Economics, Pethokoukis

Is the US trade deficit with China a lot smaller than we think?

The above chart from The Economist is one that sticks in my brain. I love how counterintuitive it is, showing that as China’s currency has strengthened, China’s trade deficit has widened. Perhaps the supposed undervaluation of the renminbi isn’t such a big deal. (And keep in mind that this chart doesn’t adjust the exchange rate for inflation. On that basis, the appreciation has been far more dramatic.)

And anyway, it may be that America’s trade deficit with China is far smaller than currently thought.  The FT:

In a joint study, the Organisation for Economic Co-operation and Development and the World Trade Orgaisation have for the first time highlighted the flaws in labels such as “Made in China” or “Made in Germany”, by tracking the origin of components and services rather than final products.

While traditional trade figures classify the sale of a Munich-assembled BMW to the US as an entirely “German” export, many of the components will have been sourced outside Germany. According to the joint study, the US trade deficit with China in 2009 was not $176bn but $131bn – or 25 per cent lower – because so much of the value of “Chinese” electronic exports include components sourced from other countries such as South Korea and Japan.

2 thoughts on “Is the US trade deficit with China a lot smaller than we think?

  1. Yes, without facts, the chart looks counterintuitive. Now here are the facts as they relate to photovoltaic cells:

    Note that China raised its domestic installed target for PV generated electricity to 40 gigawatts, which is to say it directly and indirectly subsidizes its PV companies. (So does Germany.)

    And the results:

    A chart on page 11 shows China with 56 percent of the world PV market in 2011, or a complete reversal from 2004 when the US had roughly the same position.

    A brief primer on a silicon based economy: Fabrication foundries are hugely expensive and complex. To climb the learning curve, or the path to profitable mass production, requires mass orders.

    Yes, the US generates the world’s ideas. In the case of PV we owned it for 5 years.

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