First, the US import statistics has ignored entrepot trade and value added from entrepot trade to over-estimate its imports from China. A large part of Sino-US trade is conducted through entrepot trade via a third place. Under Chinese statistics, 60% of Chinese exports to the United States are conducted through entrepot trade via a third place, mainly the Hong Kong region. According to US information, only 20% of Chinese goods are directly shipped to the United States, while the remaining 80% get into the United States through a third place. It is obvious that the added value created at the third place after the goods have left China shall not be calculated as exports from China. The conclusion of the Trade Statistics Subgroup of the Trade and Investment Working Group of the Sino-US Joint Commission on Commerce and Trade was: The average rate of value-adding of Chinese exports to the United States via the Hong Kong region was 40.7% in the past two years, which was far above the re-export value-adding rate under general circumstances. The value adding rate of some of the major re-exported commodities, such as toys and knitwear, even exceeded 100%. Chinese mainland products acquired an added value of 5.23 billion US dollars in 1992 and 6.3 billion US dollars in 1993 at Hong Kong before they were re-exported to the United States. The US side, however, calculated the added value created in Hong Kong region's entrepot trade as imports from China, and thus greatly over-calculated its import value from China.

Secondly, the US statistics of its exports to China has been under-estimated by neglecting re-exports. According to analyses by experts of the Sino-US Joint Commission on Commerce and Trade, the amount of re-exports to China via the Hong Kong region included in the US statistics of its exports to China was only about a quarter of that included in Hong Kong's statistics. In 1992 and 1993 respectively, about 1.8 billion US dollars and 2.3 billion US dollars worth of US exports to China, through entrepot trade via Hong Kong, were not included in the US statistics of its exports to China.

Thirdly, the US method in determining the origin of goods also leads to the discrepancies in the statistics of the two sides. The judgment of the origin of ordinary imported goods is usually based on the declaration by importers. Goods determined as originating in China are recorded as imports from China, regardless of whether they are actually exports via a third place or whether the goods have acquired added value in that third place. Some imports which have been recorded by the United States as imports from China should, most probably, be recorded as imports from other third countries or regions. Experts of both sides acknowledged that further studies are needed on the issue of determination of origin.

Leaving aside the error caused by the rules of origin, the US statistics over-estimated trade deficit against China by 7 billion US dollars in 1992 and 8.6 billion US dollars in 1993, or the published US trade deficits against China in these two years were exaggerated by more than 60% (see Table 2), merely through neglecting entrepot trade and value added from entrepot trade alone.

Table 2 The United States' Over-estimated Trade Deficit
   against China as the Result of Neglecting Re-exports
  and Added Value from Re-exports via the Hong Kong Region
                               (in billions of US dollars)

                                           1992     1993

US published imports from China           25.73    31.54
Value added via Hong Kong's re-exports    -5.23    -6.3
Adjusted US imports                       20.5     25.24
US published exports to China              7.42     8.77
US and Hong Kong statistic difference
  over re-exports via Hong Kong            1.8      2.3
Adjusted US exports                        9.22    11.07
US published deficit against China        18.31    22.77
Adjusted US deficit                       11.28    14.17

    Data source: Work report of the Trade Statistics
Subgroup of the Trade and Investment Working Group of
the Sino-US Joint Commission on Commerce and Trade

In addition, the United States has also under-estimated its export value to China because of its incomplete export statistics. On December 5, 1996, officials with the Census Bureau of the US Department of Commerce pointed out in the Business Journal that at least 10% of US exports might have been overlooked in statistics because exports, unlike imports, are not taxed and do not bring the government any direct revenue. According to such estimate, at least 1 billion US dollars of US exports to China might have been left out in the US statistics in 1992 and 1993 respectively.

Considering the aforementioned factors, the US trade deficit against China was over-estimated by 8 billion US dollars in 1992 and 9.6 billion US dollars in 1993, and that represents an average over-estimation rate of about 70%. The trade statistics expert group was only in charge of investigating and analyzing the difference between the trade statistics published by China and the United States. The trade statistics methods adopted by the two sides have not been correspondingly adjusted, and the US side's over-estimation of its trade deficit against China has not since changed substantially. Calculated by the aforesaid rate, the 1996 US trade deficit against China, as published by the US side, was over-estimated by an amount of some 16 billion US dollars.

