In its recent report on the foreign exchange policies of the United States’ major trade partners, the US Treasury Department stated that the six economies on its monitoring list have not achieved unfair trade advantages through currency manipulation.

China constitutes a sizable share of the overall US trade deficit, according to the report, but it has no material current account surplus, and there is no evidence of persistent one-sided intervention in the foreign exchange market.

The statistics show that China has a significant goods trade surplus with the United States, which is mainly attributed to the lack of balance in the US economy and its discriminatory trade policies rather than unilateral Chinese trade practices.

First, the United States relies on trade to meet domestic demand, which is the source of its deficit with China. It is not a matter of bilateral trade. Instead, an imbalanced economy is to blame.

The overall trade deficit will remain high if the country stops importing Chinese goods or expands imports from other countries. Because Chinese exports are competitive in terms of quality and price, such actions would mean higher spending on imports, and the costs would be passed on to consumers and manufacturers. The United States needs to rebalance domestic supply and demand if it intends to eliminate the large trade deficit.

Also, American companies who have manufacturing bases in China greatly contribute to the goods trade surplus. Processing, which is mainly funded by foreign capital, accounts for more than half of China’s international trade, and it accounts for 70 percent of bilateral trade between China and the United States. According to WTO statistics, 40 percent of China’s exports of manufacturing goods to the United States are intermediate products that are produced in other countries and transported to China for further processing.

A study by Oxford University estimated that the US trade deficit with China would shrink by half if intermediate products of this kind were excluded from calculation, making it roughly on par with the deficit between the United States and the European Union.

The true picture of American trade can be distorted by the global supply chain of multinationals. Trade statistics can record the importer of a final product while obscuring the trade volume of intermediate products and the biggest winner in the global supply chain.

The bilateral imbalance also results from restrictions that prevent the country from exporting high-tech products to China. Technology is a comparative advantage of the United States, but it is hard to make full use of the advantage if the country bars the export of advanced technology for reasons of national security. American restrictions also undermine the trade balance and limit the access of American companies to the massive Chinese market.

Artificial intervention, restriction and protection block the healthy development of a global trade balance. To increase exports, the United States needs to abandon the Cold War mentality and remove export restrictions to selected countries. The trade structures of China and the United States are more complementary than competitive.

The two sides should insightfully analyze the trade imbalance based on respect and honesty, thus seeking mutual benefit together. Instead of adopting various protective trade measures, it is better for the United States to make full use of its comparative advantage by expanding exports of high-tech products to China, which is the right path for a more balanced trade relationship between the two countries.

 

Shi Jianxun is director of the Research Center for Finance and Economics at Tongji University.