China Trade: U.S. Exports, Investment, Affiliate Sales Rising, but Export Share Falling
Published: 2005-12-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: China is important to the global economy and a major U.S. trading partner. By joining the World Trade Organization (WTO) in 2001, China pledged to further liberalize its trade regime and follow global trade rules. While U.S.-Chinese commercial relations have expanded, controversies have emerged, including the size and growth of the U.S. trade deficit with China, China's lack of intellectual property protection, and China's implementation of its WTO obligations. Despite these challenges, China's vast consumer and labor markets present huge opportunities for U.S. exporters and investors. GAO (1) analyzed U.S. goods and services exports to China, (2) assessed how U.S. exports to China have fared against those of other major trading partners, and (3) analyzed U.S. investment and affiliate sales in China. We provided the Office of the U.S. Trade Representative, the Departments of Agriculture and Commerce, and the International Trade Commission with a draft of this report for their review and comment. These agencies chose to provide technical comments from their staff. We incorporated their suggestions as appropriate.
section_title: What GAO Found
paragraphs: China is a rapidly growing market for U.S. goods and services. Although still small, accounting for only 4 percent of U.S. goods exports in 2004, U.S. goods exports to China tripled, from $11 billion to $33 billion, and increased across virtually all major categories from 1995 to 2004. Over the same period, China went from the ninth-largest to the fifth-largest U.S. market for goods behind Canada, the European Union, Mexico, and Japan. Although smaller, U.S. services exports grew from $3 billion to $7 billion, from 1995 to 2004. Economic growth in China and liberalization of its market, including joining the WTO, are among the factors driving the impressive export growth. Despite rapid growth, U.S. goods exports to China have not kept pace with those of other countries, particularly exports from Asia. The U.S. share of world goods exports to China declined from 12 percent to 9 percent, from 1995 to 2004, while South Korea and Taiwan's shares increased and at times surpassed that of the United States. The decline is partly due to increased integrated production among China's neighbors; growing resource-based exports, such as oil, from smaller countries; and macroeconomic factors, including exchange rates. Sales to China by U.S. affiliates located in China grew faster and exceeded U.S. exports to China in 2003, $38 billion versus $35 billion, while U.S. foreign direct investment grew from $2 billion to $15 billion from 1995 to 2004. Growth in U.S. investment and affiliate sales, particularly for goods, is due at least in part to China's attraction as a growing economy, including its burgeoning domestic market, high productivity and low labor costs, and developing infrastructure.

section_title: Letter
paragraphs: China has become an important nation within the global economy and a  major U.S. trading partner. China is also a top destination for foreign direct  investment, as multinational corporations increasingly access the Chinese  market through their foreign affiliates. By joining the World Trade  Organization (WTO) in 2001, China pledged to further liberalize its trade  regime and become subject to global trade rules. While U.S.-China  commercial relations have expanded in recent years, disagreements have  also emerged over a wide variety of issues, including the size and growth of  the U.S. trade deficit with China, China’s enforcement of intellectual  property protection, and concerns over China’s implementation of its WTO  obligations. Despite these challenges, China’s vast consumer and labor  markets present considerable opportunities for U.S. exporters and  investors.
In response to your request for a long-term body of work related to U.S.- China trade, we provide information in this report on the extent to which  U.S. companies have accessed the Chinese market through exports to and  investment in China. Specifically, we (1) analyzed U.S. goods exports to  China and how they have changed over time, (2) analyzed U.S. services  exports to China and how they have changed over time, (3) assessed how  U.S. exports to China have fared against other major trading partners’  goods exports to China, and (4) analyzed U.S. investment and affiliate sales  in China.
In order to analyze how U.S. exports to China have changed over time, we  collected and analyzed U.S. goods trade data from the Department of  Agriculture’s U.S. Census Bureau and U.S. services trade data from  Department of Commerce’s U.S. Bureau of Economic Analysis (BEA). To  assess how U.S. exports to China have fared compared with that of China’s  other major trading partners, we reviewed official Chinese trade statistics.  We analyzed the goods trade data at various levels, including GAO’s 10  broad categories of goods, which are aggregations of the 99 chapter  headings of the U.S. Harmonized Tariff Schedule (HTS). To compare U.S.  companies’ investments and sales in China to U.S. exports to China, we  collected and analyzed U.S. direct investment abroad and multinational  company operations data from BEA and from Chinese trade statistics. We  recognize the limitations of the Chinese trade statistics and the differences  from U.S. statistics, but we found them to be sufficiently reliable to present  individual countries’ shares of China’s trade and their investment in China.  Finally, we reviewed U.S. government and private sector studies on the  U.S.-China trade and investment relationship and interviewed relevant U.S.  government and private sector experts on U.S.-China trade. In order to  compare real changes in trade flows and remove the effects of price  inflation or deflation, we used deflators and reported statistics in 2004  constant dollars, except as noted. Appendix I contains a full description of  our objectives, scope, and methodologies.
We performed our work from April 2005 to December 2005 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Over the last few decades, various political and economic factors have  contributed to the advancement of commercial relations between the  United States and China. Trade expanded rapidly after the United States  and China signed a bilateral trade agreement in 1979. Total U.S.-China trade  increased from about $8 billion in 1985 to $20 billion in 1990 and to $57  billion in 1995, according to the Census Bureau. The economic reforms and  open investment policies that China initiated around the same time led to a  surge in demand for foreign goods and services to modernize the economy,  from infrastructure to industries. China’s rapid economic growth, with its  real gross domestic product growing at an average annual rate of about 9.5  percent from 1980 to 2000, generated demand for raw materials and basic  commodities, such as steel, iron, and cotton. Economic growth also  enhanced the purchasing power of Chinese citizens, especially those living  in urban areas. This created a relatively large middle class with the ability  to buy foreign consumer goods and services. In addition, China joined the  WTO in December 2001, making it subject to the multilateral organization’s  trade liberalizing requirements.
While U.S. exports to China rose rapidly after 1980, U.S. imports from  China grew at an even faster pace, creating a large bilateral trade deficit  that continues to increase today. The deficit in goods ballooned from $6  million in 1985 to $34 billion in 1995 and to $162 billion in 2004, according  to the Census Bureau. This U.S. trade deficit with China in 2004 accounted  for almost 25 percent of the overall U.S. trade deficit. The U.S.-China trade  imbalance has gained much political and media attention in recent years  and has become a source of trade friction between the two countries. Some  policy makers, industry leaders, and labor groups believe that this trade  imbalance is costing United States jobs in industries trying to compete with  imports from China. Further, some plicy makers believe that this trade  imbalance may be due to China’s unfair trade practices or its failure to meet  all of its WTO obligations. Some policy makers also believe that China’s  currency is undervalued relative to the U.S. dollar, and thereby inhibits greater imports from the United States. The causes of the U.S. trade deficit  with China, or with the rest of the world, while complex, are rooted in part  in macroeconomic factors at home and abroad, such as national savings  and investment decisions, growth levels, monetary and fiscal policies,  changes in domestic and foreign prices, and exchange rates. For example,  when a country’s budget deficit or domestic spending grows without  increases in domestic savings, foreign capital inflows can rise, affecting  exchange rates, leading to an increase in imports and deterioration in the  trade balance. China, Japan, and Europe have been the largest foreign  sources of these capital inflows to the United States in recent years. Some  experts remain less concerned about trade deficits because the inflow of  foreign capital allows a higher level of investment, benefiting the economy  as a whole.
