Deficits in the maths

PUBLISHED : Wednesday, 20 December, 2006, 12:00am
UPDATED : Wednesday, 20 December, 2006, 12:00am

Hopes of a significant breakthrough in Sino-American economic disputes were raised last week when US Treasury Secretary Henry Paulson visited Beijing with a team of Cabinet-level officials. Although they met similarly high-level Chinese interlocutors in this so-called 'strategic economic dialogue', those hopes have since been dashed.

Actually, the dialogue was not meant to result in quick fixes, but rather to discuss economic issues of long-term significance to both countries. They now have so many dialogues going that it is difficult to keep track of them all.

But, despite more than 50 channels of discussion, misunderstandings continue to plague the relationship. Vice-Premier Wu Yi, the leader of the Chinese side, declared that 'some American friends are not only having limited knowledge of, but harbouring much misunderstanding about, the reality in China'.

On the contentious issue of the American trade deficit with China, the two sides are not even speaking the same language. Washington says that China enjoyed a trade surplus of over US$201.5 billion last year; Beijing says the figure was US$114.2 billion. The difference is over US$87 billion.

Clearly, the two sides need to agree on how to calculate trade. Economist Lawrence Lau Juen-yee, vice-chancellor of Chinese University, has tied that gap to both sides' 'different treatments of re-exports through Hong Kong and other transshipment points'. After making adjustments, Professor Lau and his colleagues put last year's bilateral trade balance in goods and services at US$170.7 billion in China's favour - bigger than the Chinese figure but smaller than the US figure.

The two countries should have a common understanding of the dimensions of the problem. In fact, even agreeing on the size of the surplus/deficit is not enough since, in the age of globalisation, such figures are not terribly meaningful any more.

For one thing, China's trade surplus is no longer its alone - it is the cumulative trade surplus of all manufacturers based in mainland China, including those owned in Japan, South Korea, Taiwan, Hong Kong and other economies.

Moreover, American companies manufacture in mainland China. Their products, sent back to the US, are considered Chinese exports even though China makes only a relatively small processing fee from their sale.

Another significant economic activity not being accurately recorded is the sale in China of items made by American companies in the country. If those products had been made in the US and shipped to China, they would have been considered an American export. But because they are made by an American company in China, they are not being counted as American exports - even though the profits eventually show up on the ledgers of American companies.

Washington's attention is now focused on the yuan, which it says is artificially low and so gives China an unfair advantage. Even if the yuan were to rise dramatically in value, however, it would not result in the creation of American jobs. It's far more likely, as former US Federal Reserve chairman Alan Greenspan has said, that imports from other low-wage countries would replace Chinese imports.

The imbalance in Sino-American trade is more a reflection of not enough spending and too much savings in China, and too much consumption and not enough savings in the United States. Consumer consumption is weak on the mainland because there are so few safety nets, such as pensions and health insurance. That forces people to put money aside for a rainy day.

But the presence of such safety nets in the US has led to over-consumption, so that America spends more than it earns.

Interestingly, one of the accords reached in the strategic economic dialogue was that the US would try to raise its savings rate. That is a rare acknowledgement by Washington that it, too, is to blame for its economic problems. But how, one wonders, is the US government going to tell this to the American electorate?

Frank Ching is a Hong Kong-based writer and commentator