Managing Bilateral Trade Policy: A Quest for Rebalancing the Global Economy?

Part of Chapter 5 | Global Trade Policy

By Shen Minghui
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Intraregional Trade at a Glance

The international trade of most East Asian economies has witnessed a higher growth rate than the world average in recent decades. East Asian economies have successfully integrated themselves into globalization and the world economy as well. As a result, East Asian economies’ exports to the rest of world increased from $219.9 billion in 1980 to $4.69 trillion in 2015, and their imports increased from $250.3 billion in 1980 to $4.069 trillion in 2015. Correspondently the share of East Asian economies’ exports of world exports doubled from 13.6 percent in 1980 to 32.1 percent in 2015, and the share of East Asian economies’ imports of world imports also increased from 15.6 percent in 1980 to 27.9 percent in 2015.

Benefiting from export-oriented models and dramatically high trade growth, East Asian economies have been successful in fueling economic growth. Most East Asian economies except Japan significantly raised their respective shares of world GDP. However, growth of processed intermediate goods fell rapidly from 31 percent to 1.3 percent in 2014 and contracted 6.8 percent in 2015. And intermediate goods trade by value contracted 13.2 percent in 2015, affecting Asia’s overall trade performance as well. As a result, trade growth by volume fell from 3.5 percent in 2014 to 2.3 percent in 2015 in Asia, much sharper than the decline in global trade from 2.8 percent to 2.7 percent in the same period. In addition, Asia’s trade growth has consistently fallen below its GDP growth since 2012, consistent with the global trend.1

An Explanation for the U.S. Trade Deficit with China

The United States is the most important market for China’s exports. Exports to the United States in 2016 were about $389.7 billion, accounting for about 20 percent of China’s total exports. However, China only imported $135.6 billion in 2016 from the United States and this accounts for only 10 percent of China’s total imports. Looking at the details, China exported $165 million in primary goods, $420 million in processed goods, $3 million in parts and components, $11 million in capital goods, and $551 million in consumer goods in 1980. And today China’s exports of capital goods surged to $158 billion and consumer goods surged to $166 billion, accounting for 35 percent and 36 percent of total exports, respectively. China’s imports from the United States are quite diversified. China imported $29 billion in primary goods, $58 billion in intermediate goods, and $55 billion in final goods in 2015. These imports vary greatly from fuels, chemicals, drugs, electronics, transport to food and living animals, etc.

The U.S. trade deficit in goods with China has grown from 0.8 percent of GDP in 2000 to 2.0 percent of GDP in 2016, equivalent to almost half the overall trade deficit for the United States and most of the current account deficit.

However, the bilateral trade number fails to fully explain the impact of trade with China on the U.S. economy. Considering global industrial supply chains, China is an assembler instead of a final market. Meanwhile, East Asian economies become increasingly interdependent and integrated through pro-foreign direct investment (FDI) policy regimes, export-led models, unilateral liberalization, and East Asian production networks. The intraregional trade share of East Asia turns out to be fairly high due to the above factors. The overall intraregional trade share of East Asia climbed from 41.1 percent in 1990 to a pre-crisis peak of 53.0 percent in 2004, before it fell slightly to 49.2 percent in 2015.

Although China’s share of intra-East Asian trade decreased to about 35 percent, it is still a key variable in East Asian intraregional trade patterns. All the other East Asian economies increased their share of exports to China by several multiples, and China has become their top export destination, or an important merchandise trade deficit country, for its East Asian neighbors in recent years, which contributes to the continuous increase in intraregional trade in East Asia. For this reason, the “decoupling” thesis notes that East Asia can sustain its self-contained economic growth dynamism rather than its dependence on traditional external consumption market like the United States.2

The fallacy of the “decoupling” thesis was revealed by the global financial crisis in late 2007: all East Asian economies including China, which is expected to support regional trade growth, experienced severe slumps in exports and economic downturns due to the contraction of external demand.3 In fact, East Asian economies are integrated with each other through regional production networks, which operate by separating a production chain into small parts and then assigning each to the most cost-efficient location. This means that production processes are fragmented into multiple slices and located in different economies in East Asia. Some steps take place within a single firm (or firms of the same group) that has operations in different economies, while others involve arm’s-length transactions among different firms in several economies. As noted by Prema-chandra Athukorala and Archanun Kohpaiboon, the “decoupling” thesis based on horizontal specialization ignores the regional production networks and the corresponding fragmentation-based trade in East Asia, and leads to misleading conclusions.4

A breakdown of China’s trade with East Asia will show us a comprehensive interpretation of China’s role in East Asia, with almost half of Chinese imports coming from East Asia and most (71 percent) of these imports are of intermediate goods. Although East Asia is not the main market for China’s exports, 51 percent of China’s exports to East Asia were of final goods in 2015. And this trend is quite stable. It indicates that China’s regional role as an assembly plant is being strengthened, and a role as a final consumption market for East Asia is correspondingly weakened. In addition, China’s role in the global context is similar to that in East Asia.

Based on a detailed input-output analysis of Asia’s intraregional exports, the Asian Development Bank gives a clearer and more precise explanation, indicating that 54.5 percent of Asia’s exports are directly shipped to external markets like Europe and North America, and 71.1 percent ultimately end up there, when the parts and components of exports are fully taken into account. Put another way, Asia only accounts for 28.9 percent of final demand for its own total exports.