China’s accession to the WTO in 2001, a complex process that took 15  years, resulted in commitments to further open and liberalize its economy  and offer a more predictable environment for trade and foreign investment  in accordance with WTO rules. In particular, China committed to gradually  eliminate or lower tariffs and nontariff barriers on a broad range of goods  and services. A subsequent survey of U.S. companies showed that they  expected China’s membership to the WTO to have a positive impact on  their business operations. While U.S. firms are progressively gaining greater market access in China, many issues remain to be solved, from  opaque rules and regulations to intellectual property violations.
section_title: Goods Exports to China Experienced Rapid Growth in the Past Decade, Driven by China’s Economic Growth and Market Liberalization
paragraphs: Although still relatively small, China’s market for U.S. goods exports has  become increasingly important. Export growth to China was widespread  across 10 major GAO product categories and accelerated in recent years. In  particular, raw materials and intermediate inputs for manufacturing, such  as cotton for textiles and apparel, experienced the highest growth in recent  years. China’s economic development and market liberalization have been  major contributors to the growth in U.S. exports.
subsections: section_title: China Is an Increasingly Important and Fast-Growing Market for Exports of U.S. Goods
paragraphs: Although still small relative to some other U.S. trading partners, China’s  market for U.S. goods has increased in importance. China progressed from  the 9th-largest market for U.S. goods exports in 1995 to the 5th-largest in  2004, after Canada, the EU, Mexico, and Japan (see fig. 1). In addition,  U.S. goods exports to China exceeded those to any individual EU country.  However, exports to China are still significantly smaller than exports to the  United States’ largest trading partners, Canada and Mexico. In 2004, $33  billion, or 4 percent of total U.S. goods exports, went to China, compared  with $164 billion and $93 billion to Canada and Mexico, respectively.
On the other hand, China is a significant market, and in some cases even  the largest market, for certain U.S. products—mainly raw materials for  manufacturing, building, and agriculture. For example, more than 20  percent of U.S. exports of oil seeds, zinc, cotton products, and raw hides  and skins and almost 13 percent of U.S. iron and steel exports were  destined for China in 2004. Moreover, despite declines in recent years,  China is still the largest market for U.S. fertilizer exports, according to an  industry expert, and trade statistics show that fertilizer exports to China  accounted for more than 35 percent of total U.S. fertilizer exports in some  years. However, there are major exported products for which China  remains a small U.S. market, including pharmaceutical products, with  exports to China of less than 0.5 percent of total U.S. pharmaceutical  exports, and vehicles, with less than 1 percent of U.S. vehicle exports in  2004. (See app. II, tables 8 and 9, for details.)
Over the past decade, U.S. goods exports to China have grown much faster  than overall U.S. goods exports. U.S. exports to China tripled in value and  grew at an annual rate of 13 percent versus 2 percent annually for overall  U.S. exports, from 1995 to 2004, adjusted for inflation (see fig. 2). In  addition, over the same period, U.S. exports to China grew faster than U.S.  exports to any other major U.S. trading partner. Growth rates for U.S.  exports over the decade were 3 percent for Canada, 7 percent for Mexico,  and negative 3 percent for Japan. As a result of the faster growth, China’s  share of total U.S. exports more than doubled from 2 percent to over 4  percent from 1995 to 2004.
section_title: Export Growth Was Widespread among Goods Categories and Subcategories
paragraphs: While U.S. goods exports to China grew overall during the past decade,  growth was also consistent at the more detailed product category and  subcategory level. Over a 10-year period, all but 2 of GAO’s 10 categories  of goods, Aircraft, Vehicles and Other Transportation and Miscellaneous  and Special Provision Goods, had double-digit annual growth rates from  1995 to 2004, as shown in table 1. The category with the highest U.S. export  value, $12.8 billion in 2004, was Machinery, Electronics, and High-Tech  Apparatus, which grew at an annual rate of 15 percent over the period.  Aircraft, Vehicles and Other Transportation had one of the lowest annual  growth rates of 5 percent.
Much of the growth in U.S. goods exports to China occurred in recent  years. As shown in table 1, the overall annual growth rate during the second  5 years of the decade, 2000 to 2004, was 19 percent, as compared with 6  percent from 1995 to 1999. In fact, 7 of the 10 goods categories had higher  growth rate for the most recent 5-year period than for the previous 5-year  period. For example, Textiles and Apparel, Leather and Footwear, the bulk  of which includes raw cotton (including yarn and woven fabric), had the  highest growth rate during the recent 5-year period, or 45 percent annually  from 2000 to 2004, as compared with a negative 20 percent growth rate in  the previous 5 years. The goods category with the highest U.S. exports to  China by value, Machinery, Electronics, and High-Tech Apparatus, grew  at a rate of 19 percent during the most recent 5-year period versus 9 percent  during the previous 5 years.
U.S. export growth to China was also widespread at the more detailed  subcategory level. We found that out of 99 subcategories, exports of 88  subcategories increased in value over the past decade. Comparing the  average gain in export value between the first and second parts of the  decade (1995 to 1999 and 2000 to 2004), we found that most of the value  increase, 59 percent, was driven by the following 5 subcategories (see app.  II, table 10, for details):   Electric machinery, sound equipment, and television equipment  increased an average of $2 billion per year, 18 percent of the total  increase.
Nuclear reactors, boilers, machinery increased an average of $1.8  billion per year, 15 percent of the total increase.
Oil seeds, grain, seed, fruit and plant increased an average of $1.6  billion per year, 14 percent of the total increase.
Iron and steel increased an average of $800 million per year, 7 percent of  the total increase.
Optic photo etc, medical or surgical instruments etc. increased an  average of $700 million per year, 6 percent of the total increase.
Far fewer subcategories, 9 out of 99, experienced declines in U.S. goods  exports to China. Comparing the average loss in export value between the  first and second parts of the decade (1995 to 1999 and 2000 to 2004) we  found that 88 percent of the export decline was driven by the following 3  subcategories (see app. II, table 11, for details):  Fertilizer declined an average of $560 million per year, 53 percent of  the total decline.
Cereals declined an average of $185 million per year, 18 percent of the  total decline.
Animal or vegetable fats, oils etc. and waxes declined an average of  $176 million per year, 17 percent of the total decline.
section_title: Among the Factors Driving U.S. Goods Export Growth Are China’s Rapid Economic Growth and Market Liberalization
paragraphs: Both rapid economic growth in China and the removal and reduction of  Chinese trade barriers have fueled demand for many types of goods in  China, particularly raw materials and intermediate inputs for China’s  booming manufacturing sector. First, U.S. exports have benefited from this  increasing demand in China. For example, a Department of Agriculture  report noted that U.S. cotton exports surged primarily because of the rapid  growth of China’s textile and apparel industry, especially in 2005 after the  expiration of U.S. and other WTO members’ import quotas under the WTO  Agreement on Textiles and Clothing. Another contributing factor was  cotton shortage following a poor Chinese harvest in 2003. In addition, U.S.  exports of integrated circuits—a key component of consumer electronics,  such as digital video disk players, cell phones, and global position system  devices—have increased because China has become a major manufacturer  of consumer electronics and China’s domestic production of integrated  circuits can only meet around 10 percent to 15 percent of China’s demand,  according to a Commerce trade expert. Exports of electronic circuits and  micro assembling have grown at an annual rate of 47 percent since 1995,  reaching over $2 billion in 2004. Economic growth in China also has fueled  demand for energy-related equipment. For example, U.S. exports of gas  turbine parts to China increased dramatically in recent years, reaching $266  million in 2004.
Second, market liberalization has been a factor in the growth of U.S. goods  exports to China. Reduction or removal of trade barriers has created  opportunities for foreign exporters to access China’s market. The United  States concluded bilateral negotiations with China on WTO accession in  1999. Then, as part of its 2001 WTO accession agreement, China committed  to reducing or eliminating a variety of market access barriers to foreign  products. In its agreement, China made specific commitments on the tariff  rates for more than 7,000 products covering all imports as well as  commitments on trade-distorting practices, such as state trading and  quotas, affecting more than 900 products. By 2010, the end of the WTO  commitment phase-in period, China’s overall average tariff is scheduled to  be less than 10 percent. China has also committed to removing certain  nontariff barriers, such as quotas and licensing, by 2005.
