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.
This paper has two aims. The first is to reduce the range within which the true bilateral trade deficit lies. The second aim is to identify the determinants of the bilateral trade deficit, and offer an assessment of their relative importance. To anticipate our discussion, section 1 presents a smaller range of values for the bilateral trade deficit than in previous studies. We are able to achieve this because we devised a new estimation method that takes advantage of our access to detailed Chinese Customs data at the commodity-by-commodity level. The size of the discrepancy between our revised US figure and the revised Chinese figure is only 4 to 26 percent of the size of the discrepancy between the two official figures. The size of the average discrepancy between the revised figures is only 9 percent of the size of the average discrepancy between the official figures. For example, the revised US-China bilateral trade deficit is $15 billion to $20 billion in 1994, and $16 billion to $22 billion in 1995, compared to the official range of $8 billion to $30 billion, and $9 billion to $34 billion, respectively. financial services
Section 2 of this paper points out that protectionism can influence the overall trade balance only if it can modify saving-investment behavior in the economy, and this requires wealth effects to be uncharacteristically strong and unusually fast to appear. The major cause of China’s current account surplus is its high household saving rate. The high saving rate is, in turn, generated by China’s demographic profile, the absence of social insurance for the bulk of the population, and the post-1978 appearance of investment-motivated saving in response to the scarcity of formal financial intermediation to finance the investment of the non-state sector.
The widening of the US-China bilateral trade deficit in recent years reflected many factors. In our opinion, the two chief factors are (i) macroeconomic forces in the US and China moving in opposite directions, causing their respective overall trade balance to move in opposite directions; and (ii) the accelerated relocation of production of US imports from East Asia to China.