rsung

A battle is already shaping up between the U.S. Congress and President Bush over the annual renewal of MFN status for China. Though the Gulf Crisis enabled China to emerge out of isolation, the U.S. protectionist lobby is strengthened by the doubling of U.S.'s bilateral trade deficit with China in 1990 and China's evasion of U.S. textile quota limits.

Though it has long been realized that the revoking of China's MFN status will be serious for both China and Hong Kong, there have been few reliable estimates of the losses involved. Estimates of such losses are complicated by the conflicts between U.S. and Chinese trade statistics arising from the entrepot trade through Hong Kong. Chinese goods re-exported through Hong Kong to the U.S. are regarded in Chinese statistics as exports to Hong Kong instead of the U.S. U.S. trade statistics show a similar bias. Both Chinese and American statistics thus understated their exports to each other and overstated (understated) their bilateral trade deficits (surpluses). However, American statistics are less misleading than those of China because over 64 percent of China's exports to the U.S. were re-exported through Hong Kong in 1990, whereas the percentage for the U.S. was only 19 percent.

We can add Hong Kong re-exports of Chinese goods to the U.S. (obtained from Hong Kong statistics) to China's direct exports to the U.S. (obtained from Chinese statistics) to estimate China's total (direct and indirect) exports to the U.S. The total exports of the U.S. to China can be similarly estimated. However, we have to net out the re-export margin, as it is earned by Hong Kong instead of the producer. According to a 1988 survey of the Hong Kong Trade Development Council, the gross re-export margin was estimated to be 16 and 14 percent respectively for re-exports of Chinese goods and third country goods.

Chinese and American statistics on U.S.-China trade are presented in the table below. The table also includes estimates of total (direct and indirect) exports of China and the U.S. to each other. From 1987 to 89, the estimates of total Chinese exports to the U.S. are only three percent less than the official figures of U.S. imports from China. The two figures are expected to differ somewhat due to the re-export margin, time lags in transportation, and the difference between f.o.b. and c.i.f. prices. However, estimates of total U.S. exports to China from 1987 to 89 were 11 percent less than official figures of China's imports from the U.S. The difference appears to be too big to be accounted for by the above factors. This suggests that China's importers have been over-invoicing their imports to obtain foreign exchange illegally.

The revoking of MFN status for China will be serious for both China and Hong Kong. In 1990, China's exports to the U.S. was estimated to be US$14 billion; the U.S. was China's largest market, accounting for over a quarter of China's exports. Over two-thirds of China's exports to the U.S. were labor-intensive manufactures. Most of them were made in Guangdong factories, and many of those factories were run by Hong Kong investors. As mentioned before, over 64 percent of China's exports to the U.S. were re-exported through Hong Kong in 1990. As the demand for labor-intensive manufactures is price-sensitive, the loss of MFN status may reduce China's exports to the U.S. by as much as 70 percent. This implies that China would lose US$9.8 billion in exports, and Hong Kong's loss in the re-export margin would amount to US$0.9 billion. On top of re-export earnings, Hong Kong investors in processing/assembling operations in China would also lose their profits. Hong Kong accounts for roughly 60 percent of the foreign investment in processing/assembling operations in China. If we conservatively put the profit margin at 10 percent, Hong Kong investors would lose US$0.6 billion in profits.

Though China's loss of exports would be substantial, most of these exports would be from processing/assembling operations which have a low value-added margin and a high import content. The wages (processing fees) that China earns from such operations are typically around 20 percent of the value of exports. This implies that China's net loss of foreign exchange earnings (processing fees) would only be around US$2.0 billion. The loss would be greater if indirect effects are taken into account, i.e., the supporting industries of exports would also lose. However, market and commodity substitutions would cut down the losses, i.e., the goods originally designated for the U.S. market can be sold elsewhere, and the resources devoted to making these goods can be used to produce other goods of economic value. Taking into account all these offsetting effects, it is perhaps best to stick with the estimates of direct losses, that Hong Kong and China would likely lose US$2.0 billionand US$1.5 billion respectively if China were to lose its MFN status. To put matters in perspective, the losses would amount to respectively 0.5 percent of China's GDP and 2.1 percent of Hong Kong's GDP. Hong Kong's loss would be relatively much heavier than China's as Hong Kong's economy is smaller. Moreover, Hong Kong's loss would mount if China were to retaliate against the U.S.. The loss would be substantial for China and disastrous for Hong Kong.

China's loss in employment would be very substantial, probably around one million. Most of the losses would be concentrated in Guangdong which is a staunch supporter of economic reforms and the open door policy. Moreover, the Hong Kong-China synergy, which is the key to China's open door policy, would be dealt a severe blow. The damage to China's open door policy and Sino-American relationship would be extremely severe. Needless to say, Hong Kong can ill afford a major Sino-American dispute during its transition to 1997. The psychological damage on the investment climate in Hong Kong would be even greater than the direct losses involved. The irony of the situation is that a measure designed to punish China will hurt Hong Kong relatively much more than China.

The MFN dispute again underlines the fact that the Hong Kong economy is so internationalized that a dispute not connected with Hong Kong directly could nevertheless have disastrous spillover effects on Hong Kong. Hong Kong has intimate relationships with both China and the developed countries, and this is Hong Kong's most valuable asset, as it enables Hong Kong to serve as China's window to the world and also the world's gateway to China. However, the internationalization of the Hong Kong economy does place a heavy demand on Hong Kong's leaders to manage its multifarious and delicate web of international relations with wisdom, sensitivity, and tact.

TABLE
U.S.-China Trade (US$mn)
(According to American and Chinese Statistics)
	Exports	US Imports	Trade Balance	Exports	Chinese Imports	Trade Balance

1987	3,489	6,293	-2,804	3,037	4,831	-1,794
	(4,193)		(-2,100)	(6,105)		(1,274)

1988	5,034	8,436	-3,402	3,380	6,631	-3,251
	(6,111)		(-2,325)	(8,156)		(1,525)

1989	5,807	11,988	-6,181	4,391	7,863	-3,472
	(6,961)		(-5,027)	(11,685)		(3,822)

1990	5,000	15,500	-10,500	4,975*	6,668*	-1,692*
	(6,156)		(-9,344)	(13,998*)		(7,330*)
Figures in parentheses include the indirect U.S.-China trade in the form of Hong Kong re-exports.
* Projected figures based on the first three quarters of China's trade.

Source: U.S. figures from 1987-89 are obtained from the U.S. Department of Commerce;1990 figures are obtained from Hong Kong Economic Times, 24 January, 1991. Chinese figures are obtained from China Custom Statistics. U.S.-China trade in the form of Hong Kong re-exports are obtained from the Hong Kong Census and Statistics Department.

Dr. Yun-wing Sung is a Senior Lecturer in the Department of Economics at The Chinese University of Hong Kong.


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