section_title: While Overall Services Exports to China Grew during the Past 10 Years, Growth among Services Categories Varied
paragraphs: China is a small but growing market for U.S. services. From 1995 to 2004,  China moved from the 12th- to the 7th-largest recipient of services exports,  and U.S. services exports to China increased both in dollar value and as a  share of U.S. world exports. However, U.S. services exports are relatively  small, $7 billion in 2004, compared with goods exports of $33 billion in  2004. Like goods, U.S. services exports to China grew faster than U.S.  services exports to the rest of the world. The annual growth rates for  exports varied widely among the 5 main services categories and their  subcategories. The services categories that grew the fastest over the  decade were Royalties and License Fees and Passenger Fares. Among the  faster-growing subcategories were telecommunications and financial  services, while other subcategories, such as business, professional, and  technical services, experienced much slower growth. Also like goods,  overall increases in U.S. services exports are likely due to the sharp growth  of the Chinese economy and the resulting increased demand for services.  Slower export growth in some categories may be due to relatively slower  trade liberalization in China for services. For example, many WTO services  commitments have only recently come into effect or are not yet scheduled  to be phased in.
subsections: section_title: China Is a Growing Destination for U.S. Services Exports, Which Grew Faster Than Overall U.S. Services Exports
paragraphs: Although still small, China is a growing market for U.S. services exports,  which grew faster than U.S. services exports to the rest of the world from  1995 to 2004. In 2004, China received 2 percent of total U.S. services  exports and was the 7th-largest market for U.S. services, behind the EU at  35 percent, Japan at 11 percent, Canada at 9 percent, Mexico at 6 percent,  and South Korea and Switzerland each at 3 percent (see fig. 3). In 1995,  China was the 12th-largest. Since then, China has surpassed Australia,  Hong Kong, Taiwan, Brazil, and Singapore, which were among the top 12  markets for services exports in 1995.
U.S. exports of services to China have grown significantly, with growth  moderating somewhat in recent years. The annual growth rate for services  exports to China was 10 percent from 1995 to 2004, which was slower than  the growth rate for goods (about 13 percent) and faster than the overall  growth rate for U.S. services exports to the world (3 percent). As shown in  figure 4, from 1995 to 2004, U.S. services exports to China more than  doubled in value from $3 billion to $7 billion, and China’s share of total U.S.  services exports to the world also grew from 1 percent to over 2 percent.  U.S. services exports grew faster in the first part of the period—services  exports grew about 11 percent from 1995 to 1999 versus 6 percent from  2000 to 2004.
section_title: U.S. Services Exports to China Grew under All Major Categories, with Some Variation
paragraphs: While services exports grew overall over the past decade, growth rates  varied among major categories and subcategories. From 1995 to 2004,  U.S. services exports to China grew in each of the 5 main services  categories: Travel, Passenger Fares, Other Transportation, Royalties and  License Fees, and Other Private Services. (See app. III for a full description  of these categories and their subcategories). As shown in table 2, Royalties  and License Fees grew the fastest over time, with an annual growth rate of  22 percent from 1995 to 2004. While all services categories grew over time,  growth rates varied from the first half of the 10-year period to the second  half of the period. For example, services in the Other Transportation  category had an annual growth rate of 11 percent for the whole period and  declined by 4 percent from 1995 to 1999, but grew quickly at a rate of 26  percent from 2000 to 2004.
The U.S. government also collects some data on sales of services to China  at the subcategory level. As shown in table 3, all but 1 subcategory under  the main category of Other Private Services grew overall from 1995 to  2004. Growth ranged from 24 percent for insurance services to 8 percent  for the business, professional, and technical services category, and there  was a 1 percent decline for Other Private Services. U.S. export growth  rates under some of these subcategories also varied between the two  periods. For example, exports of financial services grew 12 percent in the  first period, from 1995 to 1999, and 27 percent in the second period, from  2000 to 2004. One large subcategory for services sales was education,  which comprised about half the value of Other Private Services exports,  $1.3 billion in 2004, and consists of tuition and living expenses of foreign  students enrolled in U.S. colleges and universities.
The U.S. government collects further data on the subcategory of business,  professional, and technical services, which encompasses a number of key  areas, including legal, advertising, and computer and information  services. As shown in table 4, from 1995 to 2004, growth rates in exports in  these subcategories varied from a 2 percent annual decline for  construction, architectural, and engineering services, to a 21 percent  annual growth for research and development and testing services.  Comparing the first and second half of the decade in table 4, exports in  these services appear to be somewhat volatile, since some industries  experienced declines and then growth or vice versa during the two periods.  However, because exports for subcategories under business, professional,  and technical services are relatively low (less than $100 million in most  cases) changes from one year to the next can drastically affect overall  growth rates.
section_title: U.S. Services Exports Aided by Chinese Economic Growth but Limited by Slower Trade Liberalization to Date
paragraphs: Like goods, the growth in U.S. services exports to China over the past  decade was driven in part by China’s sharp economic expansion. However,  in contrast to goods, the overall value of services exports is smaller and  individual categories and subcategories experienced more variable growth.  The smaller value of U.S. services exports to China is consistent with world  trade patterns with the United States. Trade in services tends to be smaller  than trade in goods in part because many services require some type of  direct contact or local presence and thus are harder to provide across  international borders. In addition, China is following a common trend  among developing countries, which usually have relatively small services  sectors, according to the World Bank. However, the smaller overall value of  services exports and variable growth rates among services categories may  also be due to the fact that China’s services sector is yet to be fully  liberalized. For example, most market access commitments for services are  to be phased in by 2007. Finally, China’s export-oriented growth has  depended on the industrial sector, rather than services.
While China’s WTO commitments for services are to provide foreign  services providers with increased access to a number of sectors, including  business services, communications services, financial services, and  tourism- and travel-related services, many of these commitments have only  recently come into effect or are yet to be phased in. For example, under  financial services, insurance was scheduled to be fully liberalized over a  5-year period, thereby relaxing many restrictions, such as selective  licensing processes and geographic limitations. In another example, in the  financial services area, U.S. banks will be able to provide local (Chinese)  currency services without geographic and client limitations by 2006; and  telecommunications is also scheduled to be liberalized by 2007, when  foreign providers will be allowed to offer a broad array of  telecommunications services with no geographic restrictions, although  only through joint ventures with Chinese partners. International Trade  Commission officials contend that joint venture requirements may, in part,  explain the smaller value for U.S. services exports compared with goods  exports to China. Office of the United States Trade Representative (USTR)  officials noted that implementation problems have inhibited market access  for services.
However, a portion of U.S.-China services trade does not depend upon  market access. For example, some U.S. services exports are delivered to  Chinese residents by virtue of the Chinese residents traveling to the United  States to consume these services. Thus, although exports in the  subcategory of education are among the largest in terms of dollar value, a  good portion of those exports are tuition and living expenses of foreign  students enrolled in U.S. colleges. Similarly, a portion of  telecommunications exports is international calls from China to the United  States.
Finally, a good portion of services trade depends not only upon exports, but  also upon foreign direct investment and establishing commercial presence,  or selling services through local U.S. affiliates. This is also the case in  China. A Commerce trade expert told us that cross-border trade in services  is small relative to the Chinese domestic market, since many services must  be provided by firms located in China, and the real potential for growth in  services trade is in affiliate sales. For example, while exports in  telecommunications are growing, the real potential is in providing  telecommunications services to China’s domestic market, such as  improving telephone service, which requires setting up local operations. In  another example, according to an official from the Coalition of Service  Industries, business, professional, and technical services are especially  important to coalition members as well as to the Chinese government  because the Chinese are anxious to form joint ventures to increase their  expertise. The official said that it took a smaller investment to locate  services in China compared with a manufacturing plant, especially for  financial services, where coalition members preferred to do business  through joint ventures and branches.
section_title: U.S. Goods Exports Have Not Kept Pace with Other Nations’ Exports to China
paragraphs: Although U.S. goods exports to China have grown rapidly, other countries,  particularly a few Asian countries, have experienced even higher export  growth to China, resulting in a drop in total U.S. market share of total world  exports to China. Similarly, other large suppliers to China, such as the EU  and Japan, have experienced declines in their shares, while certain Asian  countries, such as South Korea and Taiwan have increased their shares of  overall exports to China. The U.S. decline covers a wide range of products,  including autos and parts, plastics and organic chemicals, and optical  machinery. However, the United States did increase export share in other  products, particularly agricultural goods, such as prepared meats and fish,  and preserved fruits and vegetables. The U.S. share of exports to China  has declined partly due to the rise of existing smaller exporters and partly  due to the growing number of new countries exporting to China. In  particular, as local Asian production processes became more integrated,  other East Asian and Southeast Asian countries became larger suppliers of  China’s growing manufacturing and assembly operations. Another reason  for the declining market share was the quickly increasing Chinese imports  of natural resources, such as petroleum, for which the United States is not  a major supplier to China. Finally, other macroeconomic and industry- specific factors may have played a role in the declining U.S. market share.
subsections: section_title: U.S. Share of Chinese Import Market Has Declined over the Last Decade
paragraphs: Although the value of U.S. goods exports to China has increased every year  for the past 10 years, the U.S. share of total exports from all countries to  China has declined. The U.S. share of world goods exports to China fell  from about 12 percent in 1995 to about 9 percent in 2004, according to  Chinese trade statistics. Figure 5 shows the values of world and U.S. goods  exports to China as well as the U.S. percentage of world exports to China.  As figure 5 shows, overall world exports to China have grown significantly,  more than quadrupling from about $130 billion in 1995 to about $522 billion  in 2004 (unadjusted for inflation), according to Chinese trade statistics.
