Header graphic for print
China Law Blog China Law for Business

The Truth About US-China Trade.

By Dan Harris on Posted in Recommended Reading

Just came across an excellent article in the Wall Street Journal that starkly highlights how global trade statistics may not always mean what they first appear to mean. The article was written by Andrew Batson and it uses the iPhone as an example of how even something viewed as of the United States can add to the United States’ trade deficit with China. I don’t ordinarily deal in big-picture economic issues (and I am really starting to resent all the non-economists out there who do so as though it is all really quite simple), but this article so nicely raises important issues that I feel compelled to recommend it.  It’s called “Not Really ‘Made in China’:The iPhone’s Complex Supply Chain Highlights Problems With Trade Statistics” and I suggest you check it out and let us know what you think.

And for those of you who have not yet voted for China Law Blog in the ABA Journal competition, please do so soon as voting closes at the end of this month. To vote, first go here to register and then here to vote. We have slowly but surely been gaining on the leader (we got a really late start) and with your vote we can win this thing. Thanks.

  • HI

    Electronics, including the Iphone, account for a small part of the trade deficit with China. You can’t extrapolate from the Iphone to the entire spectrum of products imported from China. Unless you’re the CPPs propaganda department, in which case you’ll gladly extrapolate.

  • Robert

    The trade debate in the media and by the U.S. government has always been motivated by other things besides being fair and having a noble balance of trade. I recall a quote from long ago from a Chinese official to the press, “Do you realize how many t-shirts we have to sell to buy one Boeing plane?” The factory gate price and profit margin there to a Chinese company is minuscule compared to the markup and retail price of the imported product in the U.S. and the profits that go to the U.S. company. While China has managed to scrimp and save to accumulate billions, the U.S. companies run huge 300% margins, the country is in debt to the hilt and U.S. politicans continue to whine and complain — and want the yuan to appreciate. Give’me a break.

  • John Szeto

    Dan, I’m interested in who you regard as the “non economists out there” you resent making big picture observations. Who do you refer to that you think is full of b/s?
    But then again – if you don’t like they have to say – why continue reading them?
    My own view is that if we purely relied on the economists to describe whats going on in China, we’d be really screwed. But I’d like to know who you think is a “bad list” of blogs or journalists to avoid. Would you care to support your statement?

  • Ted

    By assembling IPOD in China, China feeds its workforce, while the US gets profit. Trade deficit is the result of both countries’ above interests. And then, the so-called undervalued RMB/USD exchange rate should not be blamed at all.

  • dale sturdavant

    I’m not sure the assumptions in Batson’s Wall St. Journal article are correct. My understanding is that the “intellectual component” of an iphone, ipad, etc., are valued as US exports under the services category, and that manufactured components made in the US, Japan, So. Korea, etc. are also counted as exports from their countries of origins to China, where they are assembled. These cost components have already been tallied separately and off-set their respective vaue-added contributions to the final export price. Once off the ship, the iphone’s wholesale value is credited as a Chinese export/US import, and then Apple and the retailer (Walmart, etc.) rake in the remainder of the selling price, including the cost of domestic transport, marketing, advertising and profit. Thus, there is no Big Mistake out there skewing the trade balance figures.
    What is true is that US manufaturers have off-shored millions of US jobs to China and that US retailers have colluded with them to keep down Chinese wages and the costs of worker health and safety and environmental protection. Both then collude with the US Chamber of Commerce to fund an army of lobbyists to preserve the steep slope of the playing field against domestic US workers–in the name of free enterprise and lower consumer prices. The WSJ article, by minimizing the true costs of our ponderous trade imbalance, fits nicely into that agenda.

  • Hillbilly

    The article is fine, thought it doesn’t give much weight to the critiques of the “other economists,” that will happen when an editor says write about X and you have word limits. The problem here is that the study it is based on is a superficial pos, extrapolating from the single case of the Iphone to every trade account from net export nations to developed nations (the report is from the ADBI, which to my mind has an interest in status quo trade relations between those nations). Based on the fact that value of intermediate products trade is not differentiated in bi-lateral trade accounts (lets not forget it is accounted for in national accounts), the authors jump to the conclusion that traditional trade accounting mechanisms are grossly misleading, creating deficits where surpluses should exist. This is garbage.
    I assume that the paper was inspired by the far better WTO Staff Working Paper ERDS-2010-12, which seems to be the basis for Pascal Lamy’s quoted reference to value-added trade accounting being a more accurate, and smaller, reflection of the US-China trade deficit. Personally I consider value-added trade accounting a better rationale for moving up the value chain, as China is trying to do, than shrugging and saying everything is hunky-dory, but even if we take the conclusions of that report for accurately showing reality we still end up with a US-China trade defecit that is multiples larger than the US deficit with any other nation. using this accounting method China also remains one of the nations with a low import-content of exports, undermining Lamy’s position, and utterly invalidating that of the ADBI paper.
    The report doesnt attempt to estimate the impact of its methods on any other bi-lateral trade relationship other than US-China, but it does show that China is one of the largest players in intermediate trade products. If my scan of it was correct, then if the value-added method were applied to other bi-lateral trade relationships with the US we are as likely to find the proportion of the US trade defecit attributable to China grow as shrink.
    In the end, the only accurate account of the distortionary impact of the RMB peg on trade between the US and China is the value of US dollar assets held by the Chinese government to maintain the peg.
    At this stage of its development China probably should be a net-exporter. Based on the non-currency related policies of its government the economy has no choice but to align as a net-exporter. But any suggestion that the RMB peg doesn’t substantially alter the composition and size of its trade account is indefensable.

  • Hillbilly

    Oops, multiples was the wrong word. Multiples of most, still far bigger than the next largest.

  • http://www.criminalawyer.co.nz Naomi Cramer

    New Zealand like the USA and many other countries are in a trade deficit with China. If a country or individual spends more money than it earns, then you will go bankrupt.

  • dd

    Simple logic prevails here. Why would one country outsource its productions to another country that has a higher cost base? This is simple economics. What China makes let’s say a t-shirt, at one dollar, Taiwanese or Hong Kong trading companies buy at one, sell at three or four and then Walmart sells at what? For sure, the mark up is a 10x or 20x multiple. Same principle applies whether you are making a t-shirt, i-phone or what not. What China gets in return is via foreign investments, etc. I wonder do any of these reporters or bloogers try to see things from a more holistic perspective or from a practical standpoint covering both sides of the story? KISS and the truth will prevail.

  • http://stateless.geek.nz Nicholas Lee

    Check out Trade Myths: Globalization and the Trade Balance Fallacy by Enzio von Pfei.
    Trade Balance statistics can miss the point when you view in them in the context of Multinational Corporations and investment flows from profits.
    Separately there is an interesting example from a Cambridge talk [1]:
    “In the old days when house purchase in the UK was financed by building societies, far and away the largest building society in the country was based not in London but in Halifax — now alas simply the “H” in the failed Lloyds HBOS banking group. This was not because the people of Yorkshire were richer than the people of London and the South of England: quite the reverse. But Yorkshire people saved, while southerners borrowed and spent. So the Halifax Building Society came to dominate the UK housing finance market by channelling savings from the poorer North to the richer South. That this was not a flow across the exchanges is beside the point.”
    [1] http://breakingviewsnz.blogspot.com/2011/01/lord-nigel-lawson-five-myths-and-menace.html