China, the report said, "does not fully meet the minimum standards for the elimination of trafficking and is not making significant efforts to do so; therefore, China was downgraded to Tier 3" -- the lowest level.
According to the State Department, the TIP report is "the world's most comprehensive resource of governmental anti-human trafficking efforts."
It rates nations on how effectively governments are tackling the human trafficking industry on a scale from the worst on Tier 3 to best on Tier 1.
If a nation sits on the Tier 2 Watch List for two years, it's automatically downgraded to Tier 3, unless the US Secretary of State decides to waive it for a maximum of two years.
China was granted a waiver last year. This year, Secretary of State Rex Tillerson had the power to grant another one but has opted not to.
"China was downgraded to Tier 3 action in this year's report in part because it has not taken serious steps to end its own complicity in trafficking," Tillerson said in remarks Tuesday, "including forced laborers from North Korea that are located in China."
Tillerson commended the work of survivors and victims' advocates for their efforts to combat trafficking, and pledged US support, including through the State Department's new Program to End Modern Slavery.
"It is our hope that the 21st century will be the last century of human trafficking, and that's what we are all committed to," he said.
President Donald Trump's daughter Ivanka Trump, who serves as a White House adviser, also spoke Tuesday at the report's launch, emphasizing that combating human trafficking is a "major foreign policy priority of the Trump administration."
The report listed a wide variety of human trafficking that occurs in China, including forced labor, forced begging, sex trafficking and exploitation, and the trafficking of women, men and children from other countries into China.
While it acknowledged that China "took some steps to address trafficking," the report said the country must do more to address the issue.
It pointed to ongoing state-sponsored forced labor -- despite Beijing's claims to have abolished the practice -- and gaps in the law that allow traffickers to operate.
Publicly criticizing China in this manner never sits well with Beijing, but criticism on human rights, and specifically human trafficking, is something they've experienced before from decades worth of American administrations.
Xi's government had been warming to the Trump administration following a successful visit by Xi to the US
While Trump has called for China to do more to exert pressure on North Korea to end its nuclear program, he has also publicly praised Xi as a "terrific person."
At a daily briefing before the report's publication, China's Ministry of Foreign Affairs answered questions about a possible downgrade of China to Tier 3.
"The government's determination in fighting human trafficking is unwavering and outcomes are there for all to see," spokesman Lu Kang said. "China firmly opposes the US' irresponsible remarks on other countries' fight against human trafficking, based on its domestic laws."
Lu said no country was immune to human trafficking and China was willing to work with other countries "based on mutual respect to enhance our cooperation and jointly fight this issue."
A Tier 3 rating can trigger non-trade related sanctions and lead to restrictions on US foreign assistance, but these can be overruled by the US President.
An estimated 21 million adults and children are exploited by human traffickers around the world, according to the International Labor Organization
, Ivanka Trump wrote she would be joining the Department of State for the release of the 2017 TIP report, adding it was time to "#EndTrafficking."
Other countries failing
Four other nations were downgraded to Tier 3, joining other countries already at that level, including Russia, Iran, North Korea and Syria.
In central Africa, the report warned the "lack of an inter-ministerial coordinating body and low understanding of anti-trafficking laws among government officials continued to hinder countrywide efforts to address internal trafficking and sex trafficking from the Democratic Republic of the Congo and other countries" into the Republic of Congo.
Both countries have significant problems with child sex trafficking, while in the DRC "several armed groups continued to abduct and forcibly recruit Congolese men, women, and children as combatants and in support roles," the report said.
Two other downgraded countries -- Mali and Guinea -- are also neighbors. Both West African nations had problems with sex trafficking and forced labor, the report said.
In Mali, some of the country's Tuareg community are "subjected to slavery practices rooted in traditional relationships of hereditary servitude"
which are also a major issue in neighboring Mauritania. Such modern-day slavery, the report said, is worsening.
Fourteen countries, including Bangladesh, Iraq, and Nigeria, were downgraded to the Tier 2 watch list, putting them at future risk of being dropped to Tier 3.
Two countries in this year's report -- Guyana and Luxembourg -- rose from Tier 2 to Tier 1, while nine rose from the worst ranking to the Tier 2 watch list, including Myanmar, also known as Burma.
The report praised the Burmese government for its "continued progress to eliminate the recruitment and use of child soldiers" as well as action to improve anti-trafficking law enforcement and prosecutions.
US allies Ukraine and Qatar were among the states upgraded from the Tier 2 watch list to Tier 2, in both cases due to "increasing efforts" by government officials to take on traffickers.
Haiti, which also moved up to the Tier 2 watch list, was highlighted for "creating a post-Hurricane Matthew emergency working group to address human trafficking."