Recently, “China-US trade imbalance” has come back to the mainstream debate. On March 22nd, US President Donald Trump signed an executive memorandum following a section 301 investigation by the US Trade Representative and ordered related departments to impose restrictive measures on China. Some view this as the US’ effort to reduce the trade gap with China.
According to media report, the US estimated its trade deficit with China to be hundreds of billions of dollars. However, many experts have pointed out that the numbers are exaggerated.
USC’s Transnational Law and Business Center Director Brian Peck said that US government’s numbers only reflect the traded goods and not services. In fact, the service sector takes up well over 70 percent of US GDP. Although the US has a trade deficit with China in traded goods, it has a trade surplus in traded services.
“There is a difference in the methodology behind the estimates of China and the US,” China’s Minister of Commerce Zhong Shan said. The China-US joint estimation team which consists of experts from both sides, has compared and discussed their research statistics multiple times. According to their findings, the US officials have overestimated their trade deficit by around 20%. Last years’ conclusion of the joint team has the overestimation at 21 percent.
So where does the so called “China-US trade deficit” come from? From the US’ perspective, it imports more from China than it exports to it and thus a “trade deficit.”
What factors have affected US’ export to China?
“Trade competitiveness derives directly from industry competitiveness,” Vice-minister of Development Research Center of the State Council Long Guoqiang said. A significant factor in China-US trade imbalance is that American commodities are not competitive enough in the Chinese market. No matter import or export, the market is led by the invisible hand, and that is the consensus of consumers and companies from both sides. Under the same exchange rate, China enjoys a surplus in labor-concentrated goods yet faces a deficit in technology, agriculture and service areas. This demonstrates that competitiveness lead to a surplus. “If America wants to solve its trade deficit, instead of cutting its import from China, it needs to aim to increase the competitiveness of its own products,” he said.
In comparison, the US has large lead in two industries, agriculture and technology both due to their high efficiency. Yet much restrictions have been placed on its technology exports, especially to China.
“China-US trade imbalance is affected by America’s limit on its technology exports to China,” Zhong Shan said. American research has shown that if it loosens the limit of technology exports to China, it can reduce its trade deficit by as much as 35%.
Why the US imports so much from China?
On one hand, China has become the “world’s factory” in the globalized world economy. Many including American companies have moved their manufacturing process to China and then ship the finished products to their respective markets. Under this context, despite the goods are not counted as added value, they are reflected in the trade deficit statistics.
On the other hand, the US faces a trade deficit not only with China but with the world. Senior Lecturer and Yale University economist Stephen Roach said the US has a trade deficit with over 100 countries. The US economy is largely based on its service sector and thus it spends a lot and doesn’t save much. Its domestic products cannot meet its own demand and thus it relies largely on imports. In fact, the trade deficit is a result of the US spending other countries savings to keep up with its own consumption.
Is the US really at a disadvantage in its trade deficit with China?
Many experts agree that America’s import of low-cost Chinese goods have helped American consumers save and raised the its consumers’ surplus by a large margin. Besides, it also aided in the government’s effort to ease inflation.
“The US benefits from China-US cooperation on trade, American consumers enjoy real, palpable convenience,” Bai Ming of the Chinese Academy of International Trade and Economic Cooperation said.
According to Research Report on China-US Economic and Trade Relations published by China’s Ministry of Commerce, in the global value chain, trade surplus is reflected in China yet benefit surplus is reflected in the US-a win-win for both countries. China estimates, in 2017, foreign enterprises accounts for 57 percent of its trade surplus while manufacturing is at 59%. China’s gain is only moderate compare to what the US reaps from designing, supplying parts and sales.
Trade experts have pointed out that the current trade imbalance between the two countries is complex and is related to the economic development and industry structures of both. Moreover, it cannot be properly addressed nor changed in a short amount of time.