade surplus China holds with the US.

The article concludes with a case focus

This trade imbalance is a major source ofonfrustration for the current US administration,

Tesla, which exemplifies some of thetheAmericanautomobile

company,

led by President Donald Trump. The article

key issues facing American companies

explores some of the reasons China desiresas they contemplate investment in theto keep its export-led economic advantage in

PRC. It considers the dilemma the Trump

trade.

administration faces in regard to these

The article then considers other key

investment issues, with a desire to remedy thefeatures of US-China economic ties. It notes

trade imbalance and settle other outstanding

on-going problems between the two nations,

economic disputes, with the need to retain

including intellectual property protection, andChinese assistance in dealing with North

Chinese cyber infiltration and acquisition of

Korea’s disruptive role in East Asia.

key business data. It assesses Chinese lending
to the US that helps support continued

Trade Issues

American budget deficits. It examines recent

One of the main points of contention

trends in Chinese foreign direct investment

between the United States and China underin the US, and notes a changing pattern

the new American administration of President

in the past months. It then turns to issues

Donald Trump is the trade imbalance between

related to regional trade, including the Trans-

the two nations. In 2016, the US had a total ofPacific Partnership (TPP) and Regional

about $579 billion in trade with China, but had

Comprehensive Economic Partnership (RCEP)a deficit of $347 billion.1 This trade deficit was

multi-lateral trade regime proposals.

far larger than that the US had with otherIssues of US-China Economic Relations in 2017

nations, such as Japan, at $69 billion; Germany,

On

the

Chinese

3

side,

many

coastalat $65 billion; Mexico, with a $63 billion deficit;

manufacturers depend on exports to keep

or South Korea, at $28 billion.2

their factories running. The loss of an export

Despite this trade imbalance, China is amarket such as the United States would bemajor market for many American products,

devastating to these export industries. The

including ones produced in President Trump’

US has for years complained that Chinas political base. For example, China is thesubsidizes many of its state-owned enterpriselargest foreign market for American soybeans,

exporting industries, but has had few results

produced in the US’s rural heartland statesin changing Chinese production patterns. In

such as Iowa, Indiana, and Nebraska. The PRC

April, 2016, after a challenge in the Worldis also the largest market for US airplanes,

Trade Organization (WTO), the PRC did end

buying 25 percent of Boeing’s passenger planea subsidy program that aided small companies

production in 2016. It is also the second largest

engaged in the textile and seafood export

foreignbusiness. But that program only amounted tomarketfor

Americancotton,automobile automobile industry products, andsemiconductors.3
So a trade war between the two countries
could lead to major harm to the industries

about $1 billion in subsidies.5

Intellectual Property Protection
and Foreign Investment

Trump wants to protect. Furthermore,

The US has also seen theft of intellectual

American retailers would see higher prices forproperty as a harmful trend in bilateral

products imported from China, such as down

economic ties. To remedy this problem, injackets, which may cost $40 to import from

August President Trump requested the US

China, and sell at a large profit for $200. And

Trade Representative Office to use Sectionof course, American consumers would likely

301 of the 1974 US Trade Act to investigate

see higher prices for the furniture, footwear,

Chinese laws and policies that could be

toys, machinery, and other products the US

harmful to US intellectual property protection.

imports from the PRC.

This American action was seen as puzzling,4───────────
1 Office of the US Trade Representative, online
at https://ustr.gov/countries-regions/china-mon
golia-taiwan/peoples-republic-china
2 For Japan, Mexico, and South Korea: Officeof the US Trade Representative, various pages,
online at http://ustr.gov; for Germany, US
Census Bureau, “Trade in Goods with Germany,”
online at https://www.census.gov/foreign-trade/balance/c4280.html#2016; trade statistics arecomparable across sources
3 Business Insider, August 18, 2017, online at
http://www.businessinsider.com/us-begins-secti
on-301-investigation-2017-8
4 Business Insider, August 18, 2017, online at
http://www.businessinsider.com/us-begins-secti
on-301-investigation-2017-8

because after China joined the WTO in 2001,
most such disputes have been referred tothe international trade body for resolution.6
But President Trump was likely aiming to
make a larger public statement about Chinese
economic policies through the use of thetargeted investigation process.
On a related note, Chinese cyber-spies have───────────
5 Wall Street Journal, April 14, 2016, online
at https://www.wsj.com/articles/china-haltsexport-subsidy-program-u-s-says-1460643214
6 Business Insider, August 18, 2017, online at
http://www.businessinsider.com/us-begins-secti
on-301-investigation-2017-8

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中国経済経営研究

第 2 巻第 1 号

targeted some major US corporations in recent

in Chinese investment in the US, to $29 inyears, with specific victims including US Steel,consummated deals.9

Alcoa Inc., and Westinghouse Electric. But

The Trump administration also soughtin September 2015, the Chinese government

to slow Chinese acquisitions of Americanagreed to stop supporting the hacking ofcompanies with key technologies: in late

American trade secrets. By June of last year,

2017, the US government effectively blocked

there were reports that security breachesa Chinese private equity firm from buying

from Chinese-based groups had plunged by

Lattice Semiconductor Corp. for $1.3 billion.

