Chapter 2. On Trade Surplus from Property Rights 35
2.1 Distinguishing between Capital Flow and Logistics
In recent years, some people have been accusing China of repeat- edly manipulating the exchange rate. For example, the U.S. Senate approvedthe Currency Exchange Rate Oversight Reform Act of 2011 on October 11, 2011. The U.S. House Ways and Means Committee held the hearing about the U.S.–China economic relations in Octo- ber 2011, with the debate still focused on the issue of RMB exchange rate. The Currency Reform for Fair Trade Act of 2011 proposed by Sander Levin, the former chairman of the House Ways and Means Committee and senior representative of the Democrats, was actually a duplication of the RMB exchange rate act approved by the House, which was controlled by the Democrats.1 Before the U.S. election in 2012, the U.S. politicians, with the Republican Mitt Romney as the representative, labeled China as a currency manipulator.
These politicians needed to make surprising statements before the election to attract the attention of voters and compete for votes.
This normal state in the Western electoral system is understandable.
U.S. politicians have repeatedly been making a fuss over the RMB exchange rate. They accuse China of manipulating the exchange rate mainly because the proportion of China’s trade surplus in the GDP is always high. On the surface, China’s trade surplus against the U.S.
continues to rise in recent years. However, how huge is China’s trade surplus exactly? This problem has received increasing attention from political, business, and academic circles. Therefore, having a new understanding and definition of the trade surplus between China and the U.S. from the perspective of property rights is necessary to reveal the inherent law and the truth of international trade.
Logistics and capital flow are two different concepts. Logistics refers to the flow of commodities, whereas capital flow refers to the flow of capital in banks.
All commodities exported through China’s customs are labeled as “Made in China” and are naturally regarded as exports from
1SeeThe China Youth Daily, October 28, 2011.
On Trade Surplus from Property Rights 37
China. Without a doubt, the customs statistics refers to logistics.
In the traditional concept, the property rights of the commodities exported through the customs of a country naturally belong to the said country. Therefore, are not these commodities exported through your customs yours? In this case, logistics naturally coincides with capital flow, and distinguishing between logistics and capital flow is unnecessary. At present, nearly all the data in all research reports involving international trade are from the customs statistics, which reflect logistics and do not consider property ownership. Logistics corresponds to the GDP concept with the territory as the boundary, whereas capital flow reflects property rights that correspond to the gross national product (GNP).
However, since the 1990s, with the rise of multinational compa- nies, the form and connotation of international trade have undergone great changes. Multinational companies have significantly changed the pattern of the international industrial division of labor. Gener- ally, developing countries with low labor cost produce labor-intensive products, and developed countries with a high wage level produce capital-intensive and high-tech products. The emergence of multi- national companies contributes to the vertical division of labor to a considerable extent. Multinational companies transfer several links in the production chain to overseas for production, thus greatly reduc- ing cost and improving production efficiency. As a result, the flows of commodities between the subsidiaries and the parent companies of the multinational companies as well as among the subsidiaries increase rapidly; the proportion of the intra-industry trade grows;
the products flow bi-directionally in different countries or regions through the external and internal markets; the processing trade accounts for an increasing percentage in the imports and exports of several countries, especially in China (Fig. 2.1), Mexico, and Viet- nam. Moreover, the proportion of the export commodities in these countries whose property rights belong to the foreign capital progres- sively increases.2
2According to the regulations of the PRC Customs Supervision and Administration of Processing Trade Goods Procedures (Decree 113 of General Administration of Customs), processing trade refers to business activities in which the enterprises import all or part
38 From Trade Surplus to the Dispute over the Exchange Rate
−50 0 50 100 150 200 250 300 350 400 450
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
The balance of processing trade
The balance of processing and assembling trade The balance of feeding processiong trade
Figure 2.1: Import and export balances of China’s processing and assembling trade and feeding processing trade (Billion $).
Source: CEInet database, in which the import and export balances refer to the currently value.
In recent years, the proportion of processing trade in China’s total export volume has been increasing annually. In 2014, China’s process- ing trade accounted for 42.1% of its total exports (Table 2.1).
