What is the Real Size of the US-China Trade Deficit?
On August 1, President Trump announced that he would be placing a 10 percent tariff on the remaining value on untariffed Chinese imports into the US. While Trump later delayed the tariffs on a portion of Chinese products, specifically items of mass consumption like mobile phones, video game consoles, and certain types of footwear, clothing, and toys – new tariffs will come into effect on September 1.
Trump frequently cites the large US trade deficit with China as the central reason for instigating these tariffs. For Trump, the deficit is evidence that the Chinese are gaining economically at the expense of US manufacturing. Interestingly, the value of this deficit itself is disputed by the Chinese. Going as far back as 1997 – the Chinese claimed that US merchandise trade figures were “largely exaggerated”.
While declarations like these are inherently political, the size of the trade deficit actually depends on whose official customs data is used. Before the trade data was influenced by the effect of tariffs (starting in 2018), the US recorded their 2017 trade balance at US$375.2 billion – in favor of the Chinese. Chinese customs figures, by contrast, showed it to be US$275.8 billion.
Given the US$100 billion difference, which is no small figure, we explore the underlying reasons for the discrepancy in the trade data and attempt to provide a more workable deficit figure.
What causes the discrepancy in US-China trade figures?
In 2012, a joint US-China group, with representatives from the Chinese Ministry of Commerce and the US Department of Commerce, investigated the trade balance discrepancies and released a report detailing its causes. Although written almost seven years ago, the findings were reiterated in a US Congressional Research Service report in 2018.
“Different methods” for measurement have been cited as the central reason for the varied estimates in trade figures. Both reports found that the main cause of discrepancy stems from value that is added in-between the time goods are exported and when they are imported at their final location.
This means that the value added is recorded by the importing country but not the exporting country. Because more trade flows from China to the US, more of this added value is recorded in US customs data than in Chinese data, which creates the discrepancies.
Inconsistencies existing in the data mean estimates cannot be completely accurate. However, based on the past data used in the aforementioned studies, China Briefing estimates that around 65 percent of the deficit can be associated to value added after exportation.
How is value added after exportation?
Value added after exportation is added differently depending on the trade process.
Direct trade occurs when the exported good continues directly to its final location without any stopovers. Value is often added in this process when an intermediary party purchases the goods after they are exported and resells them at a higher price to a third party in the destination country.
Indirect trade occurs when the exported good makes one or more stops in an intermediary country before reaching its final location. Value can be added during indirect trade when goods are repackaged or reprocessed before reaching their final destination.
Discrepancies can also arise if the exporting country is not aware that China or the US is the final destination of the good. In this case, the value shows up in the importing country’s data, but not the exporting country’s data.
Other sources of the discrepancy
The rest of the discrepancy stems from a variety of different factors mainly relating to differences in trade statistics measurement methods.
These include differences in the geographic jurisdictions that are included in the trade data, whether shipping costs are measured in a good’s value, and the time lag discrepancy that exists when goods are exported in one year but arrive at their destination in the following year.
Removing value added gives a more workable figure
Because the deficit discrepancy is mostly a product of value added after goods are exported rather than differences in trade data measurements, we can use this to estimate a more workable trade balance figure.
By subtracting the value of the goods that China records it exports to the US, from the value of the goods the US records it exports to China, we get a trade balance value that excludes value added after exportation.
The disadvantage of this method is that both countries are sometimes unaware of an exported good’s final location. As was mentioned before, if the exporting country does not know where a good’s final location lies, the value is unrecorded by the exporting country but recorded by the importing country. Because our revised trade balance figure only looks at export data, the value of these goods is lost.
Nevertheless, excluding the value added after exportation is useful where the trade war is concerned. The deficit is an indicator of how the US’ and China’s domestic economies are interacting with each other.
For example, Trump sees it as evidence that the Chinese are undervaluing their currency so that goods exported to the US can undercut domestically-produced US products. Value added is largely a product of overseas activity unrelated to the functioning of either country’s domestic economy.
Although not exact, based on this rationale, a more workable trade balance figure is US$299.4 billion. This is around US$75.8 billion less than the official US estimate for 2017.
China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Dalian, Beijing, Shanghai, Guangzhou, Shenzhen, and Hong Kong. Readers may write to firstname.lastname@example.org for more support on doing business in China.