90 percent. This development seems to be a

The US argued that national security concerns

bright spot in US-China economic ties.

overrode the American company’s desire for

7

Other key elements of the bilateral econo-

the sale.10 Though the Trump administration

mic relation are Chinese lending to the US to

may be able to better protect US technologicalsupport ongoing American domestic budget

interests, such action could lead to the loss

deficits, and Chinese foreign direct investment

of deals that can bring needed capital andin the US. As of October, 2017, China had

perhaps new markets to companies based inessentially loaned the US $1.2 trillion, which

many parts of America.

was about 19 percent of the $6.3 trillion in

Regional Trade and the One Belt,
One Road Project

US Treasury bills, notes, and bonds held byforeign countries. 8 American lenders held
the rest of the US $20 trillion national debt.

Overall, Trump’s policies seem to be brin-

But China has reduced its debt holding fromging the US closer to economic isolation on$1.3 trillion in 2013, as it sells dollars try to

the global stage. In one of his first acts, thestrengthen its currency. The reduced debt

President withdrew the US from the process

may also calm American fears that the nation

to conclude the Trans-Pacific Partnershipowes too much to the PRC.

(TPP) trade agreement. This step may have

China has also become a major overseas

been welcomed in China, because the PRC wasinvestor. In 2015, Chinese companies spent

not a member of the proposed trade pact. In

about $16 billion to buy US corporations,fact, in 2017 some press reports indicate China

real estate, and other entities. The following

was concerned that Japan and other nations

year, investment surged to some $45 billion.

still part of the TPP process were pushing

However, in August 2017, the Chinese govern-

ahead to conclude the regional economic

ment decided to limit overseas investment inagreement.11 Moreover, China was pressing

real estate, hotels, cinemas, sports, and related

ahead with a rival multilateral economic───────────industries. The result was a steep decline───────────
7 Reuters news report, June 20, 2016, online
at https://www.reuters.com/article/us-cyberspying-china/chinese-economic-cyber-espionageplummets-in-u-s-experts-idUSKCN0Z700D
8 The Balance, December 27, 2017 report,
online at https://www.thebalance.com/u-s-debtto-china-how-much-does-it-own-3306355

9Rhodium Group report, January 17, 2018,
online at http://rhg.com/notes/chinese-fdi-inthe-us-in-2017-a-double-policy-punch
10 New York Times, September 13, 2017, online
at https://www.nytimes.com/2017/09/13/busine
ss/trump-lattice-semiconductor-china.html
11 Japan News, November 6, 2017, reproduced
online at https://www.bilaterals.org/?china-vigi
lant-about-revival-ofIssues of US-China Economic Relations in 20175agreement, the Regional Comprehensive

American plea. Japan is not a member of the

Economic Partnership (RCEP), which did

bank, but is currently considering joining later

include China but pointedly excluded the US.

on.

In addition to the RCEP, the “One Belt, One

In May, 2017, in addition to earlier spending,Road” project is one of China’s major efforts

Xi pledged $113 billion toward the Silk Road

to exert its economic influence outside of theinitiative.13 In a speech to a Belt and Road

country’s borders. In this way, it is setting

forum, to an audience that included Russian

itself up in some ways to be a global economic

President Vladimir Putin and leaders ofcompetitor to the United States. The following

Turkey and Pakistan, President Xi said

paragraphs discuss this project, and its“We will build an open platform, defend

relevance for China’s economic outreach.

and develop an open world economy, jointly

The project consists of several parts. In

create an environment good for opening-

2013, Chinese president Xi Jinping proposed

up and development, and push for a just,building the “Silk Road Economic Belt” and thereasonable and transparent international trade“21st-Century Maritime Silk Road.” The “belt”

and investment system so that production

countries range from China to Central Asia,

materials can circulate in an orderly way, be

and on to Russia and eastern and western

allocated with high efficiency and markets are

Europe. The “maritime road” nations stretch

deeply integrated.”14 Xi’s comments followed

as far west as northern Africa to the eastern

similar calls for free trade and a defense ofedges of Indonesia, in Southeast Asia. In thisglobalization from earlier in 2017. His words

way, China is seeking economic influence instood in sharp contrast to President Trump’

many areas that may have been outside of thes protectionist rhetoric and criticism of

US trade and investment sphere, but wereinternational trade agreements, such as thestill integral to US security interests.

