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Assessment and Analysis of the China-U.S. Trade Imbalance and Its Impacts on Employment

Oct 16,2017

By Long Guoqiang & Wang Lingli

Research Report Vol.19 No.5, 2017

The trade imbalance between China and the U.S. is a fundamental issue that affects the economic and trade relations between the two nations. Trade frictions and exchange rate problems have occurred all because of this fundamental issue. Recently, the U.S. invoked Section 301 of the Trade Act of 1974 to launch an investigation based on its view of the trade imbalance, once again threatening the stable development of its economic and trade relations with China. The wide difference in trade statistics released by the two countries has influenced the understanding of the issue on both sides. An accurate assessment of the trade balance and its impacts will help to enable a rational dialogue between the two sides and boost their mutual trust so that they are willing to meet each other halfway.

I. Three Perspectives on a Comprehensive Understanding and Assessment of the China-U.S. Trade Balance

There is a sharp difference in the trade statistics released by the two countries. The U.S. trade deficit in goods with China in 2016 was USD 347 billion according to the U.S. but USD 250.7 billion according to China so there is a difference of nearly USD 100 billion. The difference is a result of numerous factors, and to fully and accurately understand the issue of China-U.S. trade balance, three perspectives must be examined.

First, the difference resulting from entrepot trade in Hong Kong. Apart from valuation, an even more important cause of the sharp difference in China-U.S. trade statistics is the role of Hong Kong as an entrepot between the two. When the two countries are gathering import data, the goods imported via Hong Kong are categorized as imports according to the rules of origin; however, when figuring export value, the goods exported via Hong Kong are categorized not as exports to China or the U.S. but as exports to Hong Kong. According to U.S. statistics, the U.S. exported goods valued at USD 34.9 billion to Hong Kong in 2016, making it the ninth largest export market for the U.S., but imports from Hong Kong in the same year amounted to USD 7.4 billion, making it the 35th largest source of imports for the U.S. Hong Kong has served as an important entrepot for Chinese foreign trade for a long time. The volume of entrepot trade between Hong Kong and the Chinese mainland was USD 270.8 billion in 2016. Thus, as long as the fact that the entrepot trade involving Hong Kong is not taken into account, a sharp difference will naturally arise in the statistics on the trade in goods between the two countries.

Second, real value added in the bilateral trade from the perspective of global value chains (GVCs). As economic globalization increases , GVCs have become an important factor in international trade statistics. China and the U.S. are both major economies involved in GVCs; exports from both countries include a large amount of value inflows from other economies. The goods China exports to the U.S. involve a considerable proportion of intermediate inputs from Japan, South Korea, Taiwan fo China, and even the U.S. itself. For example, electronics exported to the U.S. are usually made with U.S.-produced chips. International value flows occur in exports not only in processing trade but also in other forms of trade. Similarly, U.S. exports to China involve international value flows. Since China is basically at the low end of GVCs while the U.S. is at the high end, the percentage of value inflows from the U.S. in Chinese exports is much higher than that of value inflows from China in U.S. exports. It should be noted that international trade statistics are prepared without taking into account the development of GVCs. The data gathered by customs authorities used to analyze China-U.S. trade relations are not enough to reflect how much the two countries have benefited from the bilateral trade. Therefore, the real value added in the bilateral trade should be understood from the perspective of GVCs.

Third, trade in goods and services. Over the past few decades, the trade in services has grown faster than the trade in goods, and the percentage of the former in international trade has been on the rise. In analyzing China-U.S. trade relations, it is not enough to only look at the trade in goods and disregarding the trade in services will only lead to wider differences. The U.S. and China have their respective comparative advantages, hence the enormous differences between them when it comes to the trade in goods and services. The U.S. has always been the world’s biggest country in terms of the trade in services, maintaining a large surplus with China for years. In contrast, China has a huge surplus with the U.S. in the trade in goods. Over the years, the U.S. has been emphasizing its deficit with China in the trade in goods, but failed to mention its surplus in the trade in services, thus exaggerating the trade imbalance. Therefore, to fully understand the China-U.S. trade relation, both the trade in goods and that in services should be looked at.

II. Revision of China-U.S. Trade Statistics

We need to revise existing trade statistics to fully and accurately understand the China-U.S. trade relations. Revisions can be made from the three perspectives discussed above.

First, removing the differences caused by Hong Kong’s role as an entrepot and the price factor. According to U.S. statistics, China exported goods worth USD 462.8 billion to the U.S. and the U.S. exports to China amounted to USD 115.8 billion in 2016. According to China’s statistics, however, the two figures were USD 385.1 billion and USD 134.4 billion, respectively. According to the rules of origin, China considers goods imported from the U.S. via Hong Kong of China as imports from the U.S. and the U.S. classifies goods from Hong Kong as imports from China. Thus, to remove the difference caused by Hong Kong’s role as an entrepot, the import data of both countries should be used in analyzing the bilateral trade. Therefore, the Chinese exports to and imports from the U.S. in 2016 were USD 462.8 billion and USD 134.4 billion, respectively, which means that China had a trade surplus of USD 328.4 billion. Since the customs authorities of both countries apply CIF prices to imports, this would also avoid the differences that may arise when both CIF and FOB prices are used.

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