The so-called enormous trade deficit against China under the US statistics in recent years is attributable to a variety of factors, including flaws in statistical techniques and methods as well as the US policies to China. Therefore, it is far from being sufficient to evaluate the two nations' trade balance situation only on the basis of the trade statistics of the US side. Fundamentally, the protracted US trade deficit against other countries is determined by its own deep-rooted economic factors. It should not shift the blame upon other countries.

III.Statistics Based on Rules of Origin Cannots Accurately Reflect the Situation of Sino-US Trade Balance

Currently, both China and the United States calculate their external trade according to the principle of origin of goods. A growing number of international economists and statisticians believe, however, that there are irrationalities in this currently widely-used international statistical principle, especially because big errors might occur when it is applied to calculating entrepot trade and processing trade. Here lies the essence of the matter when the United States seriously exaggerates its trade deficit against China and distorts bilateral trade balance.

Statistics by origin refers to the determination of the source of the imports as the place where they were grown, manufactured or pro"icessed to make substantial changes. As a tool for countries to exercise trade management, the rules of origin have been important in the history of world trade. Today it is still widely applied to executing multinational trade accords and implementing foreign trade policy measures by different countries. On how to judge whether goods concerned have undergone ``substantial changes,'' however, there lacks a unified and detailed criterion for its application. The ``International Convention on Customs Procedures of Simplification and Harmonization'' stipulated by the Customs Co-operation Council in 1973 contains in its appendix one annex on the rules of origin, which indicates only principles but no enforceable provisions. The Uruguay Round negotiations of the General Agreement on Tariffs and Trade (GATT) reached the ``Agreement on Rules of Origin,'' aiming at co-ordinating member countries' rules of origin on non-preferential imports. The job to formulate the technical standards on the co-ordination principle was entrusted to the World Customs Organization but has not been accomplished till today. Due to the lack of internationally unified rules of origin, countries formulate rules of origin according to their own needs, resulting in different criteria, leaving room for discretion.

It deserves to be specially noted that the limitations of the old rules of origin are being increasingly exposed by the development of the world economy and great changes in the global economic pattern. In the past when cross-border trade and investment were scarce and commodity exchange ties among countries relatively simple, statistics based on the origin of goods could grossly reflect the division of labour, trade relations and corresponding pattern of interests among countries. Today, propelled by fast-growing economic and trade co-operation among countries in the world and cross-border investment that is increasing by the day, goods exchanged through international trade are no longer products made by one country, but ``world products'' whose manufacture involves efforts from several countries. It is obviously difficult for the current rules of origin, as employed by trade statistics, to accurately reflect the main changes in world economic development; these rules could even result in a distorted picture of trade balance situation.

Processing trade that has boomed in some countries and regions over the last two to three decades had the problem further complicated. Processing trade means a country importing main raw materials and auxiliary parts to be processed or assembled and re-exported. According to current rules, the country is deemed the place of origin because within it the imported goods have undergone substantial changes. Due to the fact that main raw materials and auxiliary parts are imported, however, the processing country often profits little from the trade. This was well illustrated in the ``Barbie doll'' example cited in the ``Barbie and the World Economy'' story which was run on the September 22, 1996 edition of the Los Angles Times. The story said that in the United States, the retail price of a ``Barbie'' toy imported from China was 9.99 US dollars compared to an import price of 2 US dollars. Of the 2 US dollars, China gained 35 US cents in service fee, another 65 US cents were spent on importing raw materials and still another 1 US dollar covers costs of transportation and management. To account the 2 US dollars as the revenue of Chinese exports to the United States according to rules of origin is clearly unreasonable.

