Chapter 13. The Debate is Far From Over 429
13.2 Fictitious Foreign Trade Imbalance
Many people at home and abroad think that China’s foreign trade has serious distortions. First, FTD is too high. Second, the foreign trade surplus or deficit (i.e., the degree of foreign trade imbalance) is also too high.
FTD refers to the ratio of a country’s total foreign trade volume (exports plus imports) to the GDP. FTD is often used to measure
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the importance of foreign trade in the national economy.
FTD = (Imports + Exports)/GDP
When discussing international trade, people commonly use the cur- rent account (the difference between exports and imports) as the numerator. If the current account is greater than zero, it is referred to as foreign trade surplus; if it is below zero, it is referred to as foreign trade deficit. The evaluation of trade balance with the pro- portion of the current account in the GDP is sometimes known as the degree of foreign trade imbalance.
Degree of Foreign Trade Imbalance = (Exports−Imports)/GDP Several people accuse China of manipulating the currency because the degree of foreign trade imbalance of China is too high. This imbalance reached 11% in 2007. Economic theory indicates that if the proportion of the surplus of a country is too high, its exchange rate is undervalued. The ratio of the current account to the GDP is less than ±5% by adjusting the exchange rate.
When calculating the degree of foreign trade imbalance, the numerator is exports minus imports, and the denominator is the GDP. If the numerator is overestimated and the denominator is underestimated, the degree of foreign trade imbalance must be sig- nificantly overestimated.
Compared with those of most countries, China’s import and export data are doubly twisted aside from being different in statisti- cal caliber. Repeated calculation of processing trade causes an error, and the property rights of a considerable part of China’s export com- modities belong to foreign investment. Therefore, foreign trade data should be corrected.
Given the repeated calculation of the foreign added value return of exports and the domestic added value return of imports in process- ing trade by the customs frontier statistical method, China’s total trade volume was overestimated by 16.5% in 2002 and 25.8% in 2007;
China’s trade surplus was overestimated by 25.5% in 2002 and 33.2%
in 2007.
Commodity statistics through customs reflects logistics, and the remainder after eliminating the part with property rights belonging
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to foreign capital indicates capital flow. Capital flow is more impor- tant than logistics in terms of the sustainability of foreign trade.
In China’s manufacturing exports in 2007, the property rights of
$134.247 billion of the export value were held by the U.S., the United Kingdom, Japan, France, Italy, and 12 other countries, accounting for 11.61% of its total manufacturing exports. After excluding the part whose property rights belong to the foreign capital in China’s exports of industrial products in 2007 (worth $146.28 billion), the foreign trade surplus should be reduced from the original $443.41 billion to
$297.13 billion, a decrease of 32.98%. The balance of China’s current account dropped from $371.8 billion to $237.5 billion, a decrease of 36.12%.
In 2007, China–U.S. bilateral imports and exports were $69.39 billion and $232.68 billion, respectively. The U.S. trade deficit was
$163.29 billion. After excluding the part whose property rights belong to the U.S. (worth $72.073 billion), China’s trade surplus against the U.S. should be adjusted to $91.217 billion, an adjustment range of 44.14%. China still has surplus in the bilateral trade, but the surplus value is much lower than the customs data.
The degree of FTD and the degree of foreign trade imbalance cannot be calculated without the GDP. The GDP estimate directly affects the evaluation of the degree of foreign trade imbalance.
Chinese officials are used to the Atlas method, but Western coun- tries usually resort to the PPP. The traditional Atlas method seri- ously underestimates China’s GDP; thus, the PPP should also be used when making a transverse comparison with other countries. If China’s GDP is calculated with the Atlas method, whereas that of other countries is calculated with the PPP, China’s FTD will be significantly overestimated.
With the Atlas method, China’s FTD was as high as 57.4% in 2007. With the PPP, it was only 25.4%, the same as the world aver- age.
According to the Atlas method, the proportion of China’s current account in the GDP was 10.13% in 2007. According to the PPP, it was only 7.02%, ranking 13th in the world. The higher proportion is suspected to be a result of manipulating the exchange rate. If the
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allegations are correct, do the first 12 countries manipulate their respective exchange rates as well?
If the part with property rights belonging to foreign-invested enterprises in the export commodities was eliminated, the proportion of China’s current account in the GDP would drop to 3.34%, ranking 17th in the world. The data from other years were all below 3%.
Errors still exist in the GDP statistics even with the PPP. The average proportion of the service industry in the GDP is 73.4%
in high-income countries, 62.4% in upper/middle-income countries, 55.2% in lower/middle-income countries, and 47.1% in the lowest- income countries. Official figures indicate that the proportion of China’s service industry in the GDP in 2009 was only 43.4%, below the average of the lowest-income countries in the world.
Clearly, the statistics on China’s service industry is significantly underestimated.
With the Atlas method, China’s per capita GDP belongs to the lower/middle-income bracket; with the PPP, it belongs to the upper/middle-income group. Therefore, the reasonable range of the proportion of China’s tertiary industry should be between 55.2% and 62.4%. If the proportion of China’s service industry in the GDP in 2007 was raised to 48.9% (the average level of the lowest-income countries) or 55.2% (the average level of the lower/middle-income countries), its GDP would increase to $7.84711 or $8.30914 trillion correspondingly. Then, China’s economic scale may be significantly larger than the official data.
Official statistics indicates that China’s FTD in 2007 was 68%.
With the property rights of export commodities considered and the repeated calculation of processing trade corrected, China’s FTD was 19.5%.
Official data indicates that China’s current account in 2007 accounted for 10.13% of the GDP. With the property rights of export commodities considered and the repeated calculation of processing trade corrected, the current account comprised 1.27% of the GDP.
The degrees of foreign trade dependence and foreign trade imbalance of China are low in the data on 94 countries and regions in the world.
The proportion of China’s current account in the GDP in 2007 (the
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highest proportion) was not distorted, as well as that in other years.
Therefore, is the accusation that China manipulates the currency according to the trade weighted method unfounded?
Two basic conditions have to be met by a country to be a currency manipulator. First, the country has a special power of controlling the international market. Second, the country seeks profits by adjusting the exchange rate. In reality, no country has the privilege of manip- ulating the currencies of other countries. Products made in China do not damage the U.S. industry so China cannot be accused of manipulating the currency.