US-CHINA ECONOMIC RELATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00447R000201580001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: June 8, 2010
• Sequence Number: 1
• Publication Date: April 19, 1985
• Content Type: MEMO

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25X1
Central Intelligence Agency
Washington, D. C. 20505
DIRECTORATE OF INTELLIGENCE
19 April 1985
US-China Economic Relations
Summary
In the past two years the' United States
has dropped to third place as a supplier to
China, trailing Japan and Hong Kong.
Although China constitutes one of the fastest
growing markets for US technology,
investment, and services, our judgment is
that trade will not reach its potential
unless a host of bilateral economic issues
are managed adroitly. As we look ahead
several months, we see a series of economic
problems which have the potential of
converging. There are a number of textile
problems. Serious differences, impede an
early conclusion of a Bilateral Investment
Treaty, and there is no indication that the
maritime negotiations will resume soon. The
Nuclear Cooperation Agreement remains in
suspension., The problem of Northwest
Airlines' permit represents a serious threat
to our civil aviation relations, and it must
be faced before May. There remains a gap
between Chinese demands for liberalization of
export controls and the ability, of the COCOM
members to respond. And there are political
irritants such as Chinese membership in the
Asian Development Bank and the Huguang Bonds
appeals process that could hamper the
development of US-China economic relations.
This memorandum was prepared by the China
Division, Office of East Asian Analysis and is based on
information through 18 April 1985. Comments may be directed to
Chief, Development Issues Branch
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In the last five months China has signed more than $12 billion
in contracts for Western plants and equipment (see Table 1).* The
surge in contract signings is related to China's economic
planning cycle--most contracts for major projects that are
scheduled for start-up during the Seventh Five-Year Plan
(1986-1990) must be signed this year if the projects are to be
completed by the end of the Plan. Transport equipment and plants
account for more than half of the total--$5.4 billion--and this
explains the tremendous success so far of US firms in selling to
China. The United States has garnered almost $3.8 billion in
contracts, more than twice as much as West Germany and three
times as much as Japan. The United States is unlikely to
maintain this 30 percent share, however, since by year-end China
probably will sign several large contracts with firms from other
nations for nuclear power, coal field development, steel
facilities, and chemical plants.
The Chinese have stated that they plan to obtain about $50
billion in capital goods from the West during the course of the
Seventh Five-Year Plan, perhaps half of which will be contracted
for by the end of the year. During the Seventh Plan we expect
China's total imports from the world to average about $40 billion
per year, of which the United States could capture 15 to 20
percent, or roughly $6 to $8 billion annually.** US sales to
China could fall far short of the potential, however, if several
issues are not resolved satisfactorily. The entire history of
US-China trade has been marked by wide swings in US exports that
have resulted from fluctuations in economic and political
relations (see figure). F__-]
Over the long run, the question of Chinese access to the US
market, particularly for textiles, could cause the most problems.
Textile products continue to dominate Chinese exports to the
United States; last year they accounted for nearly half of total
sales. Because of tightening restrictions on textile trade in
the United States and other developed countries, China is trying
to diversify its exports, but with limited success. Exports of
crude oil, petroleum products, and military arms have increased
substantially,. but sales of most other goods have risen less
dramatically. China also is trying to upgrade the quality of its
* This includes both direct purchases, worth more than $5
billion, and joint venture agreements, which will ultimately
generate about $7 billion in capital imports from the West. C
*4 es projections assume that US firms will capture the same
share of the Chinese market as they now do of the world market
for each commodity China is likely to import. The upper end of
the range assumes the Chinese turn to the world market for
grain imports on the same scale as they did in 1980-83.
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Highlights of US-China Trade
Grain deliveries
end
Long-term grain / I Cotton and synthetic
agreements signed textile fibers sales
Cotton sales
jump
Chinese leadership
struggle
lifted
China buys
aluminum
I-
II I ,III~III~I
- US Imports
US Exports
25X1 305484 4.85
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textiles in order to earn more from goods that are subject to
physical quotas. The quotas have thus had the deleterious effect
of forcing China to com ete more directly with US manufacturers
of high grade textiles.
Unless bilateral relations deteriorate considerably, we do not
believe Beijing will elevate trade disputes to a level that could
affect overall relations. But Chinese exports will persistently
test any trade barriers, and US moves to restrict Chinese exports
would likely spark some form of Chinese retaliation. Because of
the centralized nature of the Chinese economic system, Chinese
policymakers can easily link what we would consider to be
unrelated issues, as they did in 1983 when the United States
imposed unilateral restrictions on their textile exports and the
Chinese responded by banning purchases of US agricultural
commodities.
China will also continue to press for loosening of US
limitations on the technologies available to it. Even though
those limitations have been liberalized, licensing delays
continue to slow deliveries, and, thus, the Chinese have felt
obliged to turn from US to European suppliers for certain
technologies where they feel US export controls could interupt
deliveries. The Chinese search for alternative suppliers also is
motivated by the inability of the United States to compete with
Japan, France, the United Kingdom and other countries on pricing
and financing terms because of the strength of the dollar and
high US interest rates.
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We expect that much of the expansion in bilateral economic
relations over the next" few years will stem from US joint
ventures and other forms of direct US investment. Recently China
has taken many steps to open its economy to increased foreign
participation, including: opening 14 coastal cities and Hainan
Island to foreign investment; passing scores of laws covering
such areas as foreign contracts, taxation of joint ventures, and
patent protection; negotiating tax, investment, and nuclear
cooperation agreements with several countries; and providing
greater access. to the domestic market for joint ventures wishing
to sell their products internally. We estimate that direct
foreign investment in China exceeded $4 billion at the end of
1984, of which US investment in joint ventures, offshore oil
exploration, and other projects totaled more than $1 billion.