Processing trade expansion is a major factor behind China's export growth in the 1990s. Total export volume rose to 151.1 billion US dollars in 1996 from 62.1 billion US dollars in 1990, up 16% per year on average. In the period, processing trade soared from 25.42 billion US dollars to 84.33 billion US dollars, an annual rise of 22.1%. In the 1990-96 period, the ratio of processing trade to overall Chinese exports rose from 41% to 55.8% and even amounted to 70% in its share of Chinese exports to the United States in 1996. The bulk of the sector has developed since the mid-1980s when investors from developed countries including the United States and Japan as well as Singapore, the Republic of Korea, and the Hong Kong and Taiwan regions started to move their labour-intensive industries or production procedures to China in a bid to cut production cost and enhance international competitiveness. Dependent on overseas investors' original marketing channels, processing trade products are primarily sold to their traditional markets including the United States via entrepot trade through Hong Kong. To calculate them according to certain rules of origin, China -- instead of the investors' home countries or regions and exporters of materials and auxiliary parts -- became the exporter. According to statistics published by the US Department of Commerce and reports from the US-China Business Council, the United States' trade deficit against Singapore, the Republic of Korea and the Hong Kong and Taiwan regions fell from 34 billion US dollars to 7.8 billion US dollars in the 1987-95 period, and in the meantime its trade deficit against China rocketed from 2.8 billion US dollars to 33.8 billion US dollars. These figures reflected the aforementioned process of place-of-origin transfer and showed that the trade balance between the United States and the countries and regions in Asia as a whole has not substantially changed over the years. In recent years, more than two-thirds of US-bound Chinese exports have undergone entrepot trade in the Hong Kong region. The value added at Hong Kong has been far greater than that in China's mainland, hence Hong Kong has benefited far more than the mainland from the processing trade. If that part of the added value is counted as Hong Kong exports, China's trade surplus against the United States will drop accordingly, or even turn into deficit.

Hence it is not difficult to conclude that,

1) While applying the origin-based statistics, it is imperative to be fully aware of the method's limitations and discern from the figures the actual benefits of all trading parties after careful analysis. That is the only way conducive to removing misunderstanding and properly settling bilateral trade disputes.

2) It is also a must to note the trend of increasingly closer international economic links and ever-growing cross-border investment and service trade that are growing by the day, and on that ground improve and perfect the computing of trade figures so that statistics will comply with reality and better serve the mutually beneficial co-operation among countries in the world.

IV.US Export Control Against China -- a Major Obstacle for Bilateral Trade Balance

The United States has adopted discriminatory export control policies towards China for many years. These policies have hindered US exports to China and therefore have become a major obstacle for bilateral trade balance.

It is acknowledged that, since the two countries established diplomatic relations in 1979, the United States has relaxed control on exports to China by categorizing the latter into group ``P'' first and group ``V'' later. But China has not fully enjoyed treatment for ``V'' countries as the United States has retained a number of discriminatory measures in its policy making and implementation. It was after 1983 that member states of the former COMCO, including the United States, began to consider an ease of export control on China. In September of 1985, resolutions were adopted to simplify approval procedures concerning exports to China, which, however, demanded not to change the final use and end users of ``controlled export items.'' The Chinese Government's response was positive. For many years, the Chinese Government has been earnest in carrying out its promise about ``end users'' and ``final use.'' Certain effective measures have been adopted to honour the promise. The results have been obvious. Other Western countries have accepted ``Elaboration on End Users and Final Use'' made by the Chinese Government. However, only the United States have indicated doubts, demanding China to come up with extra undertakings about US ``controlled export items.'' For example, end users should accept pre-licensing inspection and double check after unloading of imported goods; and various unduly strict conditions are attached to granting of licenses, such as around-the-clock spot surveil"ilance and free random check. All these are difficult for China to accept. Upon the disintegration of COMCO -- a product of the Cold War -- in March 1994, the United States could not but adjust its export control policies. Nevertheless, its discriminatory measures towards China remained largely intact.

We have noticed that Sino-US trade relations witnessed certain prog"iress in the 1980s when the United States relaxed export control on China. But, since the beginning of the 1990s, the United States has instituted a series of new sanctions against China, many of which concern export control. This change has led to severe consequences and gradually an unfavourable reverse of trade balance for the United States. It is hard to say that such a change -- indeed a double-edged sword -- is wise.

The US export control policies and lingering sanctions against China have greatly restricted US exports to China as well as US investment in high-tech sectors on the territory of the latter. In short, these measures have bottlenecked Sino-US economic and trade co-operation. The negative effects of these measures on bilateral economic and trade co-operation and on US businesses can be seen in the following examples:

-- In early 1980s, China conducted technical and commercial negotiations with the US Westinghouse and General Electric companies over the purchase of equipment for the Qinshan nuclear power plant (300,000 kilowatts) and the Daya Bay nuclear power plant (900,000 kilowatts). But the talks failed due to US export control. In 1985, China and the United States signed the ``Agreement for Co-operation Between the Government of the People's Republic of China and the Government of the United States of America Concerning the Peaceful Use of Nuclear Energy.'' It was immediately approved by China. But the US Congress insisted on attaching many preconditions thereto. As a result, the protocol has yet to take effect. At present, China's nuclear power industry is expanding, prompting substantial import of technologies and equipment. US nuclear power enterprises, with enormous interests, have lost their chance of export to China because of the US Government control over nuclear energy technology.

