CIAO DATE: 06/01

New Estimates of the United States — China Trade Balances

The United States and China have vastly different official estimates of the bilateral trade imbalance. The U.S. figures show that the United States had a merchandise trade deficit of US$57 billion vis-à-vis China in 1998 whereas the Chinese figures show that China had a merchandise trade surplus of only US$21 billion vis-à-vis the United States. There is a difference of US$36 billion. Which set of figures is right?

It turns out that neither side is completely right. Various factors, such as f.o.b.c.i.f. adjustments and treatments of re-exports and re-export markups, complicate the measurement of the bilateral trade balance between the United States and China. One important conclusion that emerges is that while U.S. trade statistics may be more reliable than Chinese trade statistics, even they are not completely accurate. By explicitly taking into account the aforementioned factors, the discrepancy between the adjusted U.S. and Chinese data on the bilateral trade balance in 1998 is narrowed from US$36 billion to US$3.3 billion, or less than 10 percent of the initial figure. Our best estimate for the true U.S.-China bilateral merchandise trade balance for 1998 is US$36.9 billion, in China's favor. If we take into account the trade in services, in which the United States has traditionally enjoyed a surplus, the U.S.-China bilateral trade balance may be estimated at US$35 billion in 1998. Compared with the U.S. trade deficit with Japan, the U.S.-China trade deficit, appropriately adjusted, is still significantly smaller.

However, it is also clear that the U.S.-China trade imbalance has been rising over time. Our adjustments do not alter this trend. In the last two years, even after all the adjustments, the U.S.-China trade deficit has grown at the rate of approximately US$7 billion a year. Overall, the U.S. government is right in stating that the bilateral trade deficits are large and growing. But the Chinese government is also correct in stating that the U.S. official statistics overstate the extent of the bilateral trade imbalances. Our contribution is to demonstrate that, appropriately adjusted, the U.S. and Chinese data are not that far apart in terms of the values of the true, underlying bilateral trade balances.

An interesting unresolved question is the relative distribution of the benefits of the U.S.-China trade to the two trading partners. In order to answer this question, we need to examine the value-added content of each country's exports to the other as well as the nationality of the exporting enterprises. China has argued that the value-added content of Chinese exports to the United States is low, especially that of the so-called "material processing and assembly" exports. Moreover, many of the exporting enterprises are actually wholly or partly owned by foreign direct investors and the returns to capital generated by these enterprises do not accrue entirely to Chinese nationals. There is some truth in the Chinese arguments. However, additional research is required before this question can be more definitively settled.

Full Text of General Ocassional Papers Article (PDF, 28 pgs, 180 Kb)