TPP and the North American Free Trade

The projects consist of investments inAgreement.

infrastructure, such as roads, rail, and harbor

The “One Belt, One Road” initiative has

construction. The goal is to achieve regionalalready led to some concrete developments. In

integration in a cohesive economic area.

May of 2017, Kenya opened its 290-mile train

To support funding for the projects, Chinaline, running from Nairobi to Mombasa. The

led the creation of the Asian Infrastructureline took $3.2 billion of Chinese investment.15

Investment Bank (AIIB), which opened for

In July, Sri Lanka signed a $1.12 billion

business in January 2016 with capitalization ofagreement to allow a Chinese state-owned$100 billion. As of 2018, the bank had a total───────────
13 South China Morning Post, May 14, 2017,
online at http://www.scmp.com/news/china/
diplomacy-defence/article/2094248/xi-jinpingpledges-us113-billion-he-woos-world-board
14 South China Morning Post, May 14, 2017,
online at http://www.scmp.com/news/china/dip
lomacy-defence/article/2094248/xi-jinping-pledg
es-us113-billion-he-woos-world-board
15 BBC news report, May 31, 2017, online at
http://www.bbc.com/news/world-africa-40092600

of 84 approved members.12 The United States
notably did not join the AIIB, and tried toconvince allies not to join. Many close friendsof the US, including the United Kingdom,
Germany, and South Korea ignored the───────────
12 AIIB website information, at https://www.
aiib.org/en/general/faq/index.html

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中国経済経営研究

第 2 巻第 1 号

enterprise to operate the port of Hambantota

company never really succeeded to produce

in the southeast part of the island nation.

jeep-model vehicles, it set the stage for later

16

However, in December 2017, Sri Lanka

investments by American companies.

granted China a 99-year lease on the port toIn the late 1990s, General Motors createdlessen the South Asian nation’s debt burden

its first joint venture in China in the moreto the PRC.17 Despite the seemingly growing

industrialized city of Shanghai. Over its first

dependence of some developing nations on

20 years, the company succeeded in becoming

China’s investment in the project, the initiative

a leader in China’s automotive sector, and sold

was showing results in regions and nations

4.04 million vehicles in China in 2017,18 about

far from the country’s borders, while further

14 percent of a total of 28.9 million vehicle

integrating these countries with China’s

sales in the PRC that year.19

rapidly growing economic global network.

Case Focus: Tesla Inc.

For General Motors and nearly all otherforeign car producers in China, however, the50 percent ownership limit means half of their

In the concluding part of the article, we

profits must go to Chinese corporate partners.

turn to a relevant development in China-

The companies also are expected to share

US economic ties: namely, the proposed newtechnology. Tesla, which closely guards its

Tesla Inc. factory in Shanghai’s Free Tradebattery technology, would like to avoid these

Zone. The article considers this case, and the

problems by creating their 100 percent foreign

implications for US investment in China.

owned factory.

In the automobile sector, China has limited

But Tesla faced challenges from bothforeign investment for carmakers to 50

the American and Chinese sides. During

percent ownership. But Tesla announced in

his campaign for office, President Trump

June it was in talks with Chinese officials to

criticized US manufacturing companies that

produce cars in Shanghai, and last month,

moved production abroad. He singled out Fordpress reports indicated Tesla would create a

Motors for a plan to shift small car production

100 percent wholly-foreign owned venture,

to Mexico, calling it “horrible.”20 As for China,

with the goal of selling its cars on thehe said “our jobs are fleeing the country …

domestic Chinese market.

you look at what China is doing to our country

If Tesla succeeds, it would follow in thesteps of other American car manufacturers in
the PRC. As early as 1983, American Motors
invested $16 million in a joint venture with
the Beijing Automotive Works. Though the───────────
16 DNA India report, July 30, 2017, online at
http://www.dnaindia.com/business/report-sri-lanka-china-sign-deal-to-develop-hambantota-port2518106
17 New York Times, December 12, 2017, online
at https://www.nytimes.com/2017/12/12/world/asia/sri-lanka-china-port.html

in terms of making our product.”21───────────

18 South China Morning Post, January 4, 2018,
online at http://www.scmp.com/business/companies/article/2126860/gm-car-sales-speed-past-re
cord-4-million-2017-china-even-it-hits
19 Markline report, January 4, 2018, online athttps://www.marklines.com/en/statistics/flash_sales/salesfig_china_2017
20 CNBC report, September 15, 2016, online
at https://www.cnbc.com/2016/09/15/trumpslams-fords-horrible-mexico-move.html
21 Quartz report, September 27, 2016, online athttps://qz.com/792387/presidential-debate-trum
ps-first-lies-of-the-debate-were-all-about-china/Issues of US-China Economic Relations in 20177