At the same time, other large suppliers to China also experienced declines  in their share of world goods exports to China. Japan and the EU lost  overall export share; although, like the United States, they had growing  exports to China during the past decade. For example, Japan’s share fell  from 22 percent to 18 percent and the EU’s share fell from 16 percent to 13  percent from 1995 to 2004. In contrast, other Asian countries, such as  Indonesia, South Korea, Malaysia, Singapore, and Taiwan, increased their  export share and, in some cases, surpassed the United States. Regionally,  Indonesia, Malaysia, and Singapore are all members of the Association of Southeast Asian Nations (ASEAN), which have increasingly integrated  their production and trade with China. The United States was the 3rd- largest exporter to China in 1995, but fell to the 6th-largest in 2004, as  shown in figure 6. South Korea, Taiwan, and the ASEAN surpassed the  United States and drew close to overtaking the EU by 2004. The remaining  countries as a group increased their share of China’s market as well, from  about 22 percent in 1995 to 24 percent in 2004. Russia was the 7th-largest  exporter to China in 2004 (at about 2 percent), followed by Hong Kong and  Australia. Japan and the EU have, since at least 1995, been larger  suppliers to the Chinese market than the United States.
section_title: Most U.S. Export Categories Have Lost Share of World Goods Exports to China
paragraphs: Despite overall growth in exports to China, the United States lost share of  world goods exports to China in 7 out of the 10 goods categories between  the first and second half of the 10-year period (average annual share 1995 to  1999 versus 2000 to 2004), as highlighted in table 5. For example:  Aircraft, Autos, and Other Transportation: U.S. share dropped 7  percentage points from 28 percent to 21 percent, even though U.S.  exports grew annually on average by 5 percent between 1995 and 2004.
Chemicals, Plastics, and Minerals: U.S. share fell 4 percentage points,  although U.S. exports grew annually on average by 10 percent, between  1995 and 2004.
Machinery, Electronics, and High-Tech Apparatus: U.S. share lost 3  percentage points, despite the fact that U.S. exports grew annually on  average by 15 percent between 1995 and 2004, and this was the largest  category by value of U.S. exports, $13 billion in 2004.
At a more detailed subcategory level, changes in U.S. export share were  mixed. Within the 10 goods categories, we found that a slight majority of  individual subcategories (55 out of 99 subcategories) experienced a decline  in the U.S. share of world exports to China. Some subcategories for which  U.S. market share declined had high export values and were major  contributors to export increases (see app. II, table 12, for the top 20  subcategories in terms of market share decline). For example:  Oil seeds, with $2.4 billion in exports in 2004, lost 12 percentage points  in share between the first and second half of the decade, although it  contributed to 14 percent of the total export increase over the period.
Optic, photo, medical, with $2 billion in exports in 2004, lost 6  percentage points in share between the first and second half of the  decade, although it contributed to 6 percent of the total export increase  over the period.
The two subcategories that contributed the most to export increases  between the first and second half of the decade also lost market share, but  to a lesser extent.
Electrical machinery, with $5 billion in exports in 2004, lost 2 percent  market share, although it contributed to 18 percent of the total export  increase over the period. This subcategory includes high-tech products,  such as telecommunications equipment, fiber optics, and computer  parts.
Machinery (other than electrical), with $6 billion in exports in 2004, lost  2 percent market share, although it contributed to 15 percent of the total  export increase over the period.
section_title: Many U.S. Agricultural Goods Have Increased Their Share of World Exports to China
paragraphs: Only categories related to agricultural goods have gained or maintained  U.S. worldwide market share in China, with the exceptions previously  noted. The largest overall increase was in the category of Prepared Food,  Beverages, Spirits, and Tobacco, in which the United States increased its  share of world exports to China by 3 percentage points, from 13 percent to  16 percent over the decade (see table 5). The U.S. export increase in this  category moved the United States from the 4th-largest supplier to China in  1995 to the 2nd-largest supplier of that category in 2004, behind Peru (see  fig. 7). According to the Department of Agriculture, exports to China from  Peru are primarily fish meal.
For the other 2 agriculture-related categories, the United States increased  its share by about 1 percent in Animal and Plant Products, while its share  remained relatively stable in Textiles, Apparel, Leather, and Footwear at  about 7 percent over the decade, on average. (See app. II, table 13, for the  20 subcategories by increase in the U.S. share of world goods exports to  China.)
Again, at the more detailed subcategory level within these broad  agricultural categories, changes in export share were mixed. Most  subcategories under Prepared Food, Beverages, Spirits, and Tobacco have  increased their world export share in China. For example:  Prepared meats and fish increased by 20 percentage points, from 11  percent to 31 percent over the decade.
Preserved foods, including a wide range of fruits, vegetables, nuts, and  juices, grew by 14 percentage points, from 31 percent to 45 percent over  the decade.
However, some subcategories under animal and plant products  experienced mixed results. For example:  Lac, gums and resins grew in share over the decade from 16 percent to  32 percent; edible fruits and nuts increased from 7 percent to 15  percent.
Edible vegetables and certain roots and tubers declined from 19  percent to 8 percent; animal or vegetable fats, oils etc. and waxes  declined from 13 percent to 3 percent.
section_title: Growing Asian Production, Oil Imports, and Macroeconomic Factors Were among the Reasons for Decreased U.S. Export Share in China
paragraphs: Over the past decade, the U.S. share of world exports to China has declined  for a variety of reasons. The loss in the U.S. share of worldwide exports to  China has occurred as the volume of exports from smaller exporters has  grown and the number of countries exporting to China has increased.  These trends are due to multiple factors. For example, greater integration  of Asian production processes has helped certain other Asian countries  become larger suppliers of China’s growing manufacturing and assembly  operations. Also, China’s resource-based imports, including those from oil- producing countries, rose sharply as its rapid economic growth increased  demand for raw materials. In addition, macroeconomic factors that  influence the overall U.S. trade deficit, including exchange rates with China  and other Asian countries, as well as industry-specific circumstances, are  likely to have affected the overall U.S. export share.
Individual countries, particularly those from Asia, have increased their  share of world exports to China at the expense of the United States and  other large suppliers. South Korea, Taiwan, and ASEAN countries,  including Indonesia, Malaysia, and Singapore, have all increased their  export share overall and in many particular products (e.g., autos and parts,  and electronics). There are several reasons why these countries may have  increased their market share in China. Regional economies in Asia have  increasingly integrated their production processes, producing parts for  products in one location and shipping them to another for assembly. China  has become a key component of this process due to its relatively low labor  costs and large-scale production potential. For example, China is a major  producer of electronic products, such as computers and video players,  which may be sold domestically or exported worldwide. As an indication of  this, China’s largest import and export subcategory is electrical machinery,  which includes finished products, such as consumer electronics, as well as  components used in their production, such as electronic circuits.
