Zeng Peiyan: An Objective Analysis of the “Losses” Alleged by the United States in its Trade with China
Remarks by Zeng Peiyan
Chairman of CCIEE
Mr Tung Chee-hwa,
Ladies and gentlemen,
Good morning! It gives me great pleasure to meet with new and old friends in the beautiful city of Hong Kong and have exchange of views on China-US trade relations.
Since last year, the US government has kept escalating its trade frictions with China and seriously undermined the growth prospect of the two countries and the world. The Chinese government has advanced with maximum sincerity its trade talks with the US, hoping that the two sides can address mutual concerns. Not long ago, the two presidents, during their meeting in Osaka, steered the course for the bilateral ties in the coming future as they reached important consensus and reaffirmed that the two countries will jointly promote China-US relations featuring coordination, cooperation and stability. They agreed to resume trade negotiations on the basis of equality and mutual respect, laying a solid foundation for smooth growth of China-US relations.
As President Xi Jinping pointed out, fundamentally speaking, China-US economic cooperation and trade are in nature for mutual benefits and win-win progress. China and the US enjoy massive convergence of interests. Therefore, the two countries should become good partners. This is conducive to China, to the United States and the whole world. In today’s world of economic globalization, relations between different economies have changed from the past, becoming highly interdependent and interwoven. Not long ago, some people in the US alleged that due to its trade deficit with China, the US has suffered losses. Such a view is lopsided and lagging behind the development of the times. It makes no sense if you carefully analyze it. In the global industrial chain and value chain, factors such as goods, technology, human resources and capital have realized large-scaled cross-border movement, realizing a greater market, exchange, circulation and balance of global factors, substantially increasing the efficiency of factor allocation and promoting global economic prosperity. Therefore, in such an era of globalization, new ideas must be adopted to make calculations from the perspective of global factor movement rather that purely from the perspective of trade in goods. Benefits of trading parties depend on their comparative advantages in factors such as their natural endowment, capital accumulation, level of science and technology, development of industries and quality of labor force as well as their models and ways on participating in trade. I would like to make an analysis for your reference from three aspects.
I. The inevitability of US trade deficit
There has been a long history of the US trade deficit, which is closely linked to the dominance of the US dollar in the international monetary system, the domestic imbalance due to low savings and high consumption, the adjustment of its industrial structure and transfer of manufacturing overseas from the US.
1. The dominance of the US dollar as an international currency is the major reason that determines the long-term trade deficit of the US. The US trade deficit and the dominance of the US dollar are the two sides of a coin. As a dominant international currency, the US dollar must meet the ever-growing need for trade and reserve in international trade and world economic development. Countries have to rely on their exports to the US for US dollars. After the Second World War, the US ran trade surplus for a long time until the early 1970s when the US dollar was unhooked from gold and the Bretton Woods system disintegrated. The US then began to run goods trade deficit which kept expanding. In the 1980s, the annual average trade deficit exceeded US$80 billion and grew to around US$170 billion in the 1990s. Since the beginning of this century, it has kept growing to an annual average of over US$ 600 billion. In the meantime, dollars held by other countries have kept growing. The share of the US dollar in global trade and payment settlement is around 40% and its share in global foreign exchange reserve has remained for years over 60% (Figure 1.1).
2. The imbalance between consumption and savings within the US is the key reason for its trade deficit. The US is a consumption-oriented society. Personal consumption spending accounts for nearly 70% of GDP and the overall saving rate has kept at less than 20%. As a result, the imbalance between the low savings and high consumption needs to be offset by foreign trade. In 1960s, the overall saving rate in the US was around 23%. Then it has shown a downward trend. In recent years, the annual average savings rate has been around 18%, down by nearly five percentage points. In the same period, the annual average share of US goods trade surplus in its GDP changer from 0.6% to a deficit of 3.8%. It’s a difference of 4.4 percentage points, nearly the same as the decline of the overall saving rate (Figure 1.2).
