fung&lau.htm

On December 11, 2001, China became the 143rd member of the World Trade Organization (WTO). China's entry into the WTO signaled to the world that China will continue to liberalize its markets. Nevertheless, it is expected that economic relations between the United States and China will remain volatile. Even though China has a low per capita income, it is often perceived to be an emerging trade giant and a potential commercial competitor of the United States. At the same time, China has become an important market for many U.S. firms. The Sino-U.S. relationship is thus both cooperative and contentious.

At center stage in the trade relationship between the two giant Pacific economies are large and growing bilateral trade deficits. In the eyes of economists, bilateral trade deficits are related to macroeconomic factors such as saving-investment imbalances and budget deficits. But to policymakers and trade negotiators, such deficits represent measures of gains and losses resulting from trading with trading partners. Trade surpluses are seen as gains, and trade deficits as losses. Inaccurate as these perceptions are, they do affect policy. In this article, we build upon our previous research (Fung and Lau 1996, 1998, 2001) and highlight the important fact that the measurement of trade balances between the two countries is seriously flawed.¹

In 2000, according to estimates by the U.S. government, the United States ran a merchandise trade deficit of US$83.8 billion with China. However, according to estimates by the Chinese government, the deficit was US$29.7 billion. It is often pointed out that as a developing and transitional economy, China lacks the resources to gather accurate trade data. However, our research shows that while it is likely true that Chinese trade data are inaccurate, when it comes to trade with China, there are also significant problems with U.S. export and import data. Our claim is thus that neither the U.S. nor the Chinese official figures are correct. Instead, we provide adjustments to these official bilateral measures and, we hope, generate more accurate estimates of these balances. Our aim is to provide more accurate data for the purpose of encouraging more objective policy discussions between the two governments.

As we discuss in detail in Fung and Lau (2001), both the Chinese and the U.S. trade data have to be adjusted when it comes to measuring bilateral trade balances. To lay the groundwork for our various adjustments, we first present the official U.S. and Chinese data on exports and imports in Table 1.

Year	Official U.S. exports to China (U.S. data)	Official Chinese imports from the U.S. (Chinese data)	Official U.S. imports from China (U.S. data)	Official Chinese exports to the U.S. (Chinese data)	Official U.S.-China trade balance (U.S. data)	Official U.S.-China trade balance (Chinese data)
1990	4.8	6.6	15.2	5.2	-10.4	1.4
1991	6.3	8.0	19.0	6.2	-12.7	1.8
1992	7.4	8.9	25.7	8.6	-18.3	0.3
1993	8.8	10.7	31.5	17.0	-22.8	-6.3
1994	9.3	14.0	38.8	21.5	-29.5	-7.5
1995	11.7	16.1	45.6	24.7	-33.8	-8.6
1996	12.0	16.2	51.5	26.7	-39.5	-10.5
1997	12.8	16.3	62.5	32.7	-49.7	-16.4
1998	14.3	17.0	71.2	38.0	-56.9	-21.0
1999	13.1	19.5	81.8	41.9	-68.7	-22.4
2000	16.3	22.4	100.1	52.1	-83.8	-29.7

What adjustments need to be made to the official export and import data? In this article, we discuss, in turn, four adjustments: (1) fob-cif differences, (2) reexports via Hong Kong, (3) reexport markups, and (4) trade in services.

First, it is most objective to measure imports and exports on the same basis. We choose to convert all import and export values to the fob basis so that they are all comparable. As the term implies, fob includes costs from home factory production as well as costs of transporting goods and loading them onto the cargo vessel in the same country. One slight complication here is that unlike most countries' data, U.S. export data are recorded on an fas basis, and fas values are less than fob values by the cost of loading the goods onto the cargo vessel at the home port. To make fas and fob values comparable, we add a 1% cost to the fas export values to convert them to fob values. Such a conversion has been proposed by researchers at various international organizations, including the World Bank.

