The China-US trading relationship is the largest, and perhaps most consequential, trade relationship in the world, dramatically impacting global economic and political stability. In particular, the bilateral trade balance remains a hotly debated issue between and beyond the two countries: the latest Chinese data show a U.S. deficit of US$261.4 billion in 2015, while U.S. data show US$367.4 billion, revealing a huge discrepancy of more than US$100 billion. However, neither of these numbers represent the full and actual trade balance and the relative benefit between the two countries. A more nuanced approach that includes additional perspectives shows that the true U.S. deficit may be as low as US$132.7 billion.
To better understand the reality of the bilateral trade relationship, it is helpful to first understand why differences exist between official Chinese and U.S. trade statistics regarding the China-US trade balance in goods and services. First, the international conventions of measuring exports of goods differ from the conventions for measuring imports. Exports are valued on an FOB (free on board) or FAS (free alongside ship) basis, while imports are valued on a CIF (cost, insurance and freight) basis. Practically, this means that the value of imported goods as measured by the importing nation is always higher than the same goods as measured by the exporting nation. Thus, Chinese exports of goods to the U.S. according to Chinese official statistics is always less than U.S. imports of goods from China according to U.S. official statistics, by approximately 10 percent, the difference between CIF and FOB valuations.
Second, Chinese exports of goods to the U.S. according to Chinese official statistics include only direct exports to the U.S. but not re-exports to the U.S. through Hong Kong, whereas U.S. imports of goods from China according to U.S. official statistics include Chinese re-exports through Hong Kong because the U.S. applies its rules of origin with regard to imports. Similarly, U.S. exports of goods to China according to U.S. official statistics do not include re-exports of U.S. goods to China through Hong Kong.
However, there are additional gaps and challenges that prevent the official statistics of both countries from presenting the full picture of the trade relationship. For instance, the increasingly important trade in services between China and the U.S. is often not included. Additionally, the real benefit that exports bring to an economy is the domestic value-added (GDP) that it generates, both directly and indirectly, and not its gross value. Thus a more appropriate measure of the relative benefits is the trade balance in terms of value-added.
To achieve a more accurate view of the U.S.-China trade balance, our recently released report titled, Adjusted China-US Trade Balance, takes several steps to circumvent the causes for these discrepancies and misrepresentations.
First, we re-estimated the China-US trade balance by relying only on the export data of each country. This avoids the distortions that may arise because of the different conventions used in the measurement of exports (FOB) and imports (CIF). By relying only on the export data of both countries, the estimated China-US trade balance is higher than the official Chinese figure and lower than the official U.S. figure. For 2015, the estimate of the China-US trade balance based on export data is US$291.3 billion, between the Chinese figure of US$261.4 billion and the U.S. figure of US$367.4 billion.
Next, we adjusted the China-US bilateral trade data for re-exports through Hong Kong. Re-exports through Hong Kong have declined significantly in recent years. Chinese re-exports to the U.S. through Hong Kong have declined from its peak of 196% of direct exports to the U.S. in 1991 to only 8% in 2015. Similarly, U.S. re-exports to China through Hong Kong has declined from its peak of 44% in 1996 to only 7% in 2015. However, with the adjustment for re-exports through Hong Kong, the estimate of the China-US trade balance is increased from US$291.3 billion to US$317.4 billion.
We then sought to incorporate the bilateral trade in services. The U.S. publishes bilateral data on trade in services, while unfortunately China does not currently publish such data. According to U.S. data, U.S. exports of services to China has grown rapidly, to US$48.4 billion in 2015, compared to Chinese exports of services to the U.S. of US$15.1 billion, resulting in a surplus of US$33.3 billion for the U.S. However, fragmentary Chinese data suggest that the U.S. surplus in trade in services was higher, amounting to approximately US$45 billion in 2015. The U.S. surplus in trade in services is likely to continue increasing for a long time because of the rapidly rising total expenditures of Chinese students and tourists in the U.S. and the possibility of the expansion of U.S. financial services in China. Including services, in terms of gross value, the China-US trade balance is reduced from US$317.5 billion to US$284.1 billion in 2015, based on U.S. official data. If the alternative estimate of U.S. surplus in trade in services of US$45 billion is used, the China-US trade balance is further reduced to US$272.1 billion, still a very substantial number.
Finally, the gross value of exports of goods and services combined is not a reliable measure of the benefits to the exporting country. For example, while most Apple iPhones are assembled in China, the value-added in China is no more than US$20 for each iPhone, even though it is exported for approximately US$500, with a value-added to gross value ratio of 4%. Therefore, a more useful indicator of the net benefit for the exporting country is the domestic value-added (or equivalently, the GDP) generated directly and indirectly by the exports. We estimated the value-added corresponding to the exports of goods and services of both China and the U.S. in 2015 by using input-occupancy- output tables of both countries. The domestic value-added of Chinese exports of goods to the U.S., which has a gross value of US$443 billion, was only US$285 billion, whereas the domestic value-added of U.S. exports of goods to China, with a gross value of US$126 billion, was US$108 billion. We may note that the domestic value-added content of U.S. exports was much higher than that of China.
To summarize, by including re-exports through Hong Kong, the China-US trade balance is increased from US$291.3 billion to US$317.5 billion. By including trade in services, the China-US trade balance is reduced from US$317.5 billion to between US$284.1 billion and US$272.1 billion. By considering value-added instead of gross value, the China-US trade balance in goods alone, including re-exports, may be estimated to be US$176.9 billion (down from the estimate of US$317.5 billion based on adjusted gross value of export FOB data). If the bilateral trade in both goods and services are included, the China-US trade balance in terms of value-added may be estimated to be between US$145.0 billion and US$132.7 billion in 2015.
As can be seen, the 2015 Chinese trade surplus is still substantial after all these adjustments, but is significantly reduced from the initial estimate of US$367.4 billion based on U.S. data on the trade in goods to an estimate as low as US$132.7 billion based on the value-added on the exports of goods and services of China and the U.S. to each other. By re-examining the China-US trade balance, it is clear that typically cited numbers may not accurately reflect the relative benefit of the China-US trade relationship.
For the full report and detailed data, please take a look at our full report.