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Sino-US trade has becoming an increasingly crucial topic in today's world, since it can exert long-lasting influences on various aspects for both countries, including citizens' life quality, economic development and government policies. This paper mainly discusses the explanations for the Sino-US trade imbalance and conflict. The analysis shows that the trade conflict cannot be explained by the exchange rate between China and US; in fact, it is a result of a combination of reasons, including contradictory features of US international trade, China's imbalanced foreign trade structure, China's poor record on intellectual property right protection and international industrial transfer.
With China's gradual market reform and its integration into the global economy, China has been creating a large trade surplus. The major part of the surplus comes from China's exporting low-end manufactured goods.
US-China economic ties have expanded substantially over the past few decades. Currently, China is US's biggest source of imports, its third-largest export market and its second-largest trading partner. With a huge population and a rapidly expanding economy, China is having an increasing number of business cooperation opportunities with US.
In 2001, China joined the World Trade Organization (WTO) and China's main responsibility is to open its market by eliminating or reducing an extensive array of tariff and non-tariff barriers on goods, services and foreign investment. Before China became a member of WTO in 2001, the US-China trade deficit was expected to decline; however, the fact shows that it has rapidly expanded instead.
Table 1 US trade deficit with China (1990 - 2009): increasing trend
From US Census Bureau.
As shown in Table 1 above, during the period from 2001 to 2009, the US-China trade deficit rose dramatically from US$83,096 million to US$226,877 million. More notably, there is a general trend that the percentage of the total trade balance has been increasing year by year. In fact, US trade deficit with China is the largest in the world, which is a vital symptom of world economic imbalance.
This paper aims to find out reasonable explanations for the Sino-US trade deficit and conflict.
2. REASONS FOR THE SINO-US TRADE IMBALANCE AND CONFLICT
2.1 Statistical discrepancy in the Sino-US trade surplus
As shown in Table 2 below, the China-US trade surplus statistics provided by the US government and the Chinese government differ a great deal. Although from 2001 to 2008, there is a trend that the bias is reducing each year, it is still very large.
Table 2 Statistical discrepancy from China and US: China-US trade surplus (2001 - 2008)
From Global Trade Atlas, US International Trade Commission.
The trade balance information provided by US government should be misleading, and there are two main reasons:
Firstly, Hong Kong plays a vital role in the intermediating trade between China and the rest of the world. In calculating the trade balance, the US government double counts Hong Kong's re-exports of China's goods. According to an independent report from the Office of Economics Working Paper in US International Trade Commission, Hong Kong's re-export to US for goods originating from China makes up as large as 15% of US total imports from China (2006). This will greatly affect the calculation of the real trade imbalance between US and China.
In addition to the reason of double counting, the research reports from the Ministry of Commerce in China showed that China's exporting goods through places such as Taiwan, Hong Kong, Korea and Mexico also leads to the discrepancy. Many of China's exports are transported to these places first. Before the goods are exported to US, some of them are repacked or reprocessed. This will result in an increase in the price of the exports because of the added value. Besides, sometimes Chinese' exporters do not know that the final destination of the exports are US, and they just think that the goods will be exported to Taiwan, Hong Kong, Korea, etc. However, according to US Rules of Origin Methodology, all these exports will be counted as imports from China. Therefore, these two factors help explain the statistical discrepancy. Due to these two factors, the statistical discrepancy was US$41.4 billion in 2006, which explains over 40% of the discrepancy in that year.
2.2 Can RMB appreciation solve Sino-US trade conflict?
Whether RMB can explain the trade conflict between US and China has long been a controversial topic. In this part, I am going to show that the role that currency revaluation plays in adjusting the trade balance is limited and RMB appreciation would not solve Sino-US trade conflict.
Throughout the period from 2005 to 2008, RMB has appreciated approximately 19% against the U.S. dollar. However, during the same period, US trade deficit with China grew at a fast rate per year. In 2009, there was a very stable exchange rate of RMB against USD; however, the US-China trade deficit even decreased by 15.36% (see Figure 1 and Table 2).
Figure 1 USD against RMB (2006 - 2010). Adapted from Yahoo Finance.
Table 3 US trade deficit with China (2004 - 2009)
From U.S. Census Bureau.
Empirical evidence from the Plaza Accord:
In the early 1980s, US experienced a sharp increase in both fiscal deficit and foreign trade deficit (twin deficits). In order to improve this situation, US hoped to increase the competitiveness of its exports through the depreciation of the US dollar. In 1985, the bank governors of US, Japan, Germany, France and Britain (G5) reached "Plaza Accord". According to this agreement, G5 countries began joint intervention in the currency market by selling a large number of US dollars in the international foreign exchange market. Consequently, investors in the market followed this trend and it led to sharp depreciation of the US dollar in the end. After the agreement and from 1985-1988, the US dollar depreciated by approximately 50% against the yen as shown in Table 4.
Table 4 Exchange rate of USD against other currencies (1985 - 1989)
From US Census Bureau.
In 1987, G5 countries met again and discussed the influence that the abnormal dollar devaluation exerted on the international economic environment. The discussion concluded that "Plaza Accord" did not help US's exports grow. That is, the appreciation in the yen did not help solve the US trade deficit (see Table 5).
Table 5 US trade deficit with Japan (1985 - 1987)
From US Census Bureau.