On the other hand, like most countries, China records its export data on an fob basis, so there is no need to convert them. Both the United States and China record imports on a cif basis. A 10% discount is subtracted from the cif values to obtain the fob values.² Applying a 10% discount is the conventional method of conversion used by, for example, the International Monetary Fund.

Why do we care to convert import and export data to make them comparable? The reason is that for large volumes of trade, fob-cif differences can generate rather inaccurate measures and impressions. For example, suppose China and the United States export to each other US$50 billion worth of goods annually on an fob basis. Then, in principle, trade should be balanced between the two countries. However, from the United States' standpoint, exports to China are US$50 billion, but imports from China are US$55 billion on a cif basis, and thus the United States has a trade deficit of US$5 billion. Using a similar argument, China's exports fob to the United States amount to US$50 billion, while China's imports cif from the United States come to US$55 billion. Thus, from China's viewpoint, it has a deficit of US$5 billion. In this example, trade should be balanced, but both sides claim that they have a deficit. Measuring import and export data on different bases thus leads to rather paradoxical results. We therefore propose to measure both types of data on the fob basis. In Table 2, we present official trade data converted to an fob basis.

Year	U.S. exports to China fob (U.S. data)	Chinese imports from U.S. fob (Chinese data)	U.S. imports from China fob (U.S. data)	Chinese exports to U.S. fob (Chinese data)	U.S.-China trade balance fob (U.S. data)	U.S.-China trade balance fob (Chinese data)
1990	4.8	6.0	13.8	5.2	-9.0	0.8
1991	6.4	7.3	17.3	6.2	-10.9	1.1
1992	7.5	8.1	23.4	8.6	-15.9	-0.5
1993	8.9	9.7	28.6	17.0	-19.7	-7.3
1994	9.4	12.7	35.3	21.5	-25.9	-8.8
1995	11.8	14.6	41.5	24.7	-29.7	-10.1
1996	12.1	14.7	46.8	26.7	-34.7	-12.0
1997	12.9	14.8	56.8	32.7	-43.9	-17.9
1998	14.4	15.5	64.7	38.0	-50.3	-22.5
1999	13.2	17.7	74.4	41.9	-61.2	-24.2
2000	16.5	20.4	91.0	52.1	-74.5	-31.7

Second, we need to adjust our trade figures by the large volume of reexports that are shipped to Hong Kong before being exported to the United States or China. Reexports come into being when imports to Hong Kong are consigned to a buyer in Hong Kong who takes legal possession of them, sells them to another party in a third country, and ships them there. The Hong Kong buyer may undertake minor processing of the imports before reexporting them; however, the character of the goods is not fundamentally altered, so no Hong Kong origin is conferred. The issue of reexports complicates both Chinese and U.S. trade data. For the Chinese data, we treat both exports and imports as reflecting only direct trade. Reexports from China via Hong Kong to the United States reflect indirect trade that has to be added to the official trade data. For the U.S. data, U.S. exports similarly reflect direct exports, so reexports have to be added. On the import side, we know that U.S. customs traces the country of origin of all its imports, including reexports. We thus treat U.S. import values as including both direct and indirect imports, so no adjustments need to be made with respect to the amount of reexports. If reexports accounted for only a small fraction of U.S.-China trade, we may have been able to ignore them. However, reexports constitute a large fraction of U.S.-China trade. Reexport data are available from official Hong Kong government statistics and are given in Table 3.

Year	Hong Kong Reexports of U.S. Goods to China (Hong Kong data)	Hong Kong Reexports as a Share of U.S. official Exports to China	Hong Kong Reexports of Chinese Goods to the U.S. (Hong Kong data)	Hong Kong Reexports as Shares of Chinese official Exports to the U.S.
1990	1.3	27.1%	10.5	201.9%
1991	1.7	27.0%	13.4	216.1%
1992	2.4	32.4%	18.1	210.5%
1993	3.2	36.4%	21.8	128.2%
1994	3.7	39.8%	25.3	117.7%
1995	5.0	42.7%	27.6	111.7%
1996	5.9	49.2%	29.2	109.4%
1997	6.0	46.9%	31.3	95.7%
1998	5.3	37.1%	31.1	81.8%
1999	5.4	41.2%	32.1	76.6%
2000	6.1	37.4%	36.5	70.1%

