18 July 2019
China’s surplus in iPhone trade with the United States would be a lot smaller if measured in terms of value-added, according to a study. Photo: Apple
China’s surplus in iPhone trade with the United States would be a lot smaller if measured in terms of value-added, according to a study. Photo: Apple

US-China trade: A tale of two reports

The release by China’s Ministry of Commerce of a research report on economic and trade relations with the United States is an opportunity for the two countries to narrow differences over trade. In particular, it is an opportunity for the US to take a more balanced view regarding its trade deficit with China.

It is especially illuminating when the Chinese report is placed side by side with a study that the US Congressional Research Service made public last month on trade issues between the two countries.

Both reports agree on certain factors that caused the high trade surplus for China (and big trade deficit for the US) under US trade reporting rules. One factor the Chinese report cites is what it calls economic globalization, which has resulted in “the transfer of manufacturing from other countries”.

The US report calls this “the transfer of Pacific Rim production to China by multinational firms”. It pointed out that in 1990, China accounted for 7.6 percent of US manufactured imports from all Pacific Rim countries, but by 2015, this had risen to 55.8 percent. Meanwhile, the value of US manufactured imports from Pacific Rim countries remained almost unchanged, at 47.1 percent in 1990 and 46.8 percent in 2015. So if the US looked at trade with the region as a whole, there would have been little change.

Both reports cite Apple’s iPhones as an example. The Chinese report says, “Apple’s iPhones are designed and developed in the US, but more than 80% of them are assembled in China.” Without cheap Chinese labor, it says, “many American innovations will not be commercialized because of the high cost.” Besides, cheap Chinese production has enabled high paying jobs in the US in such areas as “service industries, including design, marketing, logistics, retail, finance and accounting”.

The US report approaches the issue from a slightly different angle, pointing out that Apple iPhones are assembled in China by Taiwanese companies, “using a number of intermediate goods imported from abroad (or in many cases intermediates made by foreign firms in China).” However, “when the United States imports iPhones from China, US trade data attributes nearly the full value of the product as originating in China.”

It cites a 2010 study which estimated that in 2009, China exported 11.3 million iPhones to the United States, with a shipping price of US$179 per unit and total export value at US$2 billion. It reported: “The study estimated that 96.4% of the value of iPhone was attributed to foreign suppliers and producers of components and parts, including the United States (at $122 million). Standard trade data would put China’s trade surplus in iPhone trade with the United States at $1.9 billion, but that level would fall to $73.5 million if that trade was measured according to the value-added that occurred in each country.”

The US has complained over the years about its trade deficit with China, which in 2016 stood at US$347 billion, according to US trade data.

The Chinese report challenges the accuracy of the figures. For example, it points to a joint study by the US commerce department and China’s ministry of commerce on statistical differences which indicated that “the deficit figures released by the US from 2008 to 2014 were overestimated by an average of 19%.”

The CRS report doesn’t mention this joint study, but it does cast doubt on the usefulness of the US trade data. In commenting on the import of Apple iPhones, it has this to say about the relevance of US trade data in general:

“Apple products illustrate that the rapidly changing nature of global supply chains has made it increasing difficult to interpret the implications of US trade data because, while they may show where products are being imported from, they often fail to reflect who benefits from that trade.”

The US and Chinese presidents agreed in April to a 100-day plan for discussion of trade issues, centered on the reduction of the US trade deficit with China. The two sides should spend some time at least to establish the size of the deficit given that each has its own way of reporting trade data.

The US in particular should look at both the Chinese research report and that of the Congressional Research Service and realize that the trade figures reflect a complicated situation and are not just a ballooning of the trade deficit with China. It should try to improve the sophistication of the reporting system or the analysis of the data gathered. Currently, the figures often obfuscate rather than illuminate the actual situation.

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Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.

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