Non Technical Summary

China-U.S. Trade: A global outlier

Author Name THORBECKE, Willem (Senior Fellow, RIETI) East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances

This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).

International Macroeconomics (FY2011-FY2015)
East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances

The increase in China's exports to the United States has been breathtaking. For computers, the value of China's exports to the United States increased 38 times between 1996 and 2013, and the share of its exports to the United States increased from 4% of total U.S. imports to 66%. For phones, the value of China's exports to the United States increased 32 times between 1996 and 2013, and the share of its exports to the United States increased from 11% to 57%.

China's exports of all goods to the United States have also soared and far outstripped U.S. exports to China. As a result, the U.S. trade deficit with China has grown and equaled $320 billion in 2013. This is nearly the same as the U.S. trade deficit with all other countries combined. U.S. exports to China reached$120 billion while U.S. exports to the rest of the world equaled $1.5 trillion. Thus, U.S. trade with China generated the same-sized deficit as U.S. trade with all other countries, even though the value of U.S. exports to China was only 1/12 of the value of its exports to the rest of the world. This suggests that there is something unusual about China's exports to the United States. This paper investigates whether they are an outlier. Using a gravity model and exports between 31 leading exporting nations over the last 25 years, the results indicate that China's exports to the United States have been more than$100 billion greater than predicted in every year since 2005.

The results reported here indicate that not only are China's exports to the United States more than predicted, but also that its exports to South Korea, Taiwan, and other East Asian neighbors are much less than predicted. This is clear in Figure 1, where values above the diagonal line indicate that exports are more than predicted and values below the line indicate that exports are less than predicted. The value for the United States is far above the diagonal line, and the values for South Korea, Taiwan, Japan, and Singapore are below the line.

South Korea and Taiwan's exports to the United States in 2013 exceeded their imports from the United States by 50%. In addition, these economies are the leading providers of the parts and components that go into China's computers, cell phones, and other electronics exports. Thus, in a value-added sense, South Korea and Taiwan's surpluses with the United States are even larger. East Asian countries continue to put heavy weight on the U.S. dollar in their exchange rate baskets. If countries in the region shifted to more flexible exchange rate regimes that gave greater weight to currencies other than the U.S. dollar, the large surpluses that China, South Korea, Taiwan, and other economies in the region are running against the United States could cause their currencies to appreciate together against the dollar.

Results presented in the paper indicate that such an appreciation would help to rebalance trade between East Asia and the United States. It would also increase the purchasing power of Asian consumers and redirect final goods to Asian consumers. In addition, a concerted appreciation in the region would maintain intraregional exchange rate stability. Exchange rate stability in Asia facilitates the flow of parts and components within regional production networks. Finally, a joint appreciation would have an attenuated impact on East Asian countries' effective exchange rates since their exchange rates would not appreciate relative to the neighboring countries with whom they trade extensively.