In 2000, US$6.1 billion worth of U.S.-made goods were shipped to Hong Kong and then reexported to China. This represented 37.4% of U.S. official exports to China. In contrast, goods made in China valued at US$36.5 billion were exported to Hong Kong and then reexported to the United States. Reexports accounted for 70.1% of official Chinese exports to the United States. This large percentage is based on official Chinese export data, which no doubt underestimate the true extent of exports to the United States. The message here is that if we do not correct the trade data by the extent of reexports via Hong Kong, they will be grossly inaccurate. In Table 4, we present our estimates of the value of U.S. exports to China after adjusting for fob-cif difference and for reexports. Reexports are calculated by the Hong Kong government on a Hong Kong fob basis. To convert them to U.S. fob values, appropriate discounts have to be applied.

Year	U.S. exports to China fob (U.S. data)	Chinese imports from U.S. fob (Chinese data)	Hong Kong reexports of U.S. imports to China fob Hong Kong (Hong Kong data)	Hong Kong reexports of U.S. imports to China fob U.S. (Hong Kong data)	Our estimate of U.S. exports to China fob adjusted for reexports (U.S. data)	Our estimates of U.S. exports to China fob adjusted for reexports (Chinese data)
1990	4.8	6.0	1.3	1.2	6.0	7.2
1991	6.4	7.3	1.7	1.5	7.9	8.8
1992	7.5	8.1	2.4	2.2	9.7	10.3
1993	8.9	9.7	3.2	2.9	11.8	12.6
1994	9.4	12.7	3.7	3.4	12.8	16.1
1995	11.8	14.6	5.0	4.5	16.3	19.1
1996	12.1	14.7	5.9	5.4	17.5	20.1
1997	12.9	14.8	6.0	5.5	18.4	20.3
1998	14.4	15.5	5.3	4.8	19.2	20.3
1999	13.2	17.7	5.4	4.9	18.1	22.6
2000	16.5	20.4	6.1	5.5	22.0	25.9

In Table 5, we adjust the official estimates of Chinese exports to the United States by the extent of Hong Kong reexports. Note the huge discrepancy between the official Chinese figures on exports to the United States and the official U.S. figures on imports from China, adjusted to an fob basis. This discrepancy arises as a result of U.S. customs tracing the country of origin of imports from Hong Kong, including reexports, while Chinese customs does not, at least not successfully. Thus, insofar as reexports are concerned, there is no need to make adjustments (other than the fob-cif adjustment) to the official U.S. import data. The reexport data are presented in column 4 on an fob Hong Kong basis and are discounted to an fob China basis in column 5. The degree of agreement between the official U.S. figures (column 3) and the official Chinese figures (column 6) after the simple reexports adjustment is remarkable.

Year	Chinese exports to U.S. fob (Chinese data)	U.S. imports from China fob (U.S. data)	Hong Kong reexports of Chinese imports to U.S. fob Hong Kong (Hong Kong data)	Hong Kong reexports of Chinese imports to U.S. fob China (Hong Kong data)	Our estimate of Chinese exports to U.S. fob adjusted for reexports (Chinese data)
1990	5.2	13.8	10.5	9.5	14.7
1991	6.2	17.3	13.4	12.2	18.4
1992	8.6	23.4	18.1	16.5	25.1
1993	17.0	28.6	21.8	19.8	36.8
1994	21.5	35.3	25.3	23.0	44.5
1995	24.7	41.5	27.6	25.1	49.8
1996	26.7	46.8	29.2	26.5	53.2
1997	32.7	56.8	31.3	28.5	61.2
1998	38.0	64.7	31.1	28.3	66.3
1999	41.9	74.4	32.1	29.2	71.1
2000	52.1	91.0	36.5	33.2	85.3

Third, when goods are first exported to Hong Kong, Hong Kong middlemen add markups to goods that are subsequently reexported. These markups are treated as value added in Hong Kong and should be taken out of the U.S. and China trade data. We use both published and unpublished survey data on markups added by Hong Kong middlemen. These estimated markups are presented in Table 6.

