Since the People’s Republic of China (PRC) surpassed Japan as the world’s second largest economy in 2010, guessing when the PRC would eclipse the United States (US) as the world’s largest economy has been an exciting game among PRC watchers. On 10 February came the surprising news that the PRC had surpassed the US to become the world’s No. 1 trading nation, after both countries officially announced their 2012 trade figures. According to the US Department of Commerce, total US trade in 2012 amounted to $3.82 trillion, about $50 billion short of the PRC’s exports and imports of $3.87 trillion, estimated by China Customs.
The rapid expansion of the PRC’s trade in the last three decades is the result of the export-led growth strategy. To promote exports as well as imports of intermediate inputs, the Chinese government has been using various policy measures, such as special economic zones and incentives for export-oriented foreign direct investment (FDI) through preferential tax treatments. On the other hand, the PRC’s processing trade—the imports of intermediate inputs for the assembly of final products to be exported—has made its trade volumes much bigger than what the economy actually produced for exporting and purchased from foreign countries for spending. In 2012, the processing trade amounted to $1.3 trillion, about one-third of the PRC’s total trade volume. No other economy has ever had such a large scale of processing trade.
As I argued more than two years ago in an iPhone analysis paper, conventional trade statistics are misleading and fail to outline the true picture of modern trade based on global supply chains (Xing and Detert 2010). The PRC’s trade volumes and bilateral trade balances are greatly inflated in the conventional measures. The PRC is well-known as a global assembly center for the manufacture of products such as computers, digital cameras, liquid-crystal displays, mobile phones, among others. To manufacture these products, Chinese companies import key parts and components, assemble them into finished goods, and then export them. The round tripping of the imported parts and components greatly exaggerates both the export and import figures of the PRC. In other words, a double counting problem exists in the total trade figure if flows of goods across borders are simply added up. The iPhone trade is a typical example. Chinese workers contribute only $6.50 to each iPhone, but $179 is credited to the export figure as an iPhone is shipped out of the PRC, as the PRC needs to pay $172 to import parts and components for the assembly of an iPhone.
In 2012, the PRC’s processing imports (imported intermediate inputs for making goods for export) amounted to $481 billion, or about 26.5% of the total imports. The $481 billion in intermediate inputs were counted again when products assembled with these intermediate inputs were shipped out of the PRC. Processing imports represent demand by third-party countries and should not be considered as the true import demand of the PRC economy. Similarly, the value of imported intermediates embedded in the export figures does not represent the PRC’s export capacity either. If we exclude the double counting of the processing imports—$962 billion from the official number of $3.87 trillion—the PRC’s trade figure would be $2.91 trillion, far less than the US trade volume of $3.82 trillion.
Of course, some US companies also engage in processing trade, such as sending materials to Maquiladora, Mexico, for processing and then importing processed products back into the US. The US trade with Canada also involves intermediate trade for final exports. To be fair, the gross trade figure of the US should be adjusted, too. Due to data limitations, I am not able to do this. The United Nations Conference on Trade and Development’s (UNCTAD) recent study on global value chains estimates that the PRC contributed 70% of value added in its exports while the US contributed 89%. Using this study as a reference, it is reasonable to assume that the scale of the US processing trade should be much smaller than that of the PRC, the global assembly center.
The bottom line is that conventional trade statistics are inconsistent with trade flows driven by global value chains and production networks and should be interpreted with care by policymakers. Trade in value added should be adopted if we wish to know the true export capacity and real import demand of a country. The consensus on reforming trade statistics has been reached among international organizations, including Organisation for Economic Co-operation and Development, UNCTAD and the World Trade Organization. The newly released WTO–OECD study (OECD–WTO 2012) on trade in value added suggests that the PRC’s trade deficit with the US in 2009 was 25% lower than showed by the conventional trade statistics.
Detert, N., and Y. Xing. 2010. How the iPhone Widens the US Trade Deficit with the PRC. ADBI working paper series. No. 257. Tokyo: Asian Development Bank Institute
OECD–WTO. 2012. Trade in Value-Added: Concepts, Methodologies and Challenges. Geneva, Paris
UNCTAD. 2013. Global Value Chains and Development. Geneva