The Foreign Service Journal, January 2003

of the lack of a “level playing field” there and urge retaliatory measures against protectionism. While our bilateral trade deficit with China is indeed high, the fig- ures exaggerate the size of the deficit and the seriousness of the problem significantly. U.S. statistics for our imports from China, for example, include the value-added or “markup” in Hong Kong (estimated at $10-15 billion), which should more accu- rately be attributed to Hong Kong. U.S. statistics also exclude our indirect exports to China through Hong Kong (estimated at $5-10 billion), thus significantly understating U.S. exports to China. Additionally, 50-60 percent of China’s exports to the United States can be sourced to export processing or assembly plants which basically process or assemble raw material and/or parts imported from other economies around the region, such as Hong Kong, Taiwan, Japan and Korea. China’s value-added contribution to these finished exports normally constitutes about one third of their final export value. Taking this into consideration, our “true” total value-added imports from China would have been nearly $30 billion lower last year. It should also be noted that U.S. import statistics are calculated to include miscellaneous cost, insurance and freight charges, and these usually make up about 10 per- cent of the final import value. Export statistics, however, are calculated on a “free on board” basis and do not include these same charges. Thus, the value of our imports from China would be reduced by around $10 bil- lion if calculated on the same basis as U.S. exports to China. Finally, the apparent “imbalance” in our bilateral trade relationship actually represents a major restructuring of broader trade and investment relations within East Asia and between the United States and that region over the past 20 years. China’s rapid export growth has been to a very large extent the result of the shifting of export pro- duction facilities from other more developed areas in East Asia to China to take advantage of its relatively lower labor and pro- duction costs. Yet even as the U.S. bilateral trade deficit with China rose, our overall deficit with East Asia as a whole has remained rela- tively constant. After making the above adjust- ments in the calculation of our bilat- eral trade statistics, we estimate that the true U.S. trade deficit with China was somewhere between $20 billion and $30 billion in 2001, not $80 billion. The WTO and Market Access Meanwhile, the United States has continued to engage China in World Trade Organization-related trade negotiations over the past 15 years, culminating in China’s accession to the WTO on Dec. 11, 2001. To do so, China had to make far-ranging commitments to open up its markets in virtually all sectors, but particu- larly in the agricultural and services sectors where the United States expects to obtain substantial benefits. Over the past 20 years, China essentially followed the earlier Japanese model — i.e., promoting exports in the manufacturing sector where it had (and still has) com- parative advantage in terms of low labor costs, while pro- tecting the domestic market in such areas as agriculture and services where it is not yet competitive. The end result of this policy — as we now witness in Japan — is the existence of a strong export economy on one hand and a weak and inefficient domestic economic and finan- cial market on the other. Chinese leaders thus see China’s entry into the WTO as a way of encouraging, and even forcing, the country’s less competitive industries to restructure, modernize or downsize. In the agricultural sector, for example, China agreed to replace all import quotas with tariff rate quotas for bulk commodities while at the same time expanding these quotas by 15 percent each year and reducing tariff rates by about half over the next five years. It also com- mitted to eliminating all agriculture export subsidies and establishing a cap on trade-distorting domestic subsidies. The government is thus encouraging farmers to move away from grain production, where China clearly does not have comparative advantage, to planting cash crops and animal husbandry. F O C U S J A N U A R Y 2 0 0 3 / F O R E I G N S E R V I C E J O U R N A L 55 Robert Wang is the Economic Minister-Counselor in Embassy Beijing. An FSO since 1984, he has served in Tokyo, Hong Kong, Shanghai, Singapore and Washington, D.C. The debate over the many trade and investment issues facing our two countries has frequently been acrimonious.