Trade Relations Between the US and China Are Politically Unsustainable

Senior Fellow, RIETI

Gabriel Wildau and Jane Pong are correct that there are few easy options to cut China/US trade imbalances by $100bn ("China faces struggle to meet $100bn US trade demand," March 16). Reducing these imbalances is a political imperative, however.

Mr Wildau and Ms Pong note that the US calculated the 2017 imbalance at $376bn and China calculated it at $276bn. They then state that the US census calculations include Hong Kong. This is not correct. The US census records US trade with Hong Kong separately. What the US calculations do is treat goods that are produced in China and transshipped to the US via Hong Kong as imports from China. China's measurement of the imbalances is smaller because China treats these goods as exports to Hong Kong instead of to their ultimate destination, the US.

The authors also state that China's exports of mobile phones, computers and computer accessories accounted for 29 per cent of total exports and that China produces only a fraction of their value-added, since it imports expensive components from elsewhere. It used to be true that China produced only a fraction of the value-added but is not true any more. China's capital deepening has allowed more parts and components to be produced domestically and China's growing knowledge base has led to the transfer of technology from foreign direct investment firms to local enterprises. For processing trade, where parts and components are imported to produce goods for re-exports, more than half of the value-added now comes from China.

Mr Wildau and Ms Pong show that China runs current account surpluses of 2 per cent of gross domestic product with the US year after year. This implies that this amount of wealth is transferred from the US to China every year. China's manufacturing surpluses are much larger, and researchers from MIT find that China's manufacturing exports led to "stunning" losses in US employment. The Financial Times also reports that the People's Liberation Army hacked into US Steel, stole the secret formula for one of the company's biggest commercial advantages, and helped Chinese competitors to make a similar product ("How Ugly Gorilla added to Trump's steel conundrum,", February 19).

The trade relations between China and the US are politically unsustainable, and will not be fixed either by cosmetic changes from China or by tariffs from the US. If economists and policymakers in both countries cannot come up with better solutions, the imbalances will empower politicians who will make Donald Trump seem like a lamb.

March 21, 2018 Financial Times

October 19, 2018

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