Monday, November 12, 2018

The United States has a trade surplus with China - Part 1

Xi Jinping, the Chinese president, meets with Henry Kissinger, former US secretary of state, at the Great Hall of the People in Beijing, China, Nov. 8, 2018. The 95-year old Kissinger, who first visited China in 1971 to pave the way for the rapprochement between the US and China, is likely the most admired American in the former Middle Kingdom. (Xinhua/Pang Xinglei)

Reality Check: The United States has a trade surplus with China, which maybe surprising as a trade war exists between the two countries — official data distorts the real trading situation, which ignore sales by majority-owned US multinational affiliates in China.

China's exports as a ratio of GDP (gross domestic product) has fallen from 36% in 2006 to 20% in 2017 — indicating that the continued rapid development in the vast country is increasingly fuelled by domestic economic activity.

President Trump and his Chinese counterpart, Xi Jinping, will meet at the G-20 summit of the 19 leading rich and emerging economies of the world in Buenos Aires at the end of November.

Trump has applied tariffs of between 10% and 25% on $250bn of Chinese imports and has threatened to go up to 25% on all goods imports.

According to the Office of the US Trade Representative, US goods and services trade with China totalled an estimated $710bn in 2017. Exports were $187bn; imports were $523bn. The US official goods and services trade deficit with China was $336bn in 2017 as services provided a surplus of $40bn.

China is currently the largest goods trading partner of the US with $635bn in total (two way) goods trade during 2017. Goods exports totalled $130bn; goods imports totalled $506bn. The US goods trade deficit with China was $376bn in 2017.

China was the United States' 3rd largest goods export market in 2017 while China was the United States' largest supplier of goods imports in 2017.

The top US export categories to China in 2017 were: aircraft ($16bn), machinery ($13bn), miscellaneous grain, seeds, fruit (soybeans) ($13bn), vehicles ($13bn), and electrical machinery ($12bn). US total exports of agricultural products to China totalled $20bn in 2017, the 2nd largest agricultural export market.  The top import categories from China in 2017 were: electrical machinery ($147bn), machinery ($110bn), furniture and bedding ($32bn), toys and sports equipment ($26bn), and plastics ($16bn).

Mobile phones (mainly Apple’s iPhone) comprised $70bn in imports in 2017.

As most of the material that is used in an iPhone comes from countries such as Japan, South Korea, Taiwan, and the US, China is estimated to make about $8.50 on each iPhone7 but the export cost per unit is $240in effect China’s exports to the US are boosted by $231.5 per unit shipped.

However, the competitive Chinese are already becoming serious players in the global phone market!

Chinese smartphone makers are expected to account for 54% of the global market share this year according to research by TrendForce, a global provider of market intelligence on technology industries.

Chinese brands have experienced rapid growth in recent years, and have even broken the dominance of Samsung and Apple according to TrendForce. TrendForce said that 9 of the top 12 smartphone manufacturers were Chinese and the global market share exceeded 50% in the first half of 2018 due to overseas expansion of Chinese companies in India, Russia and Europe — One Plus, an emerging Chinese phone maker, achieved a 40% share in India’s high-end smartphone market, followed by Samsung with 35% and Apple was in third place with only 14%.

US affiliate sales

In Greater China (mainland, Hong Kong and Taiwan), a fifth of Apple’s global iPhone sales are made, while General Motors sells more cars in China than it does in the United States.

Deutsche Bank economists said this year that the bilateral trade balance is misleading because (1) it does not capture the sales of goods and services by foreign firms' local subsidiaries (the FDI channel); and (2) countries such as Japan and Korea have large businesses in China that export to the US.

[US firms sold $372bn of goods and services to China in 2015, while Chinese firms sold $403bn to the US. The net balance, which we defined as "aggregate sales balance", is a surplus of $30bn from China's perspective, much smaller than the $367bn bilateral trade balance. We estimate that from the US perspective, this balance has turned from a deficit of $30bn in 2015 to a surplus of $7bn in 2016 and $20bn in 2017.]

According to US Bureau of Economic Analysis, data on sales of goods and services in China by majority US-owned affiliates were at $479bn in 2016 while sales in the United States by majority China-owned firms were valued at $61bn.

In China, US affiliates employ 1.9m while Chinese affiliates in the US employ 112,000.

Deutsche Bank says: 

Our studies show that while the US remained in trade deficit, US companies have sold more to the rest of the world than other countries have sold to the US for every year in the last 10 years: the US aggregate sales balance rose from a $0.2trn surplus in 2005 to a $0.9trn surplus in 2015. US multinationals do not sell more in every country than their counterparts do in the US. There is asymmetry: US corporates operate all over the world, but not all corporates operate in the US. Foreign subsidiaries in the US are mostly from Japan, Canada, and a few European countries. In contrast, emerging market corporates generally have limited presence in the US. Interestingly Mexico and Canada show a pattern similar to what we see with China – they ran a bilateral trade surplus against the US, but a bilateral deficit against the US once US multinationals' sales in these countries are taken into consideration. Japan and Germany ran a surplus against the US in both trade balance and the aggregate sales balance. These bilateral balances reflect comparative advantages: US multinationals tend to localise their production only in countries with lower costs (China, Mexico and Canada).

Even estimating Balance of Payments data between the EU and the US results in a huge difference and a German economist argues that Eurostat's data lack credibility