Is the deficit as big as Trump says?

Editor's note: The trade war between China and the United States is becoming tense. The Chinese government on Monday published a white paper to show the facts and explain its position on the ongoing trade frictions with the US. In the white paper, China gives detailed facts about the US accusations. Did China manipulate its currency? Is the deficit as big as President Trump says? Ken Moak, who taught economic theory, public policy and globalization at various universities for 33 years, shares his views in two pieces. Here is part two. The article reflects the author's opinion, and not necessarily the views of CGTN.

The US trade deficit with China

There appears to be no relationship between the value of the Yuan and the trade between the US and China. As the first part mentioned, the Yuan has appreciated by over 25 percent since 2005, but the size of the US trade deficit with China kept on increasing. This suggests the Asian giant did not manipulate its currency to gain an export advantage. It could indeed be argued that the US deficit is caused by America's industrial and foreign policies.

[Photo: CGTN]

US businesses decided to focus on services and discard manufacturing in the 1980s, relocating the latter to low-wage and less environmentally stringent developing economies as a way to increase profits and reduce pollution at home.

Thanks to the first-generation leadership's determination to industrialize and the establishment of vocational schools, China was able to gain a comparative advantage in manufacturing, offering relatively inexpensive skilled labor.

Coupled with the "opening to the world" policy, massive investment in infrastructures, the overseas Chinese communities' investment and international network, and increasingly affluent huge domestic market and, China became the "magnet" for foreign investment, forming joint-ventures to produce goods for China and the world.

To increase economies of scale and competitiveness, US enterprises created a global supply chain of which China is the hub. The country not only produces the final product but also parts for manufacturers, ranging from defense equipment to furniture, around the world, particularly the US.

Indeed, Trump's trade war is giving the US automobile industry "migraine headaches" because his tariffs will make it less competitive.

Moreover, what was once considered intra-company trade was turned into the international trade by the US government has inflated the deficit figure. For example, the Apple iPad is designed in the US, engineering, and parts outsourced to countries like Japan and shipped to China for final assembly.

The total cost of producing an iPad was 174 US dollars, of which China accounted for less than 11 US dollars. But the US Customs valued the "Chinese import" at the total cost figure if not higher.

The US Congress further “muddled” the deficit figure by banning "dual use" technology exports to China, citing "national security" concerns.

If it had not been "paranoid" merchandise exports to China would increase dramatically, cutting the deficit or may even enjoy a surplus. Not including service trade in which the US has a comparative advantage, and enjoy a sizable surprise also distorts the current account balance of payments.

A final comment

Accusing China of "raping America" with "alternative facts" (i.e. currency manipulation, etc.) is like the bank robber blaming the bank for robbing it, just because it has money. The Steve Jobs of America invest in China because of its manufacturing efficiency and huge market. China is the biggest and most profitable market for Boeing, General Motors, Apple and other Fortune 500 US firms. 

For America in accusing China of currency manipulation is a classic example of the "pot calling the kettle black". The US's "unfair trade" practices are even more blatant than those of China.