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posted on 21 July 2015

Reconsider China's Global Trade

Written by

As of 2014, China is the world largest exporter and second largest importer of goods. It has trade surpluses with most of its trading partners. In contrast, the United States, the largest economy in the world, has trade deficits with more than 90 countries. In recent years, we can always hear a voice that China is rising while the US is falling. However, I cannot agree with this optimistic view (optimistic from China's perspective).

The reasons are as follows.

First, using gross trade flow data as the basis of analysis is neglecting the fact that there is an increasing fragmentation of production steps across countries since the 1990's. In the literature, it is called "supply-chain trade". Figure 1 below shows final goods as the proportion of total production and exports in different countries and the world. Only 50% of world production and 34% of world exports are final goods (the green bar represents the world as a whole). In other words, more than half of our exports (66%) are intermediate goods which are used as inputs to produce final goods.

Figure 1

Figure 1

( Figure 1 from Richard Baldwin and Javier Lopez-Gonzalez (2014) )

Using the production of Porsche Cayenne as an example to illustrate the concept of “supply-chain trade”. Porsche produces its engine and high-tech components in Germany. These parts are then assembled into cars in countries like Slovakia where labor costs are very low. In the last step, these cars are shipped back to German for final production and inspections. So in the gross trade data, we can see Germany ships high-tech parts to Slovakia while Slovakia ship nearly finished cars to Germany. In value, Slovakia exports more than Germany does!

In the case of China, almost half of its manufacturing exports are produced by processing plants which simply assemble imported parts and components into final goods and then export them. In this way, the values we add on the products we export are far less than developed countries such as the US. For example, Foxconn which assembles iPhones in China and then exports them back to the states earn only $8 a phone, while Apple sells its product for over $600. As a result, gross trade data can be very misleading.

Workers at Foxconn

( From OnlineAthen.com )

Second, one should also pay attention to the unit value of exports instead of only total values. In the literature, this is called the quality of trade. For example, most of products that China exports to the US are labor intensive ones such as shoes, clothes or toys. On the other hand, most exports from the US to China are capital intensive such as aircrafts, vehicles, and machines. We can easily find out that firms in the US are much more competitive than those in China.

In the above paragraphs, it is shown that today's international trade is so complex that one cannot simply use gross trade data for analysis. Admittedly China has been very successful in last two decades and I feel very proud of it. However, China is still a developing country with low per capita income and backward technology. China has a long way to go.

References:

Richard Baldwin and Javier Lopez-Gonzalez. 2014. “Supply-chain Trade: A Portrait of Global Patterns and Several Testable Hypothesis.” The World Economy doi:10.1111/twec.12189

Gordon H. Hanson. 2012. “The Rise of Middle Kingdoms: Emerging Economies in Global Trade.” NBER Working Paper 17961

Lennart C. Kaplan, Tristan Kohl, and Inmaculada Martinez-Zarzoso. 2015. “The Effects of the CEEC’s Accession on Sectorial Trade: A Value Added Prospective” Working Paper

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