The same methods we have used above can be applied to measure the markup on Hong Kong re-exports to any other country. In Table 3 we report the results for re-exports from China to Germany, Japan, and the United Kingdom. In each case, we calculate the markups from methods A and C, since the results for method В – which gives the markup for re-exports from China to the entire world – do not depend on the country of destination. (The results for method В in Table 2 therefore are unaffected when the country of destination changes). It can be seen that the markups for re-exports to Germany are slightly larger than those for the United States, while the markups for Japan are larger still, and the markups to the United Kingdom are somewhat smaller. Overall, the differences with the markups obtained for the United States are not that great, especially as compared to the year-to-year fluctuation in the estimated markups for any country.10 Method С continues to give smaller estimates of the markup as compared to method A is virtually all cases, and it is our preferred estimate.
This raises the question of whether it is possible to improve upon these approaches, and obtain another estimate of the markup, possibly lying in-between those from Methods A and B. To achieve this, we will have to rely on data beyond that of Hong Kong imports and re-exports since, as explained above, this data does not distinguish the Hong Kong imports from China that are destined for the United States from those that are destined for elsewhere. This means that the difference in prices of these imports, illustrated by $1.10 and $0.90 in Figure 1, cannot be measured from the Hong Kong data. In order to measure these prices, we rely instead on the Chinese export data from the General Customs Administration. Using that data, we can distinguish a unit-value for Chinese exports to Hong Kong, destined for the United States, from the unit-value for Chinese exports to Hong Kong that are destined for all other markets. It turns out that the goods destined for the U.S. tend to have higher prices than those destined elsewhere, as illustrated in Figure 1. By merging the China export data with the Hong Kong import and reexport data, we are therefore able to make a more accurate calculation of the markup, indicated by Method С in Figure 1.
Markup on Hong Kong Re-exports to the United States
The value-added attributed to Hong Kong equals the markup on the prices of goods shipped through this entrepot center, multiplied by the value of these goods. There are several estimates of the markup available, as summarized in Table 2. The interagency report from the Joint Commission on Commerce and Trade (1996) estimated the markup as 40.7% for 1992 and 1993.
Since 1993, the Chinese customs authorities have attempted to determine the final destination for goods exported to Hong Kong with greater accuracy, so as to improve its reported trade statistics. It is still the case, however, that many of the goods bound for the United States via Hong Kong are not recorded as such. This can be seen by breaking up the Chinese exports to the U.S. into those goods that are directly exported (in the third column of Table 1, Part A), and those goods that are exported via Hong Kong (in the fourth column). The latter can be compared to the value reported by the Hong Kong census authorities, in the last column, on the value of reexports from China to the U.S. Thus, in 1988, China reported $705 million in exports to Hong Kong bound for the U.S., while Hong Kong reported $5.6 billion in re-exports to the U.S. that originated in China. These differ by a factor of eight times. In 1995, China reported $ 14.3 billion in exports to Hong Kong bound for the U.S., while Hong Kong reported $27.5 billion in re-exports to the U.S. that originated in China. These now differ by only a factor of two, though the difference in dollar values is still very large.
The Role of Hong Kong in U.S.-China Trade
The entrepot trade of Hong Kong has caused the bilateral US-China trade deficit estimated by the U.S. Dept of Commerce to be very different from that estimated by China’s Customs authorities. In Table 1, we contrast the values of eastbound and westbound trade between the U.S. and China, as reported by these two countries. Part A gives eastbound trade (i.e. China’s exports and U.S. imports), and Part В gives westbound trade (U.S. exports and China’s imports), while Part С computes the difference between westbound and eastbound trade to arrive at the U.S.-China trade balance. The information in the first column is obtained from the U.S. Department of Commerce, while that in the second to fourth columns is obtained from the Customs General Administration, People’s Republic of China. We supplement this with information on Hong Kong re-exports in the last column, as reported by the Hong Kong Census and Statistics Office.
A recent report by the Joint Commission on Commerce and Trade (1996), a US-China intergovernmental agency, used disaggregate data on Hong Kong’s import and re-export trade to estimate the markup for 1992 and 1993. This study (hereafter referred to as the “interagency report”) finds that the average markup on Hong Kong re-exports of Chinese goods to the U.S. is 29 percent of the re-export value. It attempts to reconcile the differing trade statistics of the two countries using the markups and additional information on specific commodities.
Of all the economic issues between the United States and China, none has the potential for greater confusion than the bilateral trade deficit. The official trade statistics of the United States and China have huge discrepancies. Much of the difference is due to, among others, the different treatment of Hong Kong’s entrepot trade by the two sides. In the 1988-95 period, on the average, over two-third of U.S. imports from China came through Hong Kong.
Our focus on the US-China bilateral trade balance is of course based on political economy considerations 4 In 1988, the U.S. Congress passed Super-301 legislation to combat “unfair” trading practices by foreign countries. Because the imposition of the retaliatory measures permitted by Super-301 can seriously rupture international political and economic relations, it is important that the criteria upon which retaliatory actions are made are accurately quantified. We focus on the US-China bilateral trade deficit because the bilateral trade deficit has been cited many times by U.S. politicians and by the U.S. Trade Representative as an important indicator of the existence of unfair trading practices. The large discrepancy between the U.S. and the Chinese estimates of the bilateral trade deficit doubtlessly makes decisionmaking about Super-301 actions more inexact.
It is quite incredible that while the negotiations of China’s accession to the World Trade Organisation (WTO) are greatly influenced by the deficit that the United States runs in its trade with China, the actual size of the US-China bilateral trade deficit1 is not actually known! The US puts the 1995 bilateral trade deficit to be $34 billion, while China puts it at $9 billion. If the US figure is correct, then China has the second highest bilateral deficit, after Japan whose bilateral trade deficit with the US is $59 billion. But if China’s figure is correct, then the China bilateral trade deficit is lower than that the US bilateral trade deficits with Canada, Mexico, Germany and Taiwan.