Year	Estimates of Hong Kong reexport markups for U.S. imports to China (%)	Estimates of Hong Kong reexport markups for Chinese imports to U.S. (%)
1990	11.30	17.40
1991	9.30	20.50
1992	9.30	22.90
1993	7.80	26.10
1994	5.70	24.90
1995	8.40	26.70
1996	7.63	26.03
1997	6.87	25.37
1998	6.10	24.70
1999	8.80	27.70
2000	8.80	27.70

Given the above markup estimates, we further adjust all the trade data by the extent of these markups. To sum up, to obtain a more objective measure of trade imbalances, we treat the trade data by the fas-fob and fob-cif adjustments, adjustments due to reexports, and adjustments due to reexport markups. We adjust data for the years 1990 to 2000. At the time of this writing, 2000 is the latest year for which we have complete import, export, and reexport data. The results of the adjusted trade balances are reported in Table 7.

Year	Official U.S.-China trade balance (U.S. data)	Official U.S.-China trade balance (Chinese data)	U.S-China trade balance fob basis adjusted for reexports and markups (U.S. data)	U.S.-China balance fob basis adjusted for reexports and markups (Chinese data)
1990	-10.4	1.4	-5.6	-6.3
1991	-12.7	1.8	-6.2	-7.6
1992	-18.3	0.3	-9.1	-11.9
1993	-22.8	-6.3	-11.0	-20.3
1994	-29.5	-7.5	-15.8	-24.0
1995	-33.8	-8.6	-17.7	-25.8
1996	-39.5	-10.5	-21.6	-28.0
1997	-49.7	-16.4	-30.2	-35.5
1998	-56.9	-21.0	-37.4	-40.7
1999	-68.7	-22.4	-47.5	-42.6
2000	-83.8	-29.7	-58.9	-52.6

In Table 7, we show the adjusted trade balances, using both U.S. and China trade data. After making adjustments, the discrepancy between the U.S. and Chinese data in 2000 narrowed from US$54.1 billion to US$6.3 billion. For several reasons discussed in Fung and Lau (2001), the U.S. data should be considered more reliable than the Chinese data. Hence, our best estimate for the U.S.-China bilateral merchandise trade balance for 2000 is US$58.9 billion, in Chinas favor. This is a large figure, but it is much smaller than the official U.S. estimate of US$83.8 billion.

We have so far focused on the merchandise trade balance between the United States and China. However, the United States is traditionally a net exporter of services. Service trade has grown in importance in recent years. Indeed, China's entry into the WTO means that China's service sectors such as insurance, banking, and distribution will open up. In Table 8, we provide estimates of the bilateral balance, adjusting for fob-cif, reexports, reexport markups, and private service trade.³ Private services include activities such as advertising, computer and data processing services, education, financial services (including banking and insurance), professional services (including accounting and legal services), management consulting, royalties and license fees, telecommunication, transportation, and travel.

Year	Our estimate of U.S. imports from China fob adjusted for reexports and markups (U.S. data)	Our estimate of U.S. exports to China fob adjusted for reexports and markups (U.S. data)	Official estimate of U.S. exports of services to China (U.S. data)	Official estimate of U.S. imports of services from China (U.S. data)	Our estimate of U.S.-China trade balance fob adjusted for reexports, markups, and services (U.S. data)
1992	18.7	9.5	1.6	1.0	-8.5
1993	22.6	11.6	1.9	1.3	-10.4
1994	28.4	12.6	2.0	1.5	-15.3
1995	33.7	16.0	2.5	1.7	-16.9
1996	38.7	17.1	3.2	1.9	-20.3
1997	48.2	18.0	3.6	2.2	-28.8
1998	56.3	18.9	4.0	2.3	-35.7
1999	65.2	17.7	3.9	2.7	-46.3
2000	80.5	21.6	4.6	2.8	-57.1

As Table 8 indicates, the United States has a surplus vis-a-vis China in trade in services. The surplus is very modest. In 1999 it amounted to US$1.2 billion. In 2000 it increased to US$1.8 billion. At the time of this writing, taking fob-cif adjustments, reexports, reexport markups, and services into account reduced the estimates of the bilateral trade balance to US$57.1 billion for 2000.