In addition, this greater integration of production processes can affect  trade trends. For example, U.S. components and parts exports first sent to  other countries and incorporated into those countries’ exports to China are  not captured in U.S.-China bilateral trade statistics. Trade statistics only  show direct imports and exports between countries. For products that are  produced by a process that involves a series of locations, trade statistics  generally do not capture the value of inputs coming from locations other  than the last point of export. Therefore, for some U.S.-made components,  such as semiconductors, that are modified and added to in Malaysia,  Singapore, and the Philippines before being sent to China for use in cell  phones and computers, trade statistics do not generally count them as U.S.  exports to China, but as U.S. exports to Singapore or the Philippines.
Furthermore, as the number of countries that export to China expands, 1  export category that is particularly relevant is chemicals, plastics, and  minerals, which had the 2nd-highest U.S. export value in 2004 and includes  resource-based products, particularly petroleum products, which United  States exports very little to China. All major suppliers lost overall export  share in this category as a wider range of countries supplied exports in this  category between 2002 and 2004. Petroleum products are one of the fastest- growing Chinese imports in recent years and accounts for a substantial  share of overall Chinese imports. In fact, imports of crude oil from  petroleum and bituminous minerals was the 2nd-largest Chinese import  by value in 2004, worth about $34 billion and accounting for over 6 percent  of total Chinese imports, according to Chinese statistics. Many oil- producing countries’ exports to China grew faster than the average annual growth rate of 27 percent for all countries from 2000 to 2004. Table 6 lists  examples of oil-producing countries with high growth rates.
Chad Congo Saudi Arabia Angola United Arab Emirates Finally, there are also a variety of other broad macroeconomic factors,  such as exchange rates as well as industry-specific circumstances that may  have affected the U.S share of world exports to China. For example, many  economists believe the Chinese renminbi/yuan is undervalued relative to  the U.S. dollar, and certain Asian currencies that experienced devaluations  during the Asian financial crisis may therefore have a competitive  advantage in China. A higher-valued dollar would be expected to have a  dampening effect on U.S. exports to China by making U.S. exports more  expensive in the Chinese market relative to other countries’ exports. Also,  industry-specific circumstances may provide certain countries with export  advantages over those of the United States. For example, some industries’  companies from other countries may have been operating in the Chinese  economy for longer than U.S. companies and may be gaining in export  share due to their greater experience. Also, according to one Commerce  specialist, some countries have provided “tied-aid” to China in which they  provide financial support for certain types of investments such as  environment projects, if their companies, rather than U.S. companies, are  able to supply the materials and components for the project. Also, in the  agricultural sector, Chinese concerns about animal and plant diseases may  restrict, at least temporarily, access of U.S. agricultural products and  reduce U.S. export share.
section_title: U.S. Investment in China Has Increased, and Affiliate Sales Surpassed U.S. Exports
paragraphs: Through increased foreign direct investment in China, U.S. affiliate sales  have exceeded U.S. exports to China, since U.S. companies have  increasingly sold their goods and services directly to the Chinese market  through their local affiliates. Although small, U.S. investment in China has  been growing and investment levels have been similar to that of China’s  other trading partners. U.S. companies generally concentrated their  investments in China in the manufacturing sector, in industries such as  transportation equipment, chemicals, and computers and electronic  products. U.S. investment in China funds the creation of U.S. affiliates, who  then sell in China and to other countries, including the United States, and  U.S. affiliate sales of goods and services have become an important avenue  for accessing the Chinese market. In fact, the value of U.S. affiliate sales in  China has exceeded the value of U.S. exports to China since 2002. Factors  such as the growing Chinese market, lower labor costs, and China’s WTO  accession have allowed U.S. companies to increase their investment and  sales in China, although some challenges remain.
subsections: section_title: U.S. Foreign Direct Investment in China Has Grown, Mostly in Manufacturing
paragraphs: U.S. foreign direct investment in China, although relatively small as a share  of total U.S. foreign investment, has grown and is concentrated mainly in  manufacturing (see fig. 8). In 2004, China ranked 12th as a recipient of   U.S. investment, and the cumulative stock of U.S. investment in China was  $15 billion. This was a relatively small amount compared with U.S.  investment going to other major U.S. trading partners. For example, in  2004, the cumulative stock of U.S. investment in the EU, Canada, and Japan  was $952 billion, $217 billion, and $80 billion, respectively.
However, U.S. investment in China has grown. For example, the cumulative  stock of U.S. investment in China grew from $2 billion in 1995 to $15 billion  in 2004. In addition, according to Chinese statistics, U.S.-realized annual  investment flows into China grew at about 6 percent annually from 1995  to 2003. This growth rate matched that of the EU (also 6 percent) and  slightly exceeded that of Japan (4 percent) during the same period.
U.S. investment levels in China were similar to those of its other trading  partners. According to Chinese statistics, in 2003, 8 percent of China’s  realized annual investment flows came from the United States, compared  with 7 percent from the EU, 8 percent from Korea, 9 percent from Japan, 6  percent from Taiwan, and 5 percent from the ASEAN. While Chinese  statistics show Hong Kong as providing 34 percent of investment in China,  this figure may be inflated by mainland Chinese investment going through  Hong Kong. In 2003, the United States was the 5th-largest investor with $4  billion of realized annual investment flows in China, behind Hong Kong, the  British Virgin Islands, Japan, and Korea (see fig. 9).
Realized investment represents the actual annual flow of investment. For example, in a 3-year contract  to invest $100 million, the realized annual investment might be $25 million the 1st year, $50 million the  2nd year, and $25 million the 3rd year.
Total foreign direct investment in China in 2003 was $53.5 billion.
BEA classifies data on U.S. investment abroad by industry, using a  classification system that is based on sales information, which companies  report in surveys. BEA collects data on foreign affiliates’ production of  goods, sales of goods, and services. The major industries for which it  collects data include, among others, mining, utilities, and manufacturing  and wholesale trade. In 2004, U.S. investment in China was concentrated in  manufacturing, with over half of the cumulative stock of U.S. investment  in China, or $8.2 billion. Other broad industry groupings in which U.S.  companies invested their cumulative stock in China in 2004 included  wholesale trade at $1.8 billion, and mining at $1.7 billion (see app. IV, table  15). BEA also classifies data on U.S. investment by subcategories in the  manufacturing sector. Examples of U.S. investment in manufacturing  subcategories included $1.8 billion in the transportation equipment  industry, $1.6 billion in the chemicals industry, and $1.3 billion in the  computers and electronic products industry (see app. IV, table 16).
section_title: U.S. Affiliate Sales in China Surpassed U.S. Exports to China
paragraphs: With their $15 billion investment in Chinese manufacturing and other  sectors, U.S. companies have established local affiliate companies that  increasingly sold their goods and services to the Chinese market. In 2003,  U.S. majority-owned affiliate companies sold about 75 percent of their  goods and services, or about $38 billion, in China to the Chinese market.  The remaining 25 percent of goods and services were sold to other  countries. These sales included goods and services that were exported  back to the United States, about 7 percent of the total. This indicates that  most U.S. companies’ investment is meant to access the Chinese market,  rather than using China to provide goods and services back to the U.S.  market.
By 2002, U.S. companies sold more goods and services in China through  their local affiliates than they exported from the United States. By 2003,  U.S. affiliates in China sold about $38 billion in goods and services to  China, while U.S. exports to China that same year were $35 billion. The  annual growth rate of affiliate sales was 33 percent between 1995 and 2003,  compared with 11 percent for U.S. exports. Figure 10 shows affiliate sales  from 1995 to 2003 and exports from 1995 to 2004.
For goods alone, U.S. affiliate sales in China have also surpassed U.S.  exports since 2001 (see fig. 11). In 2003, U.S. affiliates sold about $34 billion  in goods to the Chinese market, while U.S. companies sold about $29  billion through exports that same year. The annual growth rate of affiliate  sales of goods was 33 percent between 1995 and 2003, compared with 13  percent for U.S. exports of goods.
Unlike goods sales, U.S. companies export more services to China through  cross-border trade than they sell through affiliates. U.S. affiliates’ services  sales in China were at levels about two-thirds that of U.S. services exports  in 2003, that is, $4 billion in affiliate sales versus $6 billion in exports (see  fig. 12). U.S. affiliates’ services sales in China were growing faster—that is,  the annual growth rate of affiliate sales of services was 36 percent between  1995 and 2003, compared with 10 percent for U.S. exports of services.  However, services are not a major component of sales by U.S. affiliates in  China and accounted for about 10 percent of all sales by U.S. affiliates  located in China.