3. The adjustment of industrial structure in the US is an important reason for its trade deficit. In the second half of the last century, the United States started to pursue the growth of the service sector with greater value added. And also due to the impact of rising costs of labor and other factors and more environmental restrictions, the US started moving its manufacturing overseas. Since 1960, the share of manufacturing has declined from 25% to 11% and the share of the service sector has risen from 64% to 80%. The domestic production capacity of the US cannot meet the growing demands for industrial and consumer goods. So it has to rely on imports. As to the decrease in working population in manufacturing and the widening income gap, these are the results from systemic deficiencies within the US (Figure 1.3).
4. The US restriction on high-tech exports to China is the policy reason for its widening trade deficit with China. For decades, the US has kept restricting the high-tech exports to China, formulating the Export Control Act and relevant system and framework focusing on exports of key technology and products. In 2018, the US high-tech exports to China valued only US$ 39.1 billion, accounting for only 10.6% in its total high-tech exports, less than a quarter of China’s exports of high-tech products to the US. Scholars estimate that if the US eased the restrictions to the level of its high-tech exports to France, its trade deficit with China would go down by 35% (Figure 1.4).
II. A comprehensive and objective view of the figure of the US trade deficit with China
As globalization is evolving into depth, the mode, model and structure of the international trade have undergone profound changes, turning from focusing on trade in goods to giving equal importance to trade in goods and trade in services, from focusing on trade in final goods to trade in intermediate goods. The lopsided views of only looking at trade in goods without trade in services, only looking at total trade volumes without value added or only looking at the international trade from the perspective of GDP without GNP cannot fully reflect the broader picture of international trade.
1. Both trade in goods and trade in services must be taken into account. The volume of trade in services and exports of the US have for long ranked the first globally while China has been the 3rd largest export market of services for the US. In China-US trade, though US runs a deficit in trade in goods, it enjoys surplus in trade in services. Generally, trade in service has two types: cross-border trade in service and commercial presence. Cross-border trade in services includes cross-border provision of services and overseas consumption. In 2018, the US service trade surplus with China reached US$40.53 billion. Business presence refers to sales of services by organizations set up by foreign companies in the host country. In 2016, the US surplus in this aspect was US$46.8 billion and the figure for 2018 is even bigger. Based on such estimation, when the above two types are combined, the US trade surplus with China has amounted to nearly US$ 100 billion, able to markedly offset its deficit with China in trade in goods (Figure 2.1).
2. The US deficit with China in essence is to large extent its total deficit with whole East Asia. With globalized division of labor, exports from a country include products from many other countries. An accounting method based on value added in trade can better reflect the actual trade of one country. In Chinese goods exports to the US, over half of them are intermediate goods from processing trade, most of which are from economies in East Asia such as Japan and the ROK (Figure 2.2.1). Take an iPhone sold at US$999 in the US, most of its parts are from over 100 suppliers in countries like Japan and the ROK while China gains only US$55 in the whole production and 3 dollars for the workers’ wage. Therefore, if calculated with the traditional method, the US trade deficit with China would be seriously overestimated. According to the statistics of the Ministry of Commerce of China, calculated with the method of value added in trade, in 2018 the US trade deficit with China was US$182.7 billion, down nearly 43% compared with that made with the traditional method (Figure 2.2.2).
3. From the perspective of GNP, the US has gained more benefits than China from the bilateral trade. The current statistical method for trade is based on GDP. However, under globalization, such a method is lagging behind the realities. In calculating China-US trade volume, a method based on GNP should be taken to include the business revenues of enterprises from their operation in the other country. According to the statistics of US BEA, in 2016, the branches of American companies in China sold goods and services valued at US$400 billion (including part of goods and services imported from the United States). If these enterprises were based in the US, their sales in China would be regarded as exports. So if the bilateral cross-border trade in goods and trade in services are included, the US has gained more benefits from the bilateral trade (Figure 2.3).
4. The statistics of US trade deficit with China have long been overestimated. The joint study made by the Chinese Ministry of Commerce and the US Department of Commerce has shown that the US statistics of its trade deficit with China have long been overestimated by around 20%. The overestimated part mainly includes two aspects: one is that the US has included the transit trade through other counties and regions such as Hong Kong. The other is that due to the existence of international intermediary traders, the selling prices of Chinese exporters are different from the buying prices of US importers, hence the difference in the statistics made by the Chinese and US Customs (Figure 2.4).