The difference between logistics and capital flow significantly increases because of the rapid rise of processing trade. Although the commodities, through the customs of a country, are labeled as made in that certain country, their property rights are not necessar- ily owned by it. Logistics does not fully coincide with capital flow.
Aside from the GDP reflecting the regional characteristics, the GNP reflecting the property ownership should also be considered when
of raw and auxiliary materials, spare parts, components, and packing materials, and export the finished products after processing or assembling. This processing includes that with supplied materials and feeding processing. Processing with supplied materials means that the imported materials and parts are provided by the foreign enterprises, and the manufacturing enterprises do not need to pay for the imports but produce or assemble products according to the requirements of the foreign enterprises and collect the processing fee. Conversely, the feeding processing means that the manufacturing enterprise pays for the imported materials and parts, and exports the finished products.
On Trade Surplus from Property Rights 39
Table 2.1: China’s processing trade.
Total export volume of processing
and assembling
trade (billion $)
Total export volume of
feeding processing
trade (billion $)
Total export volume (billion $)
Percentage of processing and
assembling trade in the total exports
(%)
Percentage of feeding processing trade in the
total exports (%)
1995 16 28 92 17.4 30.8
1996 18 39 121 15.0 32.1
1997 24 60 149 16.3 40.4
1998 21 53 151 13.7 35.1
1999 31 74 183 16.8 40.3
2000 29 70 184 16.0 38.2
2001 36 75 195 18.4 38.6
2002 41 97 249 16.5 38.7
2003 42 105 267 15.8 39.5
2004 47 133 326 14.6 40.7
2005 54 188 438 12.4 42.8
2006 69 260 594 11.6 43.7
2007 84 333 762 11.0 43.6
2008 94 416 969 9.7 42.9
2009 93 494 1218 7.7 40.5
2010 116 502 1429 8.1 35.1
2011 110 565 1202 9.2 47.0
2012 112 628 1578 7.1 39.8
2013 108 728 1899 5.7 38.3
2014 99 764 2050 4.8 37.3
Source: CEInet Database.
discussing the sustainability of international trade. In other words, both logistics and capital flow must be taken into account.
Directly referring to the customs statistics is simple and accept- able; however, the customs statistics causes much trouble and misun- derstanding. From a logistics point of view, including all commodities moving from China to the U.S. into China’s exports in the customs statistics is neither fair nor reasonable.
The sustainability of international trade depends on capital flow because it is the main factor leading to the deterioration of the trade terms. For the U.S., as long as the trade profits continue to flow
40 From Trade Surplus to the Dispute over the Exchange Rate
in, it has enough money to order more goods. It will not change its current trade pattern because of the trade deficit in logistics. From the perspective of capital flow, a part of the capital has flowed into the U.S. even before the transport of goods. In fact, the U.S. simply takes the money out of its left pocket and places it in the right. This aspect has no relationship with China. For example, the popular product iPad, which is made in China, sells for $299. This price is composed of Apple’s profit of approximately $80, the profits of the U.S., Japan, Taiwan, and South Korea of nearly $40 (the Taiwanese company Foxconn produces the product with the profit of approximately $5), the distribution, transportation, and retail of $75, spare parts input of $85, and labor and material input in China of $19. Even if the profit of the Taiwanese company is included into that of China, the value-added in China will only be $24, accounting for 8% of the entire value-added chain. As the containers with the goods sail on to the sea, most of the profits have already been sent to the headquarters of the company in the U.S. through a financial network.
In international trade, not only the region of production but also the products’ property ownership should be taken into account. To accurately describe the real world, distinguishing between capital flow and logistics in the international trade is necessary. The only way to perceive the reality of international trade is by excluding the capital flow that belongs to the foreign capital in the trade. Distin- guishing between capital flow and logistics is of great significance to both international trade theory and practice, and it is a new challenge to international trade theory. The traditional concept has seriously lagged behind the times. Thus, it would be like notching the boat to find the sword if we continue to discuss international trade according to the traditional definition.