U.S.-China trade imbalances have been growing. Even with China's entry into the WTO, bilateral trade deficits continue to receive considerable attention. The U.S. government's official estimate for 2000 is US$83.8 billion, while the Chinese government's is US$29.7 billion. In a series of papers (Fung and Lau 1996, 1998, 2001), we argue that while U.S. data are more reliable, neither the U.S. nor the Chinese trade data are really accurate. We need to make adjustments because of fob-cif differences, reexports via Hong Kong, and reexport markups by Hong Kong middlemen. In this article, we present our results for 1990-2000. Using adjusted U.S. trade data, our best estimate for the U.S.-China merchandise trade balance is US$-58.9 billion for 2000. For service trade, the United States ran a surplus of US$1.8 billion for 2000. Thus, our estimate for the combined balance of trade and services is US$57.1 billion. This is a large figure, but still much smaller than the official U.S. government estimate.

K.C. Fung is Professor of Economics, Department of Economics, University of California, Santa Cruz and Lawrence J. Lau is Kwoh-Ting Li Professor of Economic Development, Department of Economics, Stanford University.

References:

Amjadi, A. and Yeats, A., 1995, "Have Transport Costs Contributed to the Relative Decline of Sub-Saharan African Exports?" World Bank Policy Working Paper 1559.

Feenstra, R.C., Hai, W., Woo, W.T., and Yao, S., 1999, "Discrepancies in international data: An application to China-Hong Kong entrepot trade," American Economic Review Papers and Proceedings, 89, 338-343.

Fung, K.C. and Lawrence J. Lau, 1996, "The China-United States Bilateral Trade Balance: How Big Is It Really?" Occasional Paper, Asia/Pacific Research Center, Institute for International Studies, Stanford University, April.

Fung, K.C. and Lawrence J. Lau, 1998, "The China-United States Bilateral Trade Balance: How Big Is It Really?" Pacific Economic Review, 3, 33-47.

Fung, K.C. and Lawrence J. Lau, 2001, "New Estimates of U.S.-China Bilateral Trade Balances," Journal of Japanese and International Economies, 15, 102-130.

General Administration of Customs of the People's Republic of China, "China's Customs Statistics" Economic Information and Agency, Hong Kong, various years.

Hong Kong Census and Statistics Department, "Annual Review of Hong Kong External Trade," various years.

Hong Kong Census and Statistics Department, "Hong Kong Monthly Digest of Statistics," various years.

Hong Kong Census and Statistics Department, "Rate of Re-export Margins," unpublished data, various years.

Lardy, N., 1994, China in the World Economy, Institute for International Economics, Washington, D.C.

Naughton, B., 1996, "China's Emergence and prospects as a Trading Nation," Brookings Paper on Economic Activity, 2, 273-344.

U.S. Department of Commerce, "U.S. Foreign Trade Highlights," Washington, D.C., various years.

U.S. Department of Commerce, "Survey of Current Business," Washington, D.C., various years.

Yeats, A., 1981, Shipping and Development Policy: An Integrated Assessment, Praeger Scientific, New York.

1 Other studies in this area include Lardy (1994), Feenstra, Hai Woo and Yao (1999), Naughton (1996).
² For discussions of these adjustments and measurements of transport costs, see Fung and Lau (2001) , Amjadi and Yeats (1995) and Yeats (1981).
³ Before 1992, data on U.S. exports of services are not disaggregated comprehensively by country. Thus, data on the bilateral trade in services between China and the United States prior to 1992 are not available. In addition, data of service trade for 2000 are not available.


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