Trump, however, has grown increasingly frustrated over China's inaction on North Korea and bilateral trade issues and is now 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, 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 U.S. standards.
The report said China convicted fewer sex and labor 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 labor 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 laborers 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.
A Tier 3 rating can trigger sanctions limiting access to U.S. and international aid, but US presidents frequently waive such action.
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 Darrell Issa, attended the ceremony.
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 it had detained labor rights activists who scrutinized 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. U.S. officials told the news agency that Tillerson had disregarded recommendations of State Department experts, senior U.S. 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 criticized the decision, saying that 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 U.S. 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.
