By many measures, China is the largest economy in the world. That makes it an undeniable force in international trade.
Yet, this formidable giant gives many small and midsize exporters pause—U.S. exporter pessimism is evident, especially in light of China’s slowing economic growth, mounting concerns about national security implications of technology supply chains, and U.S. and Chinese retaliatory tariffs.
With all of these factors in mind, should U.S. exporters still consider breaking into the Chinese market? Unfortunately, there’s no one-size-fits-all answer for exporters.
In this article, I’ll share many facets of exporting to China you can use to help you decide if this market is a good option for you—including the history of U.S. trade with China; the process of exporting to China, including documentation and compliance requirements; and the benefits and considerations for U.S. companies looking to break into the Chinese market.
The Bumpy Road of U.S.-China Trade
In 2017, China stood as the largest economy in the world as measured by a Purchasing Power Parity (PPP) basis that adjusts for price differences. The country became the world's largest exporter in 2010, and the largest trading nation in 2013. (CIA World Factbook)
According to the International Trade Administration's (ITA) China Commercial Guide, U.S. exports to China in 2018 were $120.34 billion, down from $129.89 billion the previous year. U.S. exports of services to China were an estimated $58.9 billion.
In 2018, the Trump Administration imposed a variety of tariffs on Chinese goods in response to what it called unfair trade practices. China responded with additional tariffs of its own on U.S. goods, and the two countries have battled back and forth ever since.
According to the China Briefing website, "the U.S. has slapped tariffs on $550 billion worth of Chinese products. China, in turn, has set tariffs on $185 billion worth of U.S. goods."
There appeared to a breakthrough in negotiations between the two countries in January 2020 when the two countries announced a Phase One Agreement, in which China agreed purchase an addition $200 billion of U.S.-made goods and services over 2020 and 2021.
Unfortunately, the latest data indicates that China is falling short of that goal as of September 2020. In fact, China is currently importing fewer U.S. goods than they did before the trade war began in 2018.
Top U.S. Exports to China
According to the Office of the U.S. Trade Representative, China was the United States' third largest goods export market in 2018. The top U.S. export categories to China in 2018 were:
- Aircraft: $18 billion
- Machinery: $14 billion
- Electrical machinery: $13 billion
- Optical and medical instruments: $9.8 billion
- Vehicles: $9.4 billion
Notably, U.S. total exports of agricultural products to China totaled $9.3 billion in 2018—down from 21 billion in 2014. China is the United States’ fourth-largest agricultural export market. Leading export categories include: soybeans ($3.1 billion), cotton ($924 million), hides and skins ($607 million), pork and pork products ($571 million), and coarse grains ($530 million).
Exporting to China: The Challenges
Exporting to China is difficult for many reasons, including the following noted by the American Chamber:
- China’s sluggish economic growth: According to most recent data, China’s growth dipped down to 6.6% in 2018, its slowest in nearly 30 years.
- Inconsistent and generally unfavorable interpretation of regulations.
- Rising costs of doing business—AmCham’s 2019 survey found that over half of its member companies experienced an increase in non-tariff barriers in 2018.
- Increased competition from Chinese competitors.
- Industrial policies that limit market access for imported goods, foreign manufacturers, and foreign services providers, while offering substantial government guidance, resources, and regulatory support to Chinese industries.
- Regulatory compliance risks.
- Laws, regulations and other measures that called into question the openness of China’s investment regime.
U.S. exporters cite “inconsistent regulatory interpretation and unclear laws” as one of the biggest challenges to doing business in China. They also cite labor costs, obtaining required licenses, hiring and retaining qualified employees, industrial overcapacity, increasing protectionism, corruption, taxes, and lax enforcement and protection of intellectual property rights.
Intellectual Property Issues
In spite of small progress towards improving its intellectual property legal and regulatory regime, China continues to be a challenging environment for Intellectual Property Rights protection and enforcement; China’s intellectual property (IP) issues are rampant and well-documented.
IP holders exporting to China must understand how to protect their IP under Chinese law before entering the market, and they should conduct thorough due diligence on potential partners or buyers before entering into any transaction. To learn more about how your company can protect its intellectual property in China, visit Stopfakes.gov. You can also refer to the summary of the programs available through the U.S. Department of Commerce to help U.S. firms develop an intellectual property strategy plan.
