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. 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. 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. 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.