-- In mid-1980s, similar restrictions ripped US exporters of potential business opportunities worth several billion US dollars when China planned to import technologies and equipment for integrated circuits and programme-controlled telephone switching boards. In recent years, China still hopes to buy electronic components and related manufacturing and testing equipment from the United States. But again, the US Government's discriminatory control policies have prevented US businesses from selling them to China.

-- China needs to import advanced machine tools, thus providing good trade opportunities for US manufacturers. But the US Government's strict export control has forestalled normal business with China.

The above examples are but a drop in the sea. Under the US Government's discriminatory export control policies towards China, not only a large number of Chinese customers are unable to co-operate with US exporters, but US exporters themselves stand to lose trade opportunities. Some analyses have concluded that the United States has lost an average of several billion dollars of exports each year to China in the recent past due to such discriminatory policies. It makes no sense for the United States to play up trade deficit against China on the one hand, and continue its export control on the other.

While the US Government maintains such discriminatory export control policies towards China, other industrialized countries have, one by one, cancelled their discriminatory policies and have even provided China with governmental financial support for its import of capital goods. This has definitely enhanced the competitiveness of their products on the Chinese market. The European Union member countries are not only free from any trade deficit, but have enjoyed an average annual trade surplus worth several billion US dollars with China. This comparison between EU and the United States speaks aloud on the different effects on bilateral trade balance brought by different export policies towards China.

The Chinese Government hopes the US Government will, proceeding from the long-term interest of bilateral trade and economic co-operation, adopt effective measures to relax or even cancel the current discriminatory export control policies against China so as to usher in a healthy and balanced Sino-US trade relationship. This is a realistic way of resolving the trade balance issue between China and the United States.

V.Sino-US Economic and Trade Co-operation Shows Vast Vistas

Lasting economic and trade co-operation between China and the United States requires sustainable and balanced growth in bilateral trade. The Chinese side has always paid great attention to the need and taken active measures to increase imports from the United States. China's market is open to US goods and services. Over the past years, China has purchased a great amount of US products. Investment sectors in China for US businesses have widened and the scale of US investment in the country has been growing continuously. All these have brought US enterprises huge profits.

-- Trade in commodities: Between 1979 and 1996, China bought 69.476 million tons, or 11.62 billion US dollars worth, of wheat from the United States. Now, China is the largest buyer of US wheat. In the period, China also bought 46.243 million tons, or 9.56 billion US dollars worth, of chemical fertilizers and 308 aircraft worth 8.72 billion US dollars from the United States.

-- US investment in China: US investment in China has been increasing rapidly. Among the top-500 US enterprises listed by the Fortune magazine, more than 100 have so far invested in various fields in China.

-- Banking and insurance: Five US banks have altogether set up eight branches in China. Three out of the six foreign insurers operating in China are US companies, respectively set up by American International Assurance Co. and the AIU Insurance Co. -- both subsidiaries of American International Group Inc. (AIG).

-- Shipping services: APL (China) and Sealand (China) are the ear"iliest wholly foreign-owned shipping companies to start operating in China, where they already have nine subsidiaries at present.

-- Retailing: US retailers, including the renowned Walmart Co., have also entered the Chinese market.

In order to open China's market wider, China and the United States signed the Memorandum of Understanding Between the Government of the People's Republic of China and the Government of the United States of America Concerning Market Access in October 1992. In the following years, China has made earnest efforts to fulfill the various obligations as stipulated in the memorandum, and has taken a series of active measures in line with its reforms and opening drive. Take sanitary and phyto-sanitary quarantine as an example: After joint research and analyses by experts from both countries, China not only abolished its import control over apples from the Washington State and wheat from California, but has signed with the United States new quarantine protocols on such imports as pigs, horses, dogs and genetic materials. In April 1994, China and the United States reached an agreement on hygiene quarantine provisions on cherry imports from the Washington State and imports of relevant species of apples grown in Idaho and Oregon. All these have helped further development of Sino-US economic and trade ties.

