“The shocking data on the US trade deficit with China may be one of the greatest economic misunderstandings of recent months. Another thing is that the deficit figures do not take into account the huge benefits that the US is receiving from investing in the Middle Kingdom and the growing number of consumers in that country,” writes Marcin Lipka, Conotoxia Senior Analyst.
“The United States lost $500 billion last year in foreign trade with China,” said US President Donald Trump at a press conference a few months ago. Such an amount accounts for as much as 2.5% of American GDP. However, in this case, it only determines the value of goods imported by the US from the Middle Kingdom, so it is difficult to mention anything about loss.
A significant amount of economists stressed that exports to China should also be taken into account (about 130 billion dollars), so the deficit in trade in goods is much smaller and the amount is 370 billion dollars. Some people added (and rightly so) that the exchange of services should also be included, as it reduces the deficit by a further 40 billion dollars. However, we are still dealing with a value exceeding 300 billion dollars. But does it really reflect the actual US-China deficit and losses for the Americans?
Unequal export performance
First of all, it should be noted, that Chinese exports consist to a large extent of components imported from other countries. On average, according to OECD data in the Congressional Research Services (CRS) report ‘China-US Trade Issues’, the foreign value added to exports of the Middle Kingdom in manufacturing is as high as 40%.
An extreme case from the CRS study concerns iPhone, which in China is practically only made up of parts manufactured by foreign companies. In 2009 China exported 11.3 million iPhones worth US$2 billion. If, however, exports were counted only on the basis of the value added by the Middle Kingdom, it would actually amount to only USD 73.5 million (less than 4% of the amount visible in trade statistics).
Even if we ignore the extreme example of the popular smartphone, OECD/WTO data in the CRS document show that the actual trade deficit (goods plus services) between the USA and China may be 35% lower, e.g. in 2011 it amounted to 179 billion dollars and not 275 billion dollars. This is the result of taking into account the added value and not just gross value.
Very similar data are presented by the leading analytical centre Oxford Economics. According to estimates prepared for the ‘The US-China Business Council’, the trade balance on the basis of added value amounts to approximately 1% GDP (for 2015), i.e. approx. USD 200 billion (taking into account GDP in 2017).
The US is not injured in its relations with China
It is also worth remembering that the United States obtains benefits through its involvement in the Chinese economy (dividends, profits). According to Oxford Economics' estimates, the deficit is about 0.2% GDP, i.e. the actual deficit is decreasing to about 0.8% GDP, which is USD 160 billion, and not the USD 500 or 370, which are referred to very often.
The growing wealth of Chinese society also creates huge opportunities for American companies. For example, the CRS study points out that Boeing sold 202 aircrafts to China in 2017 and that this figure is expected to exceed 7,000 between 2017 and 2036 (US$1.1 trillion). GM in turn sold more cars in China (over the last 7 years) than in the United States.
The sales of almost 4 million cars by GM in the Middle Kingdom are counted to a small extent towards trade as they are made by 11 joint ventures and two wholly-owned subsidiary plants in China. The total sales of U.S. subsidiaries in China amounted to USD 481 billion in 2015 and USD 630 billion including Hong Kong.
It should not be forgotten that the people of the United States benefit from their presence in the Middle Kingdom. Most Americans are capital market participants, so their investments are worth more and more thanks to the involvement of companies in the Chinese economy. In addition, Oxford Economics stresses that every American family saves an average of USD850 a year due to lower prices of goods produced in China.
As a result, it is possible to understand Washington's demands for respect for US intellectual property in China, a greater opening of Asia's leading economy or for fears of technology transfer during certain investments. However, the US companies have significant benefits from operating in the Middle Kingdom, which Americans also benefit from and the trade deficit is much smaller than the statistics show.