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US China Trade Imbalance (Part II)

 

Factors Driving the U.S.-China Trade Imbalance

us trade balance 1Americans Consuming, not Saving: The U.S. has a large trade deficit not only with China but with much of the world. Simply put, this is because the U.S. imports much more than it exports and has done so for many years now. But since 2000 when the U.S. government relaxed its monetary policy to fight recession, the U.S. has been on an especially long-running spending spree, leading to a ballooning in imports. Aided by a long housing boom, Americans borrowed against their rising property values and consumed much more than they were saving. Consumer spending makes up two-thirds of the U.S. economy. The U.S. demand for goods meshed perfectly with China's exports of labor-intensive consumer and household goods.

Relocation of Exports to China from elsewhere in Asia: Because of the way exports are calculated based on the final place of assembly and export, China, which has become the final assembly point for a number of products such as computers and other electronic items – the component parts of which are produced in other Asian countries - has absorbed the exports previously credited to countries such as Japan, Taiwan and Hong Kong. In fact, China's share of the overall U.S. trade deficit rose from 27% in 1997 to 28% in 2006 while the share of the rest of East Asia fell from 43% to 17% in the same period. This shows that Americans may be importing more from China, but they are now importing less from other Asian nations.

Overcounting China exports: Many of China's exports are actually produced by foreign-invested firms in China, among them many American companies, who then ship these products back to the U.S. for sale. In fact, in recent years, the majority of China's exports, nearly 60% by value, have been produced by foreign-invested enterprise but have been counted as Chinese exports, thus helping to drive up China's export figures, even though the reality is that U.S. firms are selling to U.S. consumers. For example, Apple's iPod is conceived, patented, and designed in the U.S., but is assembled in China by a Taiwanese firm using component parts from different parts of the world. China, however, only receives $3.70 from the wholesale price of $224. Most of the profits flow back to Apple even though the item is labeled "Made in China" and gets counted as a Chinese export. Typically, about 20% of revenues from each mobile phone, and 30% from each computer made in China are returned to the original investors or patent owners in the U.S. and other countries.

Undercounting U.S. sales: Conversely, due to the same method of calculating exports, the sale of goods and service to the Chinese by U.S. foreign affiliates operating in China are not counted as U.S. exports to China. This figure totaled $86.5 billion in 2005 (latest available) and was 70% larger than U.S. exports in the same year. If these figures were counted as U.S. "exports", then the total amount of U.S. sales to China would look quite different and the trade imbalance would not be quite so large. Thus are the U.S.-exports side of the numbers in this bilateral trade relationship somewhat misleading and not reflective of the actual balance of commerce. If anything, the primary means by which U.S. firms sell goods services in China is via their foreign affiliates and not via exports, but this is almost never accounted for in the trade debate. Until a better more nuanced method of calculating becomes available, American politicians and citizens alike will have the opportunity to continue to use these somewhat inaccurate numbers to suit their own political ends.

Who has benefited from China's big trade surplus with the U.S.?

Certain American Companies: American companies and businesses, especially large firms who have been able to relocate or outsource to China, have been the big beneficiaries as they've seen their comparative costs reduced. In fact, U.S. firms have profited handsomely from their businesses in China with over $4 billion in profits in 2007, 50% more than a year ago. These companies are also the ones most likely to lobby Congress against passing tariffs.

American Consumer: The average American consumer has benefited from the huge volume and wider variety of lower-cost goods (for everything from toys to clothing, footwear and electronics) coming out of China.

American Government: The American government has also benefited from China's trade surplus as China has recycled its foreign exchange surplus into U.S. Treasury securities, which have helped fund everything from America's wars to the bailout of the U.S. sub-prime mortgage crises.