Rules and Regulations In China
As previously mentioned, deciphering the many (often conflicting) Chinese rules and regulations can be frustrating in the least and, at worst, cause issues that force an exporter to stop trade to the country completely.
There are ways to combat these issues:
- Work closely with your local U.S. Commercial Service office. They will link you to offices in China that will help you establish your presence in China and assist you through difficulties you may face.
- Additionally, the U.S. Department of Commerce's Advocacy Center can help you with early stages of your project.
- Find partners who have experience working with China. Your freight forwarder and banker should have documented experience working with the country.
Exporting to China: The Opportunities
While the risks of exporting to China undoubtedly loom large, the potential rewards to exporting to China may as well. Exporters should identify and cultivate opportunities while building a strategy to minimize the risks.
Chinese officials continue to promise economic reforms to provide greater market access and protection to foreign investors, but these announcements are met with skepticism due to lack of details and timelines. Investors also cite inconsistent regulations, growing labor costs, licensing and registration problems, shortages of qualified employees, insufficient intellectual property protections, and other forms of Chinese protectionism as contributing to China’s deteriorating business climate.
Areas of Growth in China
According to the ITA, China’s growing middle class will create market opportunities across a number of industries, and the manufacturing economy, which is already 50% larger than the U.S. manufacturing economy, will continue to evolve toward more technology-intensive high value-added production manufacturing.
The promising areas for future growth include:
- Environmental Technology
- Medical Devices
If you do decide that the benefits of exporting to China outweigh the considerations, the best thing about exploring the opportunities to export to China is knowing you don’t need to go it alone. You can rely on assistance from your in-country allies, including the U.S. Commercial Service office, trade missions, and chambers of commerce.
One of the first places to consider are your local and in-country U.S. Commercial Service offices. The Commercial Service in-country offices offer U.S. exporters business partners in China—on the ground in the country—and include representation by an agent, distributors or partners who can provide essential local knowledge and contacts that can be critical for your success. You can learn more about in-country offices in our article, Tapping into the U.S. Commercial Service's In-Country Offices.
DECs across the country can help exporters by supporting trade and services that strengthen individual companies, stimulate U.S. economic growth, and create jobs. DEC members also serve as mentors to new exporters and can provide advice to smaller companies.
Sponsored by state and local trade offices as well as commercial service offices, trade missions are a great way to get introduced to and network with contacts. Check into them.
The ITA is an excellent resource to help you combat problems. Staff at the ITA are resident experts in advocating for U.S. businesses of all sizes, customizing their services to help solve your trade dilemmas as efficiently as possible. If you find yourself caught in an unfair international trade situation, the ITA is a valuable resource that can expeditiously help you understand and solve your problems. The ITA makes it easy to report a problem, allowing you to submit your report online.
U.S.-China Chambers of Commerce
Chambers of commerce may be a way to help you when exporting to China. You can learn more about various chambers in our article, The Chamber of Commerce Role in Exporting.
Export Document Requirements for China
When exporting to China, documentation and procedures are still critical. The documents you need to export to China will vary depending on your products, but include the following:
- Bill of lading
- Commercial invoice
- Packing List
- Sales contract
- Proforma invoice
- Certificate of origin signed by a local chamber of commerce
- AES filing
- Customs declaration
- Insurance policy
In addition, there are some more specialized documents that may be required:
- Import quota certificate for general commodities (where applicable).
- Import license (where applicable).
- Inspection certificate issued by the General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) or its local bureau (where applicable).
- Other safety or quality licenses.
The Chinese importer will gather the documents necessary for importing goods and provide them to Chinese Customs agents.
Export Compliance Issues When Exporting to China
It’s important to understand the regulations covering exports to China. You must be concerned with complying with export regulations no matter where you ship, but you are more likely to need an export license shipping to China than if you were shipping to Canada. It’s a part of the world where more items are controlled, so you need to understand what is required of you and what you risk if you don’t do your job in complying with those regulations.
Product Classification for Export Controls
The first step in ensuring export compliance is determining who has jurisdiction over your goods: the U.S. Department of Commerce under the Export Administration Regulations (EAR) or the State Department's Directorate of Defense Trade Controls (DDTC).
