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Jake Van Der Kamp

'In the Sino-US trade relationship, China gets the trade surplus, the United States gains profits'

Commerce Minister Bo Xilai

GIVE THE MAN a medal. He has figured it out at last. China gets the toil and China gets the trouble but the big winners mostly hail from the United States.

The news here obviously is that Beijing is becoming more worried about its trade imbalances. As the first chart shows,  the mainland's overall trade surplus is  running at an astounding US$205 billion a year and it has all happened in  a space of barely two years.

The trade surplus with the  US alone for the last 12 months was US$152 billion. This is certain to cause yet more protests in Washington and more pressure for a rapid revaluation of the yuan. But here's the big question. Who are the most prominent beneficiaries of this export boom? Who really stands to clean up?

Turn to the second chart. Yes, it is the foreign corporation, not quite the same entity that complains so much about  the mainland's trade imbalance but probably from the same country.

Twelve years ago, only 9 per cent of  mainland exports originated  in foreign-owned enterprises. The figure  now is 39 per cent. Add joint-venture enterprises with foreigners to this and total foreign-invested enterprises  make up almost 60 per cent of  mainland exports.

It is thus understandable that senior government officials in Beijing should become a little annoyed from time to time when American politicians accuse them of trade distortions. These distortions are in fact largely generated by American corporations for the benefit of American corporations.

And yet you can also say that  the mainland has itself to blame for letting them get away with it. The basic problem is that there are many stages in the consumer goods business between product concept and delivery of the product into the customer's hands.

There is also no reason why all these stages should be undertaken in one country alone. That was yesterday's model of industrial development. In today's model, the process is obviously spread over many countries and  the mainland, unfortunately, is still for the most part identified only with the manufacture and assembly stage.

This is a misfortune for  the country because the real money