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Doing the Math on China's Trade Surplus

Is China's trade surplus with the United States not such a menace after all?

September 10, 2003

Is China's trade surplus with the United States not such a menace after all?

Much has been made recently of China's bilateral trade surplus with the United States, which reached a record $103 billion in 2002. But does this number truly reflect the trade flows between these two countries? Joe Quinlan — Chief Market Strategist of Bank of America — offers a fascinating perspective.

Are China's trade practices solely to blame for the large trade imbalance with the United States?

"The rather large trade deficit with China is due more to how U.S. firms deliver goods and services to China than to unfair trade practices on the part of China."

What are some implications of that?

"In 2000, which is the last year of available data, U.S. companies operating in China had sales of $32 billion within China. These sales are not factored into trade calculations — and lead to an inflated Chinese trade surplus."

What are some examples of U.S. companies operating in China?

"Coca-Cola has a massive bottling and distribution operation in China. Procter & Gamble sources and sells many of its products in China. In the financial services sector, Citigroup, Merrill Lynch and Goldman Sachs all operate within China. These activities are buried in the U.S. balance of payments statistics, but do not appear in the more popular merchandise trade figures — which are usually cited in the political debate."

Where does that leave America's trade deficit with China?

"After factoring local affiliate sales into the overall commercial equation, America's deficit with China shrinks to roughly $57 billion in 2000 — or by nearly one-third of what was publicly reported."

Numbers aside, what else complicates the outlook for China in the United States?

"While many politicians in Washington view China as a strategic competitor, U.S. businesses have increasingly embraced the mainland as a strategic partner."

What are some possible effects of this stance?

"Washington does not understand that they are raising the potential for a protectionist backlash in the United States. If that happens, many U.S. firms — along with their workers and shareholders — will be at risk."

Why does it seem that more products are made in China today than in the past?

"Toys, garments, footwear and computers used to be exported to the United States from either Taiwan or South Korea. These same firms are now selling to America via a different export location — China. Many European and Japanese manufacturers are also exporting more goods from China to the United States."

From which aspect of China's economy do U.S. firms expect to benefit the most?

"At the end of the day, the Chinese consumer is more important to U.S. firms than is the Chinese laborer."

What do U.S. companies have to be aware of when operating in China?

"China's mainland is not a unified market. Rather, it is a collection of markets — with different dialects and varying levels of development, infrastructure and per capita income."

How does the United States today depend on the Chinese?

"Unbeknownst to many in Washington, one of China's top exports to America is the U.S. dollar — or recycled greenbacks stemming from China's massive trade surplus with the United States."

How has this relationship helped the struggling U.S. economy?

"Beijing effectively has been an active partner in the pump-priming efforts of the U.S. Federal Reserve. Massive Chinese purchases of U.S. Treasuries and government agency bonds served to keep U.S. interest rates at historical lows."

What effect would U.S. economic sanctions on China have?

"Should the United States opt to curtail or sanction China to benefit its exchange rate policy, it may be cutting off a key source of foreign capital — something the world's largest debtor nation can hardly afford."

And finally, what do the United States and China have in common?

"Surprisingly, China has a large trade deficit of some $75 billion with the rest of the world — excluding the United States. That is a trait it shares with, of course, non other than the United States."