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.
Some analysts have interpreted the large US-China bilateral trade deficit as prima facie evidence of unacceptably high levels of protectionism in China, and have advocated stringent entry conditions for China’s admission into WTO, even though China is in the poorest third of the world’s economies.2 In response, supporters for easier entry conditions for China have emphasised other factors (e.g. the movement of low-skill, labor-intensive manufacturing industries to China from neighboring economies) for the recent widening of the bilateral trade deficit.
Because the overall trade balance of a country equals domestic saving minus domestic investment, the normal expectation is that low-income countries that have high rates of return to investments (e.g. China) should be borrowing from abroad to finance their development. However, since 1994, China has been running an overall trade surplus that is growing over time. This counter-intuitive phenomenon of a low-income China that is extending loans to the outside world has strengthened the impression of a mercantilist China intent focussed on export promotion. This impression has its origin in the great extent that China has increased its penetration of the US market over the last decade. Of the 34 categories of manufactured goods imported by the US, China was among the top 5 suppliers in 9 categories in 1995, up from 1 category in 1990 and none in 1985. financing