The majority of local sales through U.S. affiliates, 67 percent in 2003, were  in the broad industrial grouping of manufacturing, with over half of these  sales in the computers and electronic products industry (see app. IV, table  18). The other notable industry was wholesale trade, with at about 20  percent of all local sales by affiliates. Other smaller industries included  professional, scientific, and technical services and utilities, with both  accounting for about 1 percent of total sales (see app. IV, table 17).
section_title: U.S. Companies Are Increasingly Investing in China and Selling through Affiliates, but Challenges Remain
paragraphs: China’s growing domestic market, improving productivity, low labor costs,  and improving infrastructure has made it an increasingly attractive  investment venue for U.S. companies. The U.S.-China Business Council  reported in 2004 that China’s implementation of its WTO commitments  has increased foreign investors’ ability to expand their operations. The  trend of U.S. affiliate sales surpassing U.S. exports to China is consistent  with the pattern of U.S. trade and investment worldwide. U.S. multinational  companies typically sell their goods and services directly through their  foreign affiliates. However, some experts believe that U.S. investment and  affiliate sales in China are particularly important. According to a 2004  Center for Strategic and International Studies report, China is an  attractive venue for foreign investment due to its large domestic  consumption market, improved productivity, better infrastructure, and  higher technology standards and quality control. Morgan Stanley reported  in 2002 that sales of foreign affiliates, rather than exports, are rapidly  becoming the primary means by which U.S. products are delivered to the  Chinese; therefore, U.S. export figures do not fully capture the true level of  U.S. commercial sales in China. The report said that China’s massive  consumer and labor markets set it apart from the rest of the world, and  many U.S. firms have no choice but to “be on the ground there.” A Coalition  of Service Industries official predicted that U.S. affiliate sales of services  would continue to rise and eventually overtake service exports, especially  in financial services in which coalition members to do business through  joint ventures and branches. The Center for Strategic and International  Studies reported in 2004 that increasing total foreign direct investment in  China indicates that investment is targeting the domestic market for the  long term, rather than focusing on China as an export platform. According  to the International Trade Commission, however, for some countries, such  as Asian countries, investing in China as an export platform is still an  important part of their foreign direct investment.
However, there are some factors that limit or discourage U.S. companies  from investment in China. For example, the Chinese government is still  undergoing market-oriented reforms, such as phasing in many of its WTO  commitments for services; these reforms affect how U.S. companies access  the market for services in China–-which may explain why sales of services  through affiliates lagged behind exports of services. According to USTR’s  December 2004 report, China’s opaque regulatory process and burdensome  licensing and operating requirements continue to frustrate efforts of U.S.  services providers in a number of industries. For example, the report cited  excessive capital requirements for U.S. companies in insurance, banking,  and telecommunications sectors, among others, that might prevent U.S.  services companies from operating in China.
section_title: Observations
paragraphs: This analysis reflects a range of issues affecting U.S.-China trade and  investment, including broad factors, such as China’s economic  development and exchange rate regime, and more narrowly focused sector- specific aspects such as China’s growing importance as a market for U.S.  goods and services, the rise in integrated production among China’s  regional trading partners, China’s increasing demand for oil, and China’s  growing role as an attractive venue for foreign direct investment. Beyond  this broad overview, further study may be warranted in particular areas, as  follows:  The strong, overall growth in U.S. exports over the past decade shows  that some U.S. companies are successfully selling their goods and  services to China. This growth is despite the current trade frictions  between the two countries, which include allegations that China has not  been meeting all of its WTO commitments and that China is limiting  market access for U.S. companies. An in-depth analysis of the  relationship between U.S. export growth in China and China’s WTO  commitments might provide useful insights about the impact of China’s  reforms.
U.S. services exports to China, although growing, are still relatively  small and undeveloped, in part because most WTO commitments for  services either have just recently come into effect or will do so in the  near future, and in part because of various Chinese restrictions.  Therefore, it may be best to observe the pattern of U.S. services exports  when WTO commitments have been phased in and given more time to  be implemented.
Integrated production, as China’s neighbors, including Japan and South  Korea, use China as an assembly and export platform for their products,  has implications for the nature of the U.S. trade deficit with China.  Examining integrated production, particularly for China’s largest import  and export category machinery, electronics, and high-tech apparatus,  in which the United States lost export market share in China to other  countries, may shed light on reasons for the U.S. trade imbalance with  China.
The rise in U.S. affiliate sales relative to U.S. exports also has  implications for U.S. companies’ ability to access the Chinese market.  For example, declines in U.S. vehicle exports to China appear to be  offset by U.S. companies’ shifting production to China and selling  vehicles directly to the Chinese market through their affiliates.  Exploring the extent and reasons why affiliate sales have replaced  exports as a means of accessing the Chinese market may be useful.
The significance of exchange rates to the U.S.-China trade relationship  is likely to remain an issue of continuing policy interest. While China’s  exchange rate has changed only slightly since the Chinese government  announced a policy modification in July, further changes could, over  time, provide additional opportunities to study the relationship between  exchange rates and trade patterns.
section_title: Agency Comments
paragraphs: We provided USTR, the Departments of Agriculture and Commerce, and  the International Trade Commission with a draft of this report for their  review and comment. All four agencies chose to provide technical  comments from their staff. Their comments focused on descriptions of  data sources, methodologies for computing data, and explanations of  trends in the data. We modified the report in response to their suggestions.
We will send copies of this report to the appropriate congressional  committees, the U.S. Trade Representative, the Departments of Agriculture  and Commerce, and the International Trade Commission. We also will  make copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions concerning this report, please contact  me at (202) 512-2717 or at yagerl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. A GAO contact and staff acknowledgments are listed in  appendix V.
section_title: Objectives, Scope, and Methodologies
paragraphs: As part of a long-term body of work that the Chairman and the Ranking  Minority Member of the Senate Committee on Finance as well as the  Chairman and the Ranking Minority Member of the House Committee on  Ways and Means requested, we (1) analyzed U.S. goods exports to China  and how they have changed over time, (2) analyzed U.S. services exports to  China and how they have changed over time, (3) assessed how U.S. exports  to China have fared against other major trading partners’ exports to China,  and (4) analyzed U.S. investment and affiliate sales in China.
In order to examine U.S. goods exports to China, we collected annual U.S.  export statistics from 1995 to 2004 at various levels of detail from the  Department of Commerce, U.S. Census Bureau. We used U.S. Bureau of  Labor Statistics export price deflators to deflate the U.S. trade data so that  all of the values reported are in 2004 constant dollars. We did not deflate  the foreign direct investment data since we report U.S. investment abroad  on an historical cost basis, which reflects the prices of earlier periods in  which the investment was made and represents the accumulated stock of  these investments. Although Commerce’s U.S. Bureau of Economic  Analysis (BEA) calculates investments at current prices for aggregate  investment (which could then be deflated), it does not do so on a bilateral  basis. Therefore, we do not have an appropriate way to adjust these values  for any potential effects of inflation.
We used the U.S. harmonized tariff schedule (HTS) chapter level deflators  when available; otherwise, we used the corresponding section deflators.  For the few cases where section deflators were missing as well, we used  the general export price deflator. To facilitate a broad analysis of U.S.  exports to China, we grouped imports and exports into higher-level  categories of goods on the basis of the HTS product codes and our  discussions with tariff experts. We took the 22 section headings of the HTS  and grouped them into 10 broader categories. Table 7 shows these  groupings in detail. We studied the composition of exports by grouping  products into 10 categories. We compared the annual growth rate of U.S.  exports to China with U.S. exports to the world from 1995 to 2004 and also  from 2001 to 2004 at the overall level and the products level. We identified  products with the highest growth and decline in terms of both value and  percentage. We (1) analyzed the importance of China as an export market  for the United States by looking at the share of exports going to China at  various HTS levels and (2) identified products for which exports to China  accounted for a significant share. We interviewed a range of government  and industry experts to obtain contextual information on selected export  products we identified in our data analysis. Throughout this report, we  relied on secondary sources and did not independently review Chinese law  and regulations to determine their effect on sales and investment.
