How Bad is the U.S. Trade Deficit with China?

San Pedro Harbor
Creative Commons License photo credit: prayitno

According to a new study by Asian Development Bank Institute, some of the U.S. trade deficit with China may be a statistical illusion (pdf).  More specifically, they delve into how the iphone, invented in the U.S., actually makes our trade deficit with China worse.

In a nutshell, China is only an assembler of the iphone, yet, beancounters count the whole value of the finished iphone rather than the value-added by Chinese assemblers.  On a value-added basis, the trade deficit in iphones becomes a trade surplus.  Here is an excerpt from the study:

Being solely an iPhone assembly center, the PRC first imports all components and then re-exports them as the final assembled product to the US. The imported components from other countries greatly inflate the export value. If iPhone exports from the PRC to the US were calculated based on the value-added contributed by PRC workers, i.e., the assembling cost, the value of the PRC’s iPhone exports to the US would be much smaller, at only US$73.5 million. Accordingly, the trade deficit associated with iPhone trade would also drop substantially. As mentioned above, the PRC imported US$121.5 million worth of components from the US companies Broadcom and Numonyx for assembling iPhones. Based on the value added approach, the US would have no deficits but a US$48 million trade surplus with the PRC in iPhones related trade. The sharp contrast between the two different trade deficit measurements indicates that conventional trade statistics are not consistent with the trade where global production networks and production fragmentations determine cross-country flows of parts, components, and final products. Bilateral trade imbalances between a country used as a final assembler and its destination markets are greatly inflated by trade in intermediate products. These statistics provide a distorted picture about bilateral trade imbalances.

While this study is interesting, the Chinese are still sitting on $3 trillion dollars worth of foreign exchange reserves. That is no statistical illusion and someone needs to do something about it . . . paging Donald Trump? Sorry, I just couldn’t resist 🙂