From the Chinese side, economic policies

combat air pollution and save on imported oil,seem to be more welcoming. In 2013, thethe nation has set goals to produce as many

PRC opened its first Free Trade Zone (FTZ)

as three million electric vehicles by 2020,27 andin Shanghai. In 2017, the country hosted 11seven million by 2025.28 Tesla’s productionof these FTZs, 22 which encourage foreign

presence would help meet these ambitious

investment with more relaxed rules than ingoals.

other parts of the country. In September, aHowever, Chinese officials may fear otherdraft proposal indicated foreign carmakers

foreign vehicle manufacturers, including

could create wholly owned factories in these

General Motors, would call for similarzones.

However, if such ventures wanted totreatment. They might even ask to eliminate

sell vehicles in China, they would have to pay

the rule allowing a maximum of 50 percent

the 25 percent import tax the country levies

foreign ownership for companies outside

23

on imported vehicles.

24

the FTZs selling gasoline-fueled cars on the

Tesla has some advantages working toward

Chinese domestic market. Because foreign

its investment plan. In 2016, it sold somemanufacturers still dominate much of the

11,000 cars in China,25 so it saw a firm market

vehicle industry in China, it could be afor its products. Because Teslas are seen as

problem if American and other outside auto

luxury cars, customers may not be sensitive tomakers gain a larger hold on car production.

the added tariff costs. Furthermore, earlier in2017 the Chinese company Tencent Holdings

Conclusionbought five percent of Tesla for $1.8 billion,26

The current status of the Tesla case serves

giving the American company some element

as an example of larger current Americanof Chinese ownership control.

policies toward China. Since Tesla made its

Finally, China would benefit by increasing

initial announcement of intentions to build a

its electric vehicle production capability. To

Shanghai factory, President Trump has been───────────
22 Wall Street Journal, October 22, 2017, online
at https://www.wsj.com/articles/tesla-strikes-deal-with-shanghai-to-build-factory-in-china-1508670
181
23 Bloomberg News report, reproduced in the
The Malaysian Reserve, September 20, 2017
online at https://themalaysianreserve.com/2017/09/20/china-weighs-foreign-ev-makers-ftz/
24 Wall Street Journal, October 22, 2017, online
at https://www.wsj.com/articles/tesla-strikes-deal-with-shanghai-to-build-factory-in-china-1508670
181
25 Wall Street Journal, October 22, 2017, online
at https://www.wsj.com/articles/tesla-strikes-deal-with-shanghai-to-build-factory-in-china-1508670
181
26 Wall Street Journal, March 29, 2017, online athttps://www.wsj.com/articles/chinas-tencent-bu
ys-5-stake-in-tesla-1490702095

silent on the proposal. One reason for this may
be the fear of a backlash from the US business
community, whose support Trump needs
for many of his domestic economic polices.
Tesla, after all, has made major investmentsin the US, building factories to make vehicles,
electric batteries, and other products thatcreate jobs for Americans. Many other
American companies with ties to China can───────────
27 Quartz report, May 3, 2017, online at https://qz.com/972897/china-is-selling-more-electric-veh
icles-than-the-us-and-its-not-even-close/
28 Wall Street Journal, October 22, 2017, online
at https://www.wsj.com/articles/tesla-strikes-deal-with-shanghai-to-build-factory-in-china-1508670
181

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中国経済経営研究

make similar arguments.

第 2 巻第 1 号

So as long as foreign security is at the top

The other reason Trump may be relativelyof the American agenda, companies like Tesla,

quiet on this and other issues related to Sino-and overall China-US economic relations,

American economic ties, is the importancewill likely avoid being targeted by the US

of China for resolving problems with Northadministration. Moreover, as noted earlier,

Korea. In early November, 2017, just his

a trade war would likely have devastating

before travel to Asia, when asked in a Fox

effects on both nations, leading to lose-loseNews television interview if he planned

consequences. Because of these factors, weto be tough on China over issues of trade,

may cautiously expect to have a relatively

intellectual property theft, and government

stable relation in US-China economic ties, as

subsidies, Trump responded “You have toleast in the short-term future.

understand something - very important. We
have a problem called North Korea.”29───────────
29 Reuters news report, November 2, 2017, online
at https://www.reuters.com/article/us-usa-trump-asia/trump-dogged-at-home-begins-longest-presidential-asia-trip-in-years-idUSKBN1D30A9(Eric Harwit, University of Hawaii)