In keeping with all the harsh remarks on trade with China by president-elect Donald Trump, Peter Navarro, Trump’s choice to be chairman of the National Trade Council, has accused China in extreme language, with his well-known, dramatically titled writings, “Death by China“, and ”Trade Wars with China“.
It seems the rule of the game is that almost all the presidential candidates and their teams pick out China as an easy target, blaming China for all American economic troubles, from trade deficits, production cuts, job losses and income drops. Donald Trump and Peter Navarro are only repeating those used words, more alarmingly.
Trade Deficits with China has been Exaggerated
The author will not repeat the elaborations in previous articles that no fundamental linkages could be found between American job loss and trade deficits, either with China or the rest of the world. The point here is, the trade deficit data itself is questionable. According to USDOC official data, in 2015 the US had goods import volume of $ 483.25 billion from China, and $ 116.07 billion exports to China, leaving deficit of $ 367.17 billion, 49.2% of its global trade deficits. This is based on customs clearance only. The import data only show the total volume of goods “made in China” cleared through US customs, including the amount that China imported from other sources. For instance, the American Apple iPhone import value from China is based on the import price, which is close to the wholesale price on the American market. However, an Apple iPhone is made in various countries. It is designed at Apple headquarters in the US. The screen, touch screen, DRAM, etc. are made in Japan and South Korea, accounting for 60% of the wholesale price. Its wireless power supply and core electronic apparatus are supplied in the US, accounting for another 25.4% of the value. The Netherlands, France and Italy supply other parts. Foxxcom represents only about 2% of the cost for assembling in China.
Robert Koopman, the former chief economist of USITC, found after meticulously calculation, that out of the total US imports of $201.1 billion from China in 2006, $113 billion was actually not produced in China, or 55% of the total. In 2012, WTO, in a joint study with JETRO, “The East Asian Trade Pattern and Global Value Chain“, put forward the ownership approach, a new measurement of exports based on the actually added value in the exporting economy. The report found that only 48.5% of total Chinese exports to the US were actually produced in China. By this methodology, the Chinese actual exports to the US in 2015 should have been $ 234.4 billion, and the US had a deficit of only $118.3 billion, instead of $ 367.17 billion.
The ownership approach is officially adopted by WTO, endorsed by OECD, and thus should be acknowledged by the US, a member of both.
America’s Own Competitive Disadvantages
The huge US trade deficit could easily find its root cause in the poor export performances of American manufacturers, even based on customs statistics. In 2015, the US had trade surpluses mostly in oil & coal products, agricultural products, waste and scrap, used and second hand merchandise, minerals and ores, and paper; it had trade deficits mostly in computers and electronics, transportation equipment, electrical equipment and appliances, machinery and textiles mills products. Hence it looked like a developing country. Germany and Japan, on the other hand, enjoyed large trade surpluses in manufactures.
According to Chinese customs data, during the first 9 months of 2016, China had trade deficits of $15.59 billion with Germany and US$ 10.09 billion with Japan, because of large imports of machinery and other manufactures. During the same period, Japan exported $42.03 billion of transportation and machinery to China, while the US exported $37.56 billion. However, the size of the US economy is almost four times as large as Japan’s and five times Germany’s. All the three countries export to the same market—China. Why such a big gap? Apparently, it’s a problem of America, not China.
A major burden in American manufacturing competitiveness is its exceptionally high health care cost. According to the USDOC “American Manufacturing Report“ in 2004, the US had the world’s highest healthcare cost in the manufacturing sector. For instance, per employee healthcare cost at Starkey Labs, in Minnesota, was $8,000 in the early 21st century. The total healthcare cost in America was already 18% of GDP in 2015 compared to around 13% a dozen years ago. Another big burden is legal compliance and lawsuit cost. According to the report, this cost averaged at $7,454 per employee at large enterprises and $16,920 at small businesses, all in the early 21st century. We don’t believe there has been a considerable cut by now.
Financial Profit-Chasing Depresses the Real Economy
Another major problem in the American manufacturing sector is the capital market. America has by far the largest capital market in the world and it is the hub of world financial trading. It’s easier to chase profit in the capital market than to make it through hard manufacturing activities. During the past three years, total US GDP grew by an aggregate 6.8%, while the manufacturing production rose by only 3.0%. On the other hand, the Dow Jones Industrial Average index, a leading barometer of the capital market, rose by over 50%, from just over 13,000 to almost 20,000. President Obama, at the beginning of his first term, called strongly for Manufacture Resurgence, following the German example, so as to avoid an American economy based on “sand”. Eight years later, the manufacturing production index was still 5.6% lower than 2007, the pre-crisis level. During Q1-3 of 2016, equipment investment even fell by 9.5%, 2.9% and 4.5% subsequently (all Q-Q), although total GDP grew by 0.8%, 1.4% and 3.5%. One of the biggest challenges in the US economy is a fundamental structural change. “America First” should be interpreted as “Real Economy First”, and make financial resources supporting the investment, production and export in the real economy, primarily the manufacturing sector.
Making China a scapegoat is no solution to American manufacturing problems. Escalation of trade frictions with China will not only hurt China, but also lead to more problems for America. It is recommended that, while addressing seriously the existing problems in the manufacturing sector at home, the in-coming Trump Administration enhance collaboration with China, for more Chinese investment in America in general, and in manufacturing sector and massive infrastructure development in particular.
