- China runs the largest merchandise trade surplus with the US at $US375 billion.
- But some analysts think the data can be misleading.
- The US-China trade deficit could be overstated by as much as 20%, one analyst said.
China is the world’s largest trader and is part of almost every supply and value chain. But a team of Macquarie Research analysts led by Viktor Shvets argue in a recent research note that China’s trade importance is “overstated” and “distorted.”
Shvets says the trade balance used to be more relevant. But now, in an era of multinationals and fragmentation of global supply value chains, he says it can be misleading.
China often imports parts from Japan, then assembles a final product and exports it to the US. Shvets sees that as Japan trading with the US, but on paper China has a trade deficit with Japan and a surplus with the US.
“How much value does a country or a company add to the process is what counts,” Shvets writes. “But our current trade statistics do not reflect value but rather flows.”
Deutsche Bank economists Zhiwei Zhang and Yi Xiong came to a similar conclusion earlier this year, writing in a note to clients that the US-China trade balance is “clearly misleading.” They pointed out that it doesn’t account for hundreds of billions of dollars in sales made by US companies run abroad, also known as subsidiaries.
US subsidiaries sold $US223 billion goods and services in China in 2017, according to a Bureau of Economic Analysis survey. Those weren’t counted toward the US’s goods and services trade deficit with China, which was a record $US375 billion last year.
And a lapse in data can also be seen at the company level, Zhang and Xiong said. Apple generated $US48 billion in revenue from China in 2016, mostly from iPhone sales. But, according to trade data, China imported only $US1 million of cell phones from the US that year.
“From an international trade perspective, iPhone sold by Apple’s Chinese subsidiaries are not counted as imports,” Zhang and Xiong wrote. “But from an economic and financial perspective, iPhone is a US product, and the US benefits the most from it.”
Shvets says Trade in Value Added (TiVA), an OECD measurement that tracks domestic value-added in exports and how much it’s reflected in final products of third parties, is a better way of looking at how nations measure up against one another in the global economy. Though, this method has a major timing caveat – the latest numbers are from 2011 and 2012.
“Nevertheless, it is still far better in providing clues of where the ultimate value is generated and explains the changes of relative positioning,” Shvets writes.
He uses the TiVA model to make current estimates, removing balances from products that travel through China but are mostly made in other countries. He says his results suggest the US-China trade deficit is at least 15% to 20% overstated.
“To answer our question, what would happen if China disappeared tomorrow? There clearly would be a massive dislocation,” Shvets added. “However, from a systemic perspective, there are very few things that China produces or trades that are truly unique.”
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