Because of China's desire to obtain the best technology
available, and because of the nature of the development projects
China is undertaking, we believe that US firms could continue to
be at the forefront of foreign investment, but this will of
course depend on the steadiness of the relationship and the
determination of both sides to resolve issues on their merits.
In addition to textiles and US export controls, the following
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issues have the potential to become major bilateral irritants:
o Northwest Orient Airlines: The issue of normalizing
Northwest's temporary operating permit is a politically
sensitive one that has required both sides to walk on eggshells
for the past year in order to avert a breakdown of civil air
relations. Northwest's proposal to make its PRC operations a
subsidiary operation, with its Taiwan operations remaining
primary, reversed China's proposal and, of course, CAAC could
not agree.
o Nuclear Cooperation Agreement: China still wants to purchase
nuclear technology and equipment from the United States. ? As
long as the Nuclear Cooperation Agreement remains in
suspension, however, US companies will be excluded from bidding
on nuclear plant construction and the controversy surrounding
nonproliferation assurance will raise questions about mutual
trust in the bilateral relationship.
o maritime Agreement Negotiations: Our initial maritime
agreement lapsed in December 1983, but this has not prevented
Chinese merchant ships from calling on US ports in record
numbers, despite high tonnage duties imposed on them. The
glaring contrast between the growing presence of Chinese ships
in US waters and the virtual absence of US ships in Chinese
ports poses a grievance that is waiting to ripen.
o Bilateral Investment Treaty: Although Beijing wants to sign a
BIT with the United States in order to encourage foreign
investment, in our opinion, two issues remain major sticking
points. The Chinese cannot accept language in the US prototype
treaty that extends "national" treatment to US firms and
individuals--language that goes beyond the "most favored
nation" treatment granted under the US-China Trade Agreement.
Second, the Chinese cannot accept the Western definition of
what constitutes "prompt, adequate, and effective" compensation
in the event of a Chinese expropriation.
o Asian Development Bank Membership: China's membership in the
ADB is still in deadlock and China could raise this into a
major test of US willingness to support a "one China" policy.
Recent Trends in Trade
Last year trade was essentially in balance for the second year
in a row, with each country's exports totaling $3.0 billion.
Although the Chinese cut back on purchases from the United States
in 1983 and linked those purchases to Chinese sales in the US
market,. we believe the balance between exports and imports in
1984 was merely coincidental. In the fourth quarter the United
States had achieved a $300 million surplus with China, largely on
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the strength of increased capital goods sales. Over the next
several years we expect th US will maintain a substantial
surplus in trade with China. 25X1
US exports: US sales to China have fluctuated more than
imports, peaking at $3.8 billion in 1980, then dropping to $2.3
billion in 1983, before rising again last year. Last year China
accounted for 1.4 percent of US exports, and ranked 19th on the
list of export markets, just ahead of Brazil. Despite
disruptions resulting from the textile-grain problem and from
increasing Chinese output of grains, wheat remained the largest
single US export last year, accounting for 20 percent of US sales
to China. Nevertheless, China has dropped from the leading
market for US wheat to 5th place, following Taiwan. F-1
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Other major US exports to China last year included transport
equipment (particularly Boeing aircraft and GE locomotives),
lumber, fertilizers, and plastics, which altogether accounted for
nearly 40 percent of US sales. During the next few years, we
expect capital goods and technology--designs, blueprints,
training, and management and engineering services--to constitute
a greater share of US sales, while the share taken by
agricultural commodities ebbs. Last year machinery and equipment
exports totaled more than $1 billi d technology invisibles
may have added another $0.5 billion.7-7 25X1
US Imports: Except for a slight dip in 1983, US purchases of
Chinese goods have increased steadily since 1971 when import
controls were lifted. The US absorbed about 11 percent of
China's total exports last year, and ranked third behind Hong
Kong (26 percent) and Japan (21 percent). Clothing and apparel
dominated US purchases, accounting for 30 percent of the total;
however, crude oil and gasoline purchases have increased rapidly
and now account for 21 percent. Although US restrictions on
imports of leaded gasoline are likely to hurt Chinese gasoline
shipments to the West coast, the low sulfur content of Chinese
crude makes it attractive for East coast refineries.
There is scant detailed information on China's future export
plans, but China clearly has expansive long-term goals. The
Chinese are actively searching for additional marketing
opportunities, especially through joint foreign-Chinese ventures.
As a result of reforms in the agricultural area the Chinese have
substantially boosted output of several major crops, allowing
them not only to cut imports, but also to engage in exporting on
a limited basis. Indeed, Chinese corn and cotton sales have even
cut into US markets in East Asia. We do not expect the Chinese
will be able to substantially boost sales to these markets,
however, because the needs of China's growing population will
work against volume exports of agricultural commodities. F-1
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The largest gains for China will be in the area of light
manufacturers. Various ministries, corporations, factories, and
provinces have developed at least tentative plans to upgrade
their manufacturing facilities and to improve output quality in
order to become competitive in world markets within the next five
to 15 years. China is pushing electronics development in
particular, driving to double by 1990 the output- of
semiconductors, communications equipment, computers, and consumer
electronic for both domestic use and export.
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