To analyze U.S. services exports to China, we collected annual U.S. export  statistics from 1995 to 2004 from BEA. We used BEA price indices for major  service categories from the National Income and Product Accounts to  convert the trade data so that all values reported are, unless noted  otherwise, in 2004 constant dollars. We identified the importance of China  as a U.S. services export destination by looking at China’s overall share of  U.S. services exports. We calculated the growth rates for services  categories and subcategories using a log function, so that we could  examine the categories with the highest growth. In some cases, when BEA  did not publish values for some categories in some years, we estimated the  missing values and based the growth rate on those estimations. We also  interviewed several government and industry experts to obtain contextual  information about services trade with China.
To assess how U.S. exports to China fared against other major trading  partners’ exports to China, we collected official Chinese trade statistics  from Global Trade Information Services, a licensed contractor with the  Chinese government. We reviewed these data, including comparing them  with comparable United States, European Union (EU), and Japanese trade  statistics. These data differ from the U.S. statistics, particularly on the  Chinese export side, given that a portion of China’s trade passes through  Hong Kong before going to its ultimate destination. However, after  reviewing the academic literature on this discrepancy and general reviews  of China’s statistics, we found that the Chinese import statistics (which we  use in this report) should generally record the country of origin of its  imports accurately, despite whether products first transit through Hong  Kong. On the basis of our review of these statistics and the literature, we  found that these data were sufficiently reliable for comparing the relative  U.S. share of world exports to China over time to other major trading  partners, such as the EU and Japan. We analyzed the U.S. share of world  exports to China from 1995 to 2004 at a broad GAO category level (see table  7) as well as at a more detailed subcategory level. We compared the trends  over two, 5-year periods (as discussed in this report). In addition, we also  compared the trends over 3-year periods to confirm that the results still  generally held. We calculated the average share across these time periods  by taking the average of the share in each of the years (e.g., the average of  the share for 1995, 1996, 1997, 1998, and 1999 in order to get the average  share in 1995 to 1999). However, we also calculated the weighted average  share across these time periods (using the value of trade as weights) in  order to confirm that our results still generally held. When we report the  value of Chinese trade flows (as opposed to the share of China’s trade)  using Chinese trade statistics, it is in nominal dollars. We were not able to  identify an appropriate trade deflator for Chinese statistics in order to  remove the potential effect of inflation or deflation on the values. Finally,  we also interviewed industry experts from the Departments of Agriculture  and Commerce, and the International Trade Commission, and reviewed  government and academic reports to obtain contextual information about  the trends in U.S. share of world exports to China.
To study growth in affiliate sales and foreign direct investment, we  collected annual U.S. affiliate sales statistics from 1995 to 2003 and  investment statistics from 1995 to 2004 from BEA. We identified China’s  importance as a foreign direct investment destination by looking at China’s  overall share of U.S. foreign direct investment, and examined the United  States’s importance as a foreign direct investor in China by looking at the  overall share of U.S. foreign direct investment in China compared with  other countries. We calculated the growth rates for investment categories  and subcategories using a log function, so that we could examine which  categories had the highest growth and decline both in terms of value and  percentage. BEA reports data on foreign direct investment on an historical  cost basis. We evaluated the growth in affiliate sales of goods and services  and compared these values to the growth in cross-border trade in goods  and services. We calculated the growth rates for affiliate sales categories  and subcategories using a log function. In some cases, when BEA did not  publish values for some categories in some years, we estimated the missing  values and based the growth rate on those estimations. In one case, for  foreign direct investment in the finance and insurance category, we had to  use an average annual growth rate instead of a log function because BEA  reported the value of sales as a negative number. We used Chinese  Consumer Price Index data to deflate the affiliate sales to 2004 constant  dollars. We also interviewed several government and industry experts to  obtain contextual information about U.S. investment in and affiliate sales  to China.
For each of the data sets that we used, we examined the data and found  them sufficiently reliable for the purposes of our report. In addition,  although Chinese data on U.S. exports have limitations and differ from U.S.  statistics, we found them to be sufficiently reliable to present individual  countries’ relative shares of China’s trade.
We performed our work from April 2005 to December 2005 in accordance  with generally accepted government auditing standards.
section_title: U.S. Goods Exports and U.S. Share of World Goods Exports to China
paragraphs: U.S. exports of goods to China have grown rapidly over the past decade,  while the U.S. share of world exports to China has fallen during the same  period. These trends are evident at a broad category level and at a more  detailed subcategory level. This appendix provides detailed information on  these changes as well as selected information on particular products.  Specifically, the tables that follow provide additional information on  subcategories of products. Table 8 lists subcategories whose exports to  China accounted for more than 10 percent of total U.S. exports in that  category in 2004; table 9 lists subcategories whose exports to China  accounted for less than 1 percent of total U.S. exports in 2004; table 10 list  subcategories with the largest increases in export value over the decade;  table 11 lists subcategories with the largest declines in export value; table  12 lists subcategories with the largest declines the U.S. share of world  exports to China; and table 13 lists subcategories with the largest increases  in the U.S. share of world exports to China. Finally, table 14 provides  complete data on U.S. exports to China and the U.S. share of world exports  to China for the 10 broad categories of goods and their 99 subcategories.
China is a major market for some U.S. goods exports. Table 8 lists the  products for which exports to China accounted for more than 10 percent of  U.S. exports in that category in 2004. In particular, there were four products  for which more than one-quarter of total U.S. exports were destined for  China in 2004.
China is an insignificant market for some other U.S. goods exports. Table 9  lists products for which less than 1 percent of U.S. exports went to China in  2004. Some of these products are among major U.S. exports, such as  vehicles and pharmaceutical products, which had an overall export of $67  billion and almost $19 billion in 2004, respectively.
U.S. goods exports to China for the majority, 88 out of 99 goods  subcategories, increased in value over the past decade. High-value  subcategories, such as electric machinery, and those experiencing the  highest growth rates, such as oilseeds, were the main contributors to the  overall export value increase. As shown in table 10, the top 5 subcategories  accounted for close to 60 percent of the total export increase for the  period.
Far fewer, 9 of 99 of the goods subcategories, experienced declines in  export value in the past decade. Fertilizer experienced the highest decline,  with the annual average dropping $560 million for the second 5 years from  the previous 5 years, accounting for more than half of the total export  decline.
U.S. share of world goods exports to China declined overall from 1995 to  2004. Table 12 shows the top 20 products that experienced declines in  share between 1995 to 1999 and 2000 to 2004, as well as information on the  overall value of U.S. exports to China in 2004. Carpets and other textile  floor coverings experienced the largest decline of any subcategory, falling  from 42 percent of the world exports to China between 1995 and 1999, to  only 13 percent between 2000 and 2004, on average. U.S. exports to China  of carpets and other textile floor coverings in 2004 were $4 million.  However, the table shows that a range of products experienced declines,  including tobacco, toys, some agricultural products, and fertilizers.
Although, as previously discussed, 55 of the 99 subcategories of U.S.  exports to China experienced a decline in the share of world exports to  China, 42 subcategories experience a rise from the first half of the decade  (1995 to 1999) to the second half (2000 to 2004). Table 13 shows the top 20  of these 42 categories that experienced increases in share. Miscellaneous  edible preparations—which are types of prepared foodstuffs, including  certain products, such as mayonnaise, mixed seasonings, and certain  sauces and syrups—experienced the largest increase over the decade,  growing from a 14 percent share to a 40 percent share of world exports, on  average. Once again, the subcategories that experienced increases covered  a wide range of products, including gums and resins, printed books and  newspapers, and aircraft. However, many of these, as shown in table 13,  were agricultural products.
Finally, table 14 provides information across all 10 broad categories and the  99 subcategories that comprise them on the average annual growth of U.S.  exports to China from 1995 to 1999, 2000 to 2004, and over the whole  decade of 1995 to 2004. The table also shows U.S. exports to China in 2004  and the average U.S. share of world exports to China in 1995 to 1999, 2000  to 2004, and over the whole time period. Finally, the table shows the  difference between U.S. share of exports in 1995 to 1999 and 2000 to 2004.