China is now in a period of rapid economic growth, estimated to average at least 8% a year in the run-up to 2000 and maintain above 7% in the first decade of the 21st century -- promising broad market potentials. An example is the market demand for energy and communications construction. In the next five years, China will increase its installed power-generating capacity by 80,000 megawatts and build 16,000-kilometres-long new railways plus another 2,800 kilometres of freeways. It also plans to build another 150,000 kilometres of optic fibre cables and increase telephone switching capacity by 70-80 million lines. China will continue to introduce overseas capital, technologies and equipment in an active, rational and effective way. China's imports increased to 138.8 billion US dollars in 1996 from 10.9 billion US dollars in 1978, representing an annual average growth of 15.2%. Between 1997 and 2000, cumulative imports to China will top 700 billion US dollars. China's economic growth will offer a massive market for world trade and investment. Back in 1994, the United States' Department of Commerce had put China on the top of ``top-10 emerging markets,'' reflecting its high evaluation on potentials of the Chinese market. The Chinese market is opening wider while the competition is also getting tougher. We are willing to see that US enterprises win more chances to compete on the Chinese market.

Chinese exports to the United States are mainly labour-intensive products. These products pose no threat to the production of US enterprises. An economist from the US-based Institute of International Economics was quoted by a Washington Post story in June 1996 as saying: It is true that the United States imports more and more toys and shoes from China, but these industries have almost vanished in the United States. Clyde Prestowitz, president of the Economic Strategy Institute of the United States, pointed out in an article in a December 1996 issue of the US News & World Report that China's exports to the United States are large in industries where the United States does not make things anymore. Labour-intensive Chinese exports to the United States will neither affect industrial production and employment in the United States, nor affect international market shares for US products. Instead, they are beneficial complements to the economic structure of the United States and can help the United States to readjust its economic structure.

Paralleling with the gradual deepening of its economic reforms in recent years, China has increasingly amplified its foreign-related legal system, steadily improved its trade and investment environment and enforced the intellectual property rights protection system. On the issue of trade system transparency, China has sorted out and publicized all management documents that used to be deemed confidential and publicly abolished 744 of them. In 1993, the Bulletin of the Ministry of Foreign Trade and Economic Co-operation of the People's Republic of China was launched to exclusively carry laws and regulations on the management of foreign trade and economic co-operation. Import restriction was further eased and by the end of 1995, China had rescinded import licensing and quota control over 826 tariff lines. Since the past year, China has again taken a series of imortant measures in improving its foreign-related economic regime and policies as follows:

-- A massive cut in the import tariffs of more than 4,000 tariff lines was introduced in April 1996, bringing average tariff from 35.3% down to 23%. It has also pledged to further lower overall tariff rate to 15% by the year 2000.

-- China has taken active steps to phase out non-tariff measures. Only 384 items of imports are subject to the measures today as compared with 1,247 before. China has also set forth a timetable to further lift such measures.

-- In 1996, the Chinese currency Renminbi became freely convertible under the current account, enabling foreign-invested companies to be free in international settlement and transfer under the current account.

-- China has started, on a trial basis, to open its market to foreign investors in such service sectors as domestic retailing, finance, insurance and foreign trade. Some foreign companies and financial institutions have already entered these markets. In the Pudong New Area of Shanghai, some foreign banks have begun handling Renminbi business.

By the year 2000, China will have initially established a system of socialist market economy and built up a unified and standard foreign-related economic regime, which will create better conditions for the world's business communities including those from the United States to develop economic and trade co-operation with China.

Equality and mutual benefit are the cardinal principle of international trade. It is normal that countries will seek to protect their own interests, which may lead to trade frictions and disputes. The key lies in how to cope with these issues correctly in a cool and wise way. China has always advocated that parties involved should adhere to the principle of mutual respect and settle bilateral or multilateral trade disputes, reasonably, through friendly discussions. Having experienced a winding course in their bilateral relations, China and the United States should cherish the mainstream in the two-way trade development, look to the future and face the reality with a constructive attitude. Bullying, forcing unacceptable demands on the other through constant threats of trade sanctions and even actually imposing sanctions will not help solve problems but cause damage to the interests of both sides.

It is China's sincere wish and also to the interest of the United States to expand bilateral trade and economic co-operation. Both governments are obliged to provide a sound and stable climate for the long-term development of the bilateral trade and economic co-operation. It is their duty to substantially improve bilateral trade ties and lay a solid foundation for developing and balancing trade between the two countries. We welcome the business communities from the United States to play an active role in fair competition on the Chinese market. We wish the US Government will take forcible measures to fuel stronger growth in two-way trade and economic co-operation.