In fact, the Organization for Economic Cooperation and Development (OECD) also estimates that about one-third of Chinese exports could be attributed to foreign content. More importantly, the study suggests that the foreign content of goods assembled and reexported from China is about 50 percent in some key sectors including computer equipment, electronics, and electrical machinery. Adjusting the trade balance to account for the value-added content of exports cuts the U.S. trade deficit with China in half, to about 1 percent of GDP.5

As a result, the United States’ rising deficit with China contributes to rising protectionism in the United States and then globally. The Asian Development Bank highlighted a fast-growing number of trade remedies against Asia around the world. In particular, antidumping duties are the most popular measures imposed on Asian exporters.6 Among these Asian economies, China, the Republic of Korea, and Taipei, China, are the economies most affected by the above trade remedies. For instance, China suffered much from trade remedies imposed by the United States for years. Antidumping duties imposed by the United States on China account for 40 percent of its total antidumping duties measures. And countervailing duties imposed by the United States on China also account for 40 percent of its total countervailing duties measures.

Managing Bilateral Trade Policy

More and more policymakers in East Asian economies have realized that the pre-crisis export-led growth model is unsustainable and East Asian economies, and China especially, must rebalance growth toward regional and domestic demand. Recognizing the regional absence of an adequate substitute for an external final demand market in the short run, one region-wide Free Trade Agreement is needed to provide extra final demand market for East Asia through trade creation and to help East Asia cope with negative shocks from outside. The ongoing negotiation in East Asia is the Regional Comprehensive Economic Partnership (RCEP). The RCEP is expected to help China to rebalance its exports and therefore decrease its trade surplus with the United States.

Unlike trade, direct investment will make the Chinese economy more integrated with the other economies. China considers the “Silk Road Economic Belt and Twenty-first Century Maritime Silk Road” (hereafter the BRI) as a new step to make its economy further integrated with the global market by investing abroad and therefore more balanced with the global economy. As the BRI is oriented toward development cooperation, it enables China to look for new economic opportunities by developing infrastructure networks, building industrial zones and many other projects with the countries in the region. While many of the labor-intensive manufacturing factories in China need to reallocate to low-cost places to maintain competitiveness, the developing countries in Asia and Africa have great demand to develop their own manufacturing capacity by using their advantage in low-cost labor. Different from the traditional model of moving dirty industries out, China will build new industries together with the local countries as all the projects under the BRI framework are to be designed and built jointly by China and the host countries. This new kind development cooperation differs from traditional aid and market-based reallocation of outdated production capacities. The BRI is aimed at promoting the orderly and free flow of economic factors, the highly efficient allocation of resources and deep integration of markets, encouraging the countries in BRI regions to coordinate economic policy and carry out broader and more in-depth regional cooperation of higher standards, and jointly create an open, inclusive, and balanced regional economic cooperation architecture that benefits all.

Services is a fast-growing sector for both the United States and China. The United States has a surplus with China of about 0.2 percent of GDP in trade in services, up from 0.02 percent in 2000. Nowadays, China is interested in developing its services sector and participating in the Trade in Services Agreement (TiSA). More importance needs to be attached to services by both governments to help deepen bilateral trade relations. Multilayered measures including bilateral economic dialogue, bilateral investment treaty, and TiSA should be taken into consideration urgently to avoid potential trade war between the two major economies.

In retrospect, the new ITA negotiations (ITA2) and the Environmental Goods Agreement negotiations could not be successfully concluded without China-U.S. cooperation. The Environmental Goods Agreement negotiations within the WTO framework launched in 2014 also rely heavily on a consensus between China and the United States. In the future, the new round of building the global trade system is unlikely to succeed without consensus and cooperation between China and the United States. On the other hand, the multilateral trading system remains the ideal trading platform that can easily accommodate the two major economies. In this sense, the WTO is the most important economic relation between China and the United States. China and the United States have a common stake in supporting a strong and resilient multilateral trading system.

 

[1] Asian Development Bank, Asian Economic Integration Report 2016: What Drives Foreign Direct Investment in Asia and the Pacific?, 2016, 16–17, https://www.adb.org/sites/default/files/publication/214136/aeir-2016.pdf.

[2] Yung Chul Park and Kwanho Shin, “Economic Integration and Changes in the Business Cycle in East Asia: Is the Region Decoupling from the Rest of the World?,” Asian Economic Papers Vol. 8, No. 1 (2009): 107–140, http://www.mitpressjournals.org/doi/abs/10.1162/asep.2009.8.1.107.

[3] Prema-chandra Athukorala and Archanun Kohpaiboon, “Intra-Regional Trade in East Asia: The Decoupling Fallacy, Crisis, and Policy Challenges,” Asian Development Bank Institute Working Paper Series 177, 2009, https://think-asia.org/bitstream/handle/11540/3765/2009.12.11.wp177.intra.regional.trade.east.asia.pdf?sequence=1.

[4] . Ibid.

[5] Oxford Economics, “Understanding the US-China Trade Relationship,” U.S.-China Business Council, 2017) https://www.uschina.org/sites/default/files/Oxford%20Economics%20US%20Jobs%20and%20China%20Trade%20Report.pdf.

[6] Asian Development Bank, Asian Economic Integration Report 2016, 33–35.