China now is facing the same pressure from US as Japan faced 27 years ago. Past experiences have shown that RMB appreciation would not help reduce US trade deficit. Then what is US's real intention of pushing China to realize RMB appreciation? In fact, one of its most important purposes of doing so is to obtain capital gains through US's debt repayment to China under the unfavorable exchange rate.
RMB appreciation means that US would actually pay out a lower amount of US dollars for repayment. This is because as RMB becomes a currency with a higher purchasing power, the relative depreciation of the US dollar makes the US dollar a currency with a lower purchasing power. In this scenario, US can enjoy a capital gain from the RMB revaluation at the expense of China. That is, RMB appreciation actually means that China pays part of the debt for US.
According to Table 6, we can find that China holds the largest amount of US Treasury securities (US$883.5 billion US Government Bonds as of September 2010). This implies that the capital account gain effect that US benefits from China can be very huge.
Table 6 Top foreign holders of US Treasury Securities (as of September 2010)
From US Treasury.
2.3 Other possible explanations for Sino-US trade conflict
There are many reasonable explanations for the trade conflict between US and China. I am going to discuss them from the perspectives of US, China and the product life cycle theory respectively.
2.31 Contradictory features of the US international trade
US international trade has contradictory features. On the one hand, US implements trade liberalization in its export, while it insists protectionism in its import. On the other hand, there has been an increasing trend that US implements more controls on goods and technologies exported to China nowadays, which exacerbated the trade imbalance.
Such export controls mainly focus on goods and technologies that have a military use for the purpose of protecting national security. Since 2007, new export control regulations for exports to China have been implemented by the US Government. The new rules added over 30 goods which are under the export control, such as aircraft engines, aircraft and underwater cameras. According to the official statistics from the Chinese Government, nowadays US has already implemented export control policies on over 2,400 goods in the trade with China. This puts China into a position where China has to give up importing more US products and consequently, it widens the trade imbalance between the two countries.
2.32 China's unreasonable foreign trade structure
According to Table 7, from 1995 to 2008, among the Top 10 targets of anti-dumping investigations, China had the greatest number of initiations. This can be explained by China's unreasonable foreign trade structure.
Firstly, as shown in Table 8, US imports from China are mainly products from labor-intensive industries, such as textiles and light industrial products. These products with relatively low added value have been under an environment of excessive competition for a long time, resulting in an international impression that China's exports are cheap and with low quality. Moreover, these products are quite relevant to employment creation, which will therefore negatively affect the local employment development for importers like US.
Secondly, China's export markets are too concentrated. Table 9 showed that China's exports mainly focus on US and European markets, with US being China's No. 1 export destination. Therefore, China's foreign trade structure is imbalanced and this intensifies the Sino-US trade conflict.
Table 7 Top 10 targets of anti-dumping investigations (1995 - 2008)
Table 8 Top 10 US imports from China 2009
From US International Trade Commission.
Table 9 China's Top Export Destinations 2009
From PRC General Administration of Customs.
2.33 China's intellectual property right protection
Undoubtedly, China has experienced rapid technological development during the past decade. According to the statistics from China Customs, the percentage that high-tech products take in the total exports jumped from 14.9% to 31.4% from 2000 to 2009.
US's intellectual property contributes to over a quarter of its economic growth in these few years. Therefore, the US Government always tries its best to protect its intellectual property right and interests. However, the upgrade of China's exports has brought an increasing number of problems related to intellectual property rights. The 2005 Special 301 Report prepared by the Office of the US Trade Representative pointed out that China's violation of intellectual property right led to a loss of US$2.8 to US$3.5 billion for US in that year.
2.34 Product life cycle theory and international industrial transfer
The product life cycle theory suggests that with the trend of increasing globalization, the current Sino-US trade patterns are the natural results of international division of labor and international industrial transfer.
During the past two decades, the US industrial structure has been upgrading with a much greater focus on modern services nowadays. This is because US has been gradually moving its traditional labor-intensive industries to developing countries such as China, Philippines and Sri Lanka. Theoretically speaking, US has become a pure importer of many low-end manufactured goods and this can largely explain the increased trade imbalance between US and China.
As the industrial structure upgrades in US, US's FDI in China has become an increasingly important explanation for the US-China trade deficit. US has been one of the most important trading partners and foreign investment sources for China. Nowadays, more and more labor-intensive industries in US have been transferred to China in the form of FDI. On the one hand, this enables US to reduce the production cost by fully utilizing cheaper labor in China, which just shows the important implications of the Comparative Advantage Theory described by David Ricardo. On the other hand, a large quantity of the final products produced in China will be exported back to the US market, which ultimately increases the trade imbalance between the two countries. For example, NIKE owns more than 10 shoe factories in South China and 90% of the shoes produced are exported back to US, which amounted to as much as US$ 0.25 billion (Wang, 2010).
The trade balance error analysis in this paper shows that Sino-US trade deficit is exaggerated by the US Government.
Then, the RMB revaluation analysis and the corresponding empirical analysis were given. They showed that RMB appreciation would not solve the Sino-US trade conflict and that the US Government's ultimate intention is actually to enjoy a capital gain. Or, the deficit is an important excuse for US to protect its own interests. This largely explains why the Chinese Government has always been trying to maintain a stable RMB against USD.
Finally, the analysis on contradictory features of US international trade, China's unreasonable foreign trade structure and China's poor sense of intellectual property protection implies that both US and China should be responsible for the intense Sino-US trade conflict. The product life cycle was then introduced to show that international industrial transfer and US FDI in China also largely explains the trade imbalance between the two countries.