Oil Seeds, Etc.; Misc Grain, Seed, Fruit, Plant, Etc. Lac; Gums, Resins, and Other Vegetable Sap and Extract Vegetable Plaiting Materials and Products NESOI Animal or Vegetable Fats, Oils. Etc. and Waxes (2)
Group 2: Prepared food, beverages, spirits, and tobacco Edible Preparations of Meat, Fish, Crustaceans, Etc.
Average  (1995-1999)
Average  (2000-2004) (2004) (A) (B) change (B) minus (A)(8) (2) (9) (1) (11) (6) (8) (12) (5) (10) (1) (4) (18) (4) 0 (Continued From Previous Page) growth  (1995-2004)
Mineral Fuel, Oil, Etc.; Bitumin Substances; Mineral Wax Inorganic Chemicals; Precious and Rare-Earth Metals and  Radioactive Compounds Fertilizers Tanning and Dye Ext, Etc.; Dye, Paint, Putty, Etc.; Inks (13)
Essential Oils, Etc.; Perfumery, Cosmetic, Etc. Preparations Soap, Etc.; Waxes, Polish, Etc; Candles; Dental  Preparations Albuminoidal Substances; Modified Starch; Glue; Enzymes Explosives; Pyrotechnics; Matches; Pyro Alloys, Etc.
Group 4: Wood and paper products Wood and Wood Articles; Wood Charcoal Articles of Straw, Esparto, Etc.; basket ware and wicker  ware Wood Pulp, Etc.; Recovered (Waste and Scrap) Paper and  Paperboard Paper and Paperboard and Articles (Including Paper Pulp  Articles)
Printed Books, Newspapers, Etc.; Manuscripts, Etc.
Group 5: Textiles, apparel, leather, and footwear Raw Hides and Skins (No Fur skins) and Leather Leather Articles; Saddlery, Etc.; Handbags. Etc,; Gut  Articles Fur skins and Artificial Fur and Articles Silk, Including Yarns and Woven Fabric Wool and Animal Hair, Including Yarn and Woven Fabric (7)
Average  (1995-1999)
Average  (2000-2004) (2004) (A) (B) change (B) minus (A)(1) (2) (2) (10) (10) (1) (2) (2) (5) (6) (1) (7) (1) (Continued From Previous Page) growth  (1995-2004)
Manmade Filaments, Including Yarns and Woven Fabrics Manmade Staple Fibers, Including Yarns and Woven  Fabrics Wadding, Felt, Etc.; Special Yarn; Twine, Ropes, Etc.
Carpets and Other Textile Floor Coverings (8)
Special Woven Fabrics; Tufted Fabric; Lace; Tapestries, Etc.
Impregnated, Etc. Textile Fabrics; Textile Articles For  Industry Apparel Articles and Accessories, Knit or Crochet Apparel Articles and Accessories, Not Knit, Etc.
Textile Art NESOI; Needlecraft Sets; Worn Textile Articles Footwear, Gaiters, Etc. and Parts  (1)
Umbrellas, Walking-Sticks, Riding-Crops, Etc, Parts Prepared Feathers, Down, Etc.; Artificial Flowers; H Hair  Articles Group 6: Glassware, precious metals and stones, jewelry Articles of Stone, Plaster, Cement, Asbestos, Mica, Etc.
Average  (1995-1999)
Average  (2000-2004) (2004) (A) (B) change (B) minus (A)(29) (1) (2) (3) (5) (3) (2) (2) (2) (4) (1) (4) (5) 1 (Continued From Previous Page) growth  (1995-2004)
Group 8: Machinery, electronics, and high-tech apparatus Tools, Cutlery Etc. of Base Metal; Parts  Nuclear Reactors, Boilers, Machinery, Etc.; Parts Electric Machinery, Etc.; Sound and TV Equipment; Parts Optic, Photo, Etc. Medical or Surgical Instruments, Etc.
Group 9: Aircraft, autos, and other transportation Railway or Tramway Stock, Etc.; Traffic Signal Equipment Vehicles, Except Railway or Tramway, and Parts, Etc.
Aircraft and Spacecraft; Parts Ships, Boats, and Floating Structures Group 10: Miscellaneous manufacturing Clocks and Watches; Parts  Musical Instruments; Parts and Accessories  Arms and Ammunition; Parts and Accessories  (13)
Furniture; Bedding, Etc.; Lamps NESOI, Etc.; Prefabricated  Bedding Toys, Games and Sport Equipment; Parts and Accessories (13)
Average  (1995-1999)
Average  (2000-2004) (2004) (A) (B) change (B) minus (A)(2) (2) (6) (6) (4) (1) (4) (3) (12) (6)
HTS is the U.S. Harmonized Tariff Schedule.
We adjusted these data for inflation and expressed them in 2004 constant dollars.
HTS chapter 77 is reserved for future use. Chapter 99 consists of temporary legislation, temporary  modifications, proclaimed pursuant to trade agreements legislation, and additional import restrictions  proclaimed pursuant to section 22 of the Agricultural Adjustment Act, as amended.
The percentage point change is derived by subtracting the value in column (B) from the value in  column (A).
section_title: Services Trade Categories and Their Definitions
paragraphs: Goods and services purchased by U.S. persons traveling abroad and by foreign travelers in the  United States.
Fares received by U.S. air carriers from foreign residents for travel between the United States and  foreign countries and between two foreign points.
U.S. international transactions arising from the transportation of goods by ocean, air, land,  pipeline, and inland waterway carriers to and from the United States and between two foreign  points.
Transactions with nonresidents that involve patented and unpatented techniques, processes, and  formulas, as well as trademarks, copyrights, franchises, broadcast rights, and other intangible  rights, including rights to distribute, use, and reproduce general-use computer software.
Expenditures for tuition and living expenses by foreign students enrolled in U.S. colleges and  universities and by U.S. students for study abroad.
Funds management, credit card services, fees and commissions on transactions in securities,  implicit fees paid and received on bond trading, fees on credit-related activities, and other  financial services.
Investment income of insurance companies on funds that are treated as belonging to  policyholders, and auxiliary services such as agents’ commissions, actuarial services, insurance  brokering, and agency services.
Receipts and payments between U.S. and foreign communications companies for the  transmission of messages between the United States and other countries.
Expenditures (except employee compensation) by foreign governments in the United States for  services such as maintaining their embassies and consulates, as well as expenditures by  international organizations headquartered in the United States and of foreign residents employed  temporarily in the United States.
Computer and data processing services and database and other information services.
Management services, except management of health care facilities, and consulting services,  except consulting engineering services related to actual or proposed construction projects and  computer consulting, and public relations services, except those that are an integral part of an  advertising campaign.
Commercial and noncommercial research, product development services, and testing services.
Rentals for computer and data processing equipment, and transportation equipment (such as  ships, aircraft, railway cars, etc.) without crew or operators.
Examples include accounting, auditing, and bookkeeping, advertising, construction, and legal  services.
section_title: U.S. Foreign Direct Investment and U.S. Affiliate Sales in China
subsections: section_title: U.S. Foreign Direct Investment in China
paragraphs: From 1995 to 2004, U.S. foreign direct investment in all industries in China  grew at about a 21 percent average annual rate. BEA classifies U.S. foreign  investment into broad industry groups, such as wholesale trade,  manufacturing, mining, finance, and utilities. Growth among industries  varied, as shown in tables 15 and 16.
section_title: U.S. Affiliate Sales in China
paragraphs: In 2003, U.S. affiliates in China sold about $38 billion in goods and services  to the Chinese market. BEA collects data on U.S. affiliate sales under  generally the same industry groups as foreign direct investment, as shown  in tables 17 and 18. These industry groups may include operations that  produce goods and services. For example, although U.S. affiliates in the  manufacturing industry generally produce goods, they may also produce  some services.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Adam Cowles, Assistant  Director; Ming Chen; Leah DeWolf; Grace Lui; Jamie McDonald; Yesook  Merrill; Nina Pfeiffer; Paul Revesz; Tim Wedding; and Seyda Wentworth  also provided assistance.