III. The US has gained a lot of tangible benefits in its trade with China
For years, the US has not suffered losses in its trade with China. Instead, it government, businesses and household have gained a lot of tangible benefits.
1. The US has gained massive international coinage tax thanks to the dominance of the US dollar. The production of a one-hundred US dollar note costs only several cents, but other countries need to provide real products and services worth 100 US dollars to get this one-hundred dollar note. The difference is the international coinage of the US. It has been estimated that between 2011 and 2018, US dollars circulated outside the US grew annually by around 55 billion. By the end of 2018, the US dollars circulated outside the US reached 1.0256 trillion dollars. In addition, foreign exchange reserves held by other countries in US dollars exceeded US$6.7 trillion by the first quarter of 2019 (Figure 3.1).
2. China-US trade has provided a large number of affordable quality products to US consumers. The imports of Chinese products have lowered prices and residents’ living costs in the US. Every household in the US has saved much spending as a result. A research made by Oxford Economic Institute has shown that imports from China to the US have cut the living cost of every American household by 1-1.5 percent. According to the estimates by American institutions such as Peterson International Economic Institute, the 25% tariff levied on 250 billion of Chinese products exported to the US will increase the annual spending of every household by US$500-800. If all the Chinese exports to the US are levied by 25% tariff, every American household will have to raise their spending by around US$2,000 (Figure 3.2).
3. US companies has made rich returns from the Chinese market. China is one of the major retail markets in the world. Through their trade with and investments in China, US companies have shared the dividends of China’s development. For instance, business turnover of Boeing from the Chinese market made up for 13% of its global total. The percentages for Apple and Qualcomm were 20% and 66% respectively (Figure 3.3.1). In addition, profit margins for American companies have been high in the Chinese market. For example, Nike’s EBIT in China is 35.2%, high by a dozen percentage points than in North America and Europe. According to the survey of AmCham China, in all the companies they surveyed, 64% of them had their EBIT in China higher or equal to their global EBIT (Figure 3.3.2).
4. China has provided a large amount of low-cost dollar capital to the US. China’s trade surplus for years has mainly returned to the US through the US treasury bonds, providing low-cost capital for the US economic development and advanced its prosperity. By the end of March 2019, China held around US$1.12 trillion, the largest foreign holder of the US treasury bonds (Figure 3.4.1). The average yield of the US treasury bonds is 2-3%, but the average return rate of US multinationals from their overseas investment is several folds of it. Even for World Bank which focuses on providing development aids, its floating lending interest in the US dollar reaches around 2.8%-3.7%. Market-based interest in the US is even higher. The average yield for 10-15 years corporate bonds is around 4%, while the base lending interest of banks is 5.5% (Figure 3.4.2).
Ladies and gentlemen,
Certainly, trade is mutually beneficial. China-US trade has also helped drive China’s economic growth, created more jobs, advanced industrial development and contributed to China’s reform and opening-up. China’s economy has been deeply integrated into globalization and in the meantime, facilitated the economic development of Asia and the world. The US should put the issue of trade deficits into perspective. It should not only emphasize deficits in trade in goods. Instead, it should take a comprehensive view of the reasons for trade deficits as well as its gains and losses. Its policies and measures must be taken on the basis of objective analysis. Simply levying tariffs will only be counterproductive.
As President Xi Jinping rightly pointed out, China and the US will both benefit from cooperation and both get hurt from confrontation. Cooperation is better than friction and dialogue is better than confrontation. The two presidents agreed during their meeting in Osaka to restart the trade consultations on the basis of equality and mutual respect. This is a good signal. We hope that both sides will respect each other’s core interest and address each other’s reasonable concerns so as to implement the principle and follow the direction set by the two presidents to reach a mutually acceptable trade agreement by working practically for progress and meeting each other half way. This will have not only historic significance for bilateral trade ties, but also demonstrative meaning for international trade and cooperation. I hope that all of you, as people of wisdom and vision, will share your constructive views, make positive voices and contribute to maintaining the stability of the international trading system.