If they fall under the jurisdiction of the Commerce Department, which most products do, you must determine if your export requires authorization from the Bureau of Industry and Security (BIS), which is part of the Commerce Department, you need to answer the following questions:
- What is the ECCN of the item?
- Where is it going?
- Who is the end user?
- What is the end use?
To do that, you must know how to determine the correct classification of your item, also known as determining the Export Control Classification Number (ECCN). The ECCN is different from the HTS or Schedule B classification of your goods. We explain these differences in our article, Export Codes: ECCN vs. HS, HTS and Schedule B.
By making sure your product is classified correctly, you’ll be protecting the U.S. from threats abroad and protecting yourself from severe fines, penalties and even jail time.
Export License Determination
There are several reasons the U.S. government prevents certain exports to China without an export license. Companies must use the ECCN codes and reasons for control described above to determine whether or not there are any restrictions for exporting their products to specific countries. Once they know why their products are controlled, exporters should refer to the Commerce Country Chart in the EAR to determine if a license is required.
Although a relatively small percentage of all U.S. exports and reexports require a BIS license, virtually all exports and many reexports to embargoed destinations and countries designated as supporting terrorist activities require a license. These countries include Cuba, Iran, North Korea, and Syria. In addition, there are more nuanced restrictions like those against certain Russian industries and the Crimean region of Ukraine.
Part 746 of the EAR describes embargoed destinations and refers to certain additional controls imposed by the Office of Foreign Assets Control (OFAC) of the Treasury Department.
The Shipping Solutions Professional export documentation and compliance software includes an Export Compliance Module that will use the ECCN code for your product(s) and the destination country and tell you if an export license is required. If indicated, you must apply to BIS for an export license through the online Simplified Network Application Process Redesign (SNAP-R) before you can export their products.
There are export license exceptions, like low-value or temporary exports, that allow you to export or reexport, under stated conditions, items subject to the Export Administration Regulations (EAR) that would otherwise require a license. These license exceptions cover items that fall under the jurisdiction of the Department of Commerce and not items that are controlled by the State Department or some other agency.
Surprise! You May Be an Exporter without Even Knowing It! A sometimes overlooked compliance issue for exporting to China is deemed exports, or exporting without shipping a product. A deemed export occurs when technology or source code (except encryption and object source code, which is separately addressed in the EAR under 734.2(b)(9)), is released to a foreign national within the United States.
Sharing technology, reviewing blueprints, tours of facilities, and other disclosures of information are considered potential exports under the deemed export rule and should be handled accordingly. You can learn about how to apply this principle here.
Restricted Party Screenings
Restricted party lists (also called denied party lists) are lists of organizations, companies or individuals that various U.S. agencies—and other foreign governments—have identified as parties that one can’t do business with.
There are several reasons why a person or company may be added to a restricted party list. For example, they may be a terrorist organization or affiliated with such an organization, they may have a history of corrupt business practices, or they may otherwise pose a threat to national security.
Restricted party screening (or denied party screening) refers to the process in which a company checks a potential customer or business partner against one or more of the restricted party lists to ensure they are not doing business with a restricted party.
The primary restricted party lists in the United States are published by the Department of Commerce, Department of State, and Department of Treasury. However, several other agencies produce lists as well. These agencies recommend that companies perform restricted party screening periodically and repeatedly throughout the movement of goods in the supply chain.
When exporting to China, it’s imperative you check every single restricted party list every time you export.
- Fines for export violations can reach up to $1 million per violation in criminal cases.
- Administrative cases can result in a penalty amounting to the greater of $250,000 or twice the value of the transaction.
- Criminal violators may be sentenced to prison for up to 20 years, and administrative penalties may include denial of export privileges.
Export Documentation and Compliance Software
If you’re an exporter who is considering exporting to China, consider this: Shipping Solutions export documentation software can help you quickly create the necessary documents and stay compliant with export regulations. Click here to register for a free online demo of the software.
This article was first published in 2017 and has been updated to include current information, links and formatting. It is one in a series of articles exploring exporting to specific countries across the globe, including Canada, India, Japan, Mexico and the United Kingdom.