RMB is not cause of US trade deficit
(China Daily)
Updated: 2005-04-30 08:45

Some US senators have recently blamed China for the Sino-US trade deficit hitting a new high last year and have proposed placing a 27.5 per cent tariff on all Chinese products if China does not revalue the yuan.

They believe that if China had appreciated its currency, the US deficit problem would have been solved. But it is unfair to blame China when one considers the following facts.

Does China export too many products to the United States? No. According to US statistics, since 1994 Canada has been the biggest exporter to the United States. In 2004 Canada's exports to the United States amounted to US$ 256 billion, 30 per cent greater than China's. The second and the third largest exporters to the US market were Japan and Mexico before 2003. China became the second largest after 2003.

The reason why the trade gap between the United States and China is so big is that US exports to China are far less than those sent to Canada, Mexico and Japan.

The Chinese Government has not manipulated its currency exchange rate to limit imports from any country, including the United States. According to Chinese customs statistics, China had a trade surplus of about US$32 billion in 2004. Considering US trade statistics, it could be implied that China had a huge trade deficit of US$130 billion with the rest of the world. In 2004 China's imports from Asia accounted for about 66 per cent of its total imports, while imports from the United States were only 8 per cent of the total. China had huge trade deficits with South Korea, Japan, and ASEAN nations. Plus the mainland's trade dificits with its island province of Taiwan, the total reached about US$127 billion.

Since China opened to the outside world in 1978 and has been shifting from a planned economy to a market economy, more and more foreign direct investment (FDI) has come into China. The import and export conditions in China have changed a lot. Foreign-funded companies in China have driven the main part of the Chinese import and export markets. In 2004, import and export values of foreign-funded companies accounted for about 60 per cent of the country's total trade volume.

FDI in China mainly came from Asian markets, such as those in Japan, South Korea, Singapore as well as from Taiwan, which realized FDI of US$16.8 billion in 2004, nearly 50 per cent of the country's total (except FDI from Hong Kong and the Virgin Islands).

Those overseas-funded companies aimed their money at not only the rapidly growing Chinese market with its 1.3 billion consumers but also at the country's lower labour costs.

China is a low-middle-income country. The gross domestic product per capita just exceeded US$1,000 in 2004. Average hourly labour compensation for urban manufacturing workers is only about US$1, accounting for 4.7 per cent of the US level. If the Chinese currency appreciated by 100 per cent over the US dollar, the average hourly labour cost in China still would amount to only US$2, less than 10 per cent of US level.

The majority of the Chinese population still live in rural areas, providing an abundant and low-cost labour supply.

Lower labour costs triggered a massive shift of Asian manufacturing capacity and export orders to China, especially from Japan, Taiwan Province, and South Korea, whose investments are export-oriented. Originally they produced products in their hometowns to export to United States. Now they moved to the Chinese mainland to do such work. In the beginning labour-intensive export processing, such as apparel, footwear, toys, furniture, moved to China, while gradually tech-intensive export processing, such as notebook computers, hard disc-drives and chip industry manufacturing has also moved here, too.

China has been increasingly integrated into the global manufacturing and supply chain. There are more and more Japanese and South Korean brands of electronic goods with a "Made in China" tag in the US market. These trends are obviously related to the shift of a great number of export-oriented production lines from leading Asian economies into China.

China needs to import more raw materials, parts, equipment and machine tools for export purposes and its domestic market. The main import sources for China are from Asia, not the United States. In 2003, imports from Japan, Taiwan and South Korea by overseas-funded companies totalled US$116 billion, accounting for more than half of the mainland's total imports, while import from US was just 7.5 per cent of the total.

There are several reasons why foreign-funded companies in China prefer importing from Asia to importing from the United States.

First, a large fraction of Chinese exports were related to processing and assembly activities of foreign-funded companies. Major parts, components, equipment and technology needed by assembly lines still stay in home countries. The assembly lines need to frequently import from foreign-funded companies' parent companies, which are mostly located in Asia.

Second, some companies, especially Japanese and South Korean subsidiaries in China, usually purchase goods from their inter-firms (parent company or intra-industry) in their home countries.

Third, Japan, South Korea and ASEAN economies are Chinese neighbours. The costs of transportation are far cheaper than US exports to China.

Fourth, same quality goods from Asia are generally cheaper than those from the United States because of different labour costs. For instance, in 2003 hourly compensation costs of manufacturing workers in South Korea were about 47 per cent of those in the United States.

Fifth, China is a big high-tech importer now. China needs to import more high-tech products, some of which sometimes can only be produced by the United States. According to US statistics, in 2003 China imported US aircraft, nuclear reactors, machinery and equipment worth US$10.6 billion, accounting for 40 per cent of China's imports from the United States. High-tech exports are one of US manufacturers comparative advantages. But this advantage was weakened by some US policies, especially the rigid controls over such exports to China.

In 2003, US high-tech exports to China were 10 per cent of the Chinese total high-tech imports, ranking as just the fifth largest source of China's imports of such goods.

The conclusion is clear: The reason for the US trade deficit with China is not about China's currency exchange rate. The key problem is some American policies which cause US manufacturers to lose their comparative advantages to other exporters.

If the United States truly wishes to compete on a fair and open playing field, it should review its policies, including its erroneous trade policies regarding China, rather than simply making China a scapegoat. To place tariffs on all Chinese products will only hurt the interest of both countries.

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