China has been downgraded to a Tier 3 rating which can trigger sanctions limiting access to US and international aid, but US presidents frequently waive such action.
The US State Department on Tuesday placed China on its global list of the worst offenders in human trafficking and forced labour, a step that could aggravate tensions with Beijing that had eased under President Donald Trump.
Trump, however, has grown increasingly frustrated over China's inaction on North Korea and bilateral trade issues and is considering possible trade actions against Beijing, three senior administration officials told Reuters.
Myanmar was upgraded to the Tier 2 Watch List of nations that deserve special scrutiny, from Tier 3, which includes those countries not complying with minimum US standards and making no significant effort to do so. Afghanistan, Malaysia and Qatar moved up to Tier 2, a list of nations making significant efforts to comply, from the Tier 2 Watch List.
Tier 1 designates nations that meet minimum US standards.
The report said China convicted fewer sex and labour traffickers in the 12 months ended on March 31 than in the previous year, forcibly repatriated North Koreans without screening them for indicators of trafficking and handled most forced labour cases as administrative issues rather than criminal prosecutions.
"China was downgraded to Tier 3 status in this year's report in part because it has not taken serious steps to end its own complicity in trafficking, including forced labourers from North Korea that are located in China," Secretary of State Rex Tillerson said as he presented the report.
For the previous three years, China was on the Tier 2 Watch List. It was last in Tier 3, the lowest ranking, in 2013.
Twenty-one countries were downgraded from their status on last year's report, and 27 countries were upgraded, said Susan Coppedge, the senior State Department official working on human trafficking issues, at a briefing with reporters on Tuesday.
Tillerson presented the report in the State Department's Benjamin Franklin room alongside Ivanka Trump, the president's daughter and adviser.
A crowd of about 300 people, including Republican Senator Bob Corker, chairman of the Senate Foreign Relations Committee, and Republican Representative Chris Smith, who authored the anti-trafficking law that mandated the State Department report, attended the ceremony.
In a statement, Smith called for sanctions against China as punishment for its record on human trafficking.
Ivanka Trump has tried to make the fight against human trafficking one of her signature issues. She was instrumental in arranging a White House meeting with anti-trafficking activists that Trump attended in the first few weeks of the administration.
During a visit to Rome last month, she met privately with a group of African women who had been trafficked into prostitution.
Beijing confirmed this month that it had detained labour rights activists who scrutinised conditions at a Chinese company making shoes for Ivanka Trump's namesake apparel line. The State Department has urged China to release the activists immediately.
The State Department on Tuesday also removed Iraq and Myanmar from a list of countries that recruit and use child soldiers.
The announcement confirmed a report by Reuters on Friday. US officials told the news agency that Tillerson had disregarded recommendations of State Department experts, senior US diplomats and the State Department's legal office to keep the countries on the list.
The State Department declined to comment on how the decision was made, saying it "does not discuss details of internal deliberations."
Human rights advocates criticised the decision, saying international observers continue to document child recruitment by both countries' militaries.
Under the Child Soldiers Prevention Act of 2008, the US government must be satisfied that "no children are recruited, conscripted or otherwise compelled to serve as child soldiers" for a country to be removed from the list and US military assistance to resume.
"Taking [Myanmar] and Iraq off the list when they continue to use child soldiers is both contrary to US law and harms children still in the ranks," Jo Becker, children's rights advocacy director at Human Rights Watch, said in a statement on Monday.
Coppedge said she had raised US concerns about Myanmar's response to the use of child soldiers directly with the Myanmar government in December, and acknowledged that in Iraq children are "highly vulnerable" to forcible recruitment by Iraqi forces in the fight against Daesh, as well as by Daesh.
But she did not directly respond when asked why the two countries were removed from the list, except to say that Myanmar "has made significant strides in removing children from military service."