Why China's Trade Surplus is a Lot Smaller than You Think

U.S.-China Trade
Siri: 'Can the iPhone Prove President Trump's Wrong about U.S.-China Trade?'
my conversation with
Yukon Huang
Carnegie Endowment
'How much of that $650 iPhone - which adds to China's trade surplus with the U.S. - actually originates and stays in China?
Only $25.'
- Yukon Huang -
Carnegie Endowment
  • For decades, about 50% of U.S. imports of manufactured goods have come from Asia.
  • During this time China has risen from supplying 10% of those Asian goods to supplying 65%.
  • The reason: after joining WTO, China became Asia's assembly plant.
  • Companies ship components manufactured in other Asian countries to China for assembly and export as finished products.
  • And, the full price of those products - components as well as profits - go China's trade balance, even though China's only economic benefit is the assembly.
  • Hence, China's actual trade surplus is smaller than stated, and, in fact, is a stand-in for Asia's overall trade surplus with the U.S.
Following what now appears to be the vain hope that China would solve the North Korean nuclear problem for him, President Trump seems to be tweeting up to a trade confrontation, perhaps even a trade war, with China.
But, just as he was wrong about China's being a currency manipulator, the President may also be wrong - albeit for more subtle reasons - about how much China itself actually contributes to the U.S. trade deficit.
Yukon Huang, senior fellow at the Carnegie Asia Program and former World Bank head in China, in laying out these subtle reasons, concludes that China's actual trade surplus with the U.S. is smaller than stated in trade statistics. Here's why...
For decades, U.S. imports of manufactured goods from Asia has remained pretty steady at between 45 and 50%.
What has changed is the share of those goods imported from China since it joined the WTO...
There are two possible reasons for this. One is that China simply beat out the other Asian nations.

The other - and real explanation - is that, after joining the WTO, China became the assembly plant of Asia, taking parts and components manufactured in other Asian countries, assembling them into finished products, and then exporting those products to the U.S.... 
‘China accounts for 65% of the exports from Asia to the United States.
'That 65% of exports from Asia to the United States does not represent the true value of these goods being produced in China, since most of these parts and components are actually being produced in Korea, Taiwan, Japan, Singapore, Malaysia, and the Philippines.
'China's only value-added is the labor and the assembly.'
Consider the case of the iPhone. Yukon breaks that $650 price tag down:
$325: the value of parts and components, mainly produced in South Korea and Japan.
$300: profit to Apple.
$25: labor – the only added value to China's economy.
$25 to China! Yet, on the trade books, here's what happens...
‘You take a $650 iPhone, assembled, exported from China, and it comes to the United States. It shows up in the balance of payments, in the trade balance, as a $650 item deficit for the U.S. and a $650 surplus for China.
'But, how much of that $650 actually originates and stays in China? Only $25.' 
And, adding insult of a sort to injury...
'That money actually never really shows up in China, because the receipts are basically secured in the United States, but it never stays in the United States. It's basically transferred overseas, but in the trade books it shows up as a product from China, which costs $650.'
So, what do we have... 
The U.S. is importing as many Asia manufactured goods as ever - so, there has been no surge in Asian imports.
But, what's changed is that Asian manufacturers have been funneling their products to China - Asia's assembly plant - for assembly and export.
So, on the books, it looks as if U.S. imports from China have exploded (please have a look again at the chart, above).
In reality, nothing has changed, except for China unfairly taking the blame for what is, in fact, Asia's usual trade surplus with the U.S.
Yukon huang

Yukon Huang

Senior Fellow, Carnegie Asia Program Carnegie Endowment for International Peace

Senior Fellow, Carnegie Asia Program Carnegie Endowment for International PeaceFormer Chief, World Bank’s R...
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