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China-US trade imbalance: Looking at the numbers

Xu Xianchun and Yu Hang | 2019-01-24
(Chinese Social Sciences Today)

A container terminal at the Qingdao Port in Shandong Province. China is still at the middle and lower stages of the global value chain and home to low-cost production and assembly. Photo: CHINA DAILY


 

The magnitude of the China-US trade imbalance differs from different standpoints. There is a huge difference in calculating the value added of trade and that of the total value of trade. Looking at contributors to the China-US trade imbalance, one should not only include Chinese enterprises, but also a large number of foreign-invested enterprises in China, especially those invested in by the United States. From the perspective of transnational profit transfer, foreign-invested enterprises, mostly from the United States, have created a large part of China’s trade surplus with the US, but they have also gained substantial profits and increased the gross national income and national wealth of home country.


Therefore, we need to observe the trade imbalance between China and the US from a comprehensive and objective perspective.

 

Total value of trade
At present, the data for goods traded between China and the US are calculated on the classification standards compiled by the World Customs Organization and the general trade system developed by the statistics branch of the UN.


Service trade includes transportation, travel, finance, insurance, intellectual property, etc. The statistics on China-US trade in services are compiled on the basis of the international standard adopted by the International Monetary Fund.


In 2017, China exported $429.8 billion of goods to the US, imported $153.9 billion of goods and had a trade surplus of $275.9 billion in goods, according to China’s General Administration of Customs. However, according to the US Department of Commerce, the United States exported $130.4 billion of goods to China, imported $505.6 billion of goods and had a trade deficit of $375.2 billion in goods.


The US trade deficit calculation is nearly $100 billion larger than China’s. There are a variety of factors contributing to this discrepancy, such as valuation methods, transit trade, trade premiums, inclusion of goods in travel items, and so on.


However, one key factor behind the discrepancies is differing ways of recording imports and exports. For example, FOB (Fee On Board) is adopted in China’s export statistics, while FAS (Free Alongside Ship) and CIF (Cost, Insurance and Freight) are used to measure the US imports.


Also, transit trade inflates prices of goods. One form of which is typically for processed goods, which are bought by middlemen after leaving Chinese borders and then resold to US buyers at higher prices, with a mark-up on Chinese exports to the United States. Another is Hong Kong’s intermediary role in China-US trade through re-exports. This added value or price increase is not counted along with goods exported to the US in the Chinese calculation, but as goods imported from China in the US statistics, which is another important factor causing the statistical discrepancies between China and the US in goods trade.


At the same time, the travel items in China’s service trade imports include a large number of goods, which should be counted as goods imports but are included in the service trade, reflected in China’s foreign service trade deficit. As an important destination for Chinese citizens to travel and study, the flow of goods hidden behind the service trade underestimates China’s imports of goods from the US.


In recent years, China’s trade deficit in foreign services has expanded rapidly, among which the trade deficit in services with the US has shot up. According to the Chinese government, China’s trade deficit in services with the US reached $55.7 billion in 2016, accounting for 23 percent of China’s total trade deficit in services and 22 percent of the total trade surplus in services with the US.


Therefore, it is neither comprehensive nor objective to only examine the US trade deficit in goods with China while overlooking the trade surplus in services with high added value, overestimating the bilateral trade balance.

 

Foreign-invested firms
China has long encouraged and welcomed foreign investors to participate in the global economic division of labor through direct investment in China and full access to China’s comparative advantages. There are a large number of American enterprises investing in China, including some world-class enterprises such as Procter & Gamble and General Motors.
These companies take advantage of the cost advantage of the Chinese mainland to produce products and sell them back to the US, creating jobs and tax revenue for China while providing cheap and high-quality products for American consumers.


From 2007 to 2013, foreign-invested enterprises accounted for more than 50 percent of the total import and export balance of goods in China and once accounted for more than 80 percent of China’s trade surplus in goods.


In 2016, the total value of goods sold by foreign-invested firms in China amounted to $916.8 billion, accounting for 43.7 percent of China’s total export, while their import was worth $770 billion, accounting for 48.54 percent of China’s total import. They’ve created a $146 billion trade surplus for China, nearly one-third of China’s total surplus.


 As we can see, China’s trade surplus in goods is largely caused by the transnational production, operation and sales of foreign-invested enterprises. The US is China’s largest trading partner and a major destination for Chinese exports. As an important driving force, foreign-invested firms have contributed greatly to the China-US trade imbalance.

 

Transnational profit transfer
International trade involves two processes: One is the cross-border movement of goods and services; the other is the distribution of profits after the sale of goods and services. When foreign-invested enterprises become important participants in China’s foreign trade, the transfer of profits back to their home country is an inevitable result.


Therefore, the analysis of bilateral trade relations between China and the US should not just focus on the balance of trade in goods while ignoring the profit and capital and financial account changes of transnational enterprises behind the scene. In doing so, we would underestimate the mutually beneficial relationship of trade and also undervalue how much American companies benefit from trading with China.

 

Trade in added value
At present, it is necessary to analyze the trade imbalance between China and the US from the perspective of value-added trade, so as to reflect the China-US bilateral trade relations more objectively. The positions of China and the US in the global division of labor make the difference between the statistics of the value added of trade and that of the total value of trade particularly prominent.


By calculating total trade value, we take the full value of China’s exports of manufactured goods to the United States into account, rather than seeing China as a link in the global value chain, overestimating China’s trade surplus in goods with the United States and distorting the bilateral trade relationship between China and the United States.


If we adjust the calculation methods, the magnitude of the China-US trade imbalance will be downplayed significantly. In 2017, the added value of China’s exports to the US was $277.6 billion while the added value of China’s imports from the US was $125.3 billion, creating a goods trade surplus of $152.3 billion, significantly smaller than the $275.9 billion surplus based on the calculation of total trade volume, a 44.77 percent drop in comparison.


In fact, the China-US trade surplus statistics based on the total value of trade has created a statistical illusion, severely exaggerating the magnitude of the China-US trade imbalance.

 

Trade frictions
The surplus of goods trade between China and the US is recorded in China, but the surplus behind-the-scene benefits are mostly gained by the US. Because of this, the countries have mutually benefited and obtained win-win results to some degree. Why would the US instigate bilateral trade friction against China deliberately?


The available statistics do not fully capture the benefits that the US derives from bilateral trade. Neither the statistics of China nor the US can fully identify the source and final destination of capital, which leads to an underestimate of the profits American enterprises make in China. The rapid development of offshore outsourcing and pricing transfer also makes the GDP and other statistical indicators fail to fully reflect the economic prosperity and benefits brought to the US by the division of trade.


The rising position of Chinese enterprises in the global value chain and their gradual entry into high-value-added sectors such as precision manufacturing, innovation, and research and development, areas where the US has traditional advantages, exerts a certain impact on the competitiveness of American enterprises and aggravates bilateral trade frictions.


As a result, on the basis of a comprehensive and objective understanding of the China-US trade imbalance, China must face up to the structural reasons behind the trade friction and clarify and refute false accusations in order to realize the sustainable development of bilateral economic and trade exchanges.

 

Xu Xianchun is from the School of Economics and Management at Tsinghua University and Yu Hang is from the School of Economics at Peking University.

(edited by YANG XUE)