China-US trade gap requires adjustments

The trade gap between China and the US, especially in merchandise trade, is a longstanding bilateral issue. In 2016, China's trade surplus with the US was about $254 billion, according to Chinese statistics, while the US put the figure at $366 billion. 

How can we understand the large trade gap and the different figures?

One issue is the statistical difference between China and the US. In 2016, the statistical trade gap claimed by the US was about $112 billion higher than that provided by China. In recent years, entrepot trade in which imported goods are re-exported has had less and less impact on the balance of trade statistics between China and the US. Much of the $112 billion difference in the trade balance did not actually accrue to China.

Even China's figure of a $254 billion trade surplus with the US has also overestimated the actual gains for China. According to our calculations, the added value of each $1,000 in goods that China exported to the US was $661 in 2015. In the same year, the US earned $886 for every $1,000 exported to China. Calculated by added value, including services, the trade surplus for China was $147 billion.

Additionally, part of the domestic added value of Chinese exports actually accrues to the US as investment income.  

With the development of global value chains, countries are becoming more closely interlinked, and it is also more and more meaningless to focus on bilateral trade gaps. 

The multilateral trade gap has become a more accurate indicator of a country's external balance. In 2016, the current account surplus of China, including goods and services, reached $196.4 billion, accounting for only 1.8 percent of GDP. This was far less than the 8.6 percent figure for Germany, and it was also below the line of 3 percent set by the US for identifying exchange rate manipulation. 

All these factors indicate that in the face of many economic uncertainties, China's current-account balance is at a relatively healthy level.

A country's disequilibrium in the balance of payments is associated with domestic economic imbalances. The US needs to make macroeconomic policy adjustments to correct or alleviate its imbalance in international payments - for instance, by reducing its fiscal deficit and curbing its propensity to gain seigniorage revenue by using the US dollar's status as an international reserve currency.

Instead of raising trade barriers, correcting its internal imbalances would solve the problem more fundamentally. Shifting the source of imports from China to other places with higher costs won't help reduce its trade deficit inferiority and or problems in its international balances. 

To solve the trade gap between China and the US requires long-term, common efforts by both sides. From our point of view, China can further reduce the actual tariffs on some imports within an acceptable scope and also consider relaxing restrictions on the State trading of crude oil and refined oil products. 

The US can reform its export regulations by easing some restrictions, or at least by not imposing excessive controls, which serve as fetters on its competitive advantages. Solving the trade imbalance by promoting exports to China is smarter than raising import barriers in the US.

At present, most of China's exports to the US are actually the end products of the East Asian regional value chain. A large part of China's trade surplus with the US reflects China's deficit with economies such as Japan and South Korea. Therefore, in the long run, we need to build a global value chain that includes both China and the US, one that allows them to cooperate better, exert their respective advantages and benefit collectively. That will shrink the trade gap, but it also calls for more mutual investment. 

Therefore, we think it is very important for China and the US to restart negotiations on a bilateral investment treaty. If successful, both sides can obtain tremendous benefits in the future.

Cui Fan is a senior research fellow of the Center for China and Globalization and professor of School of International Trade and Economics at University of International Business and Economics. Zhu Kunfu is an associate research fellow at the Research Institute of Global Value Chains, at the University of International Business and Economics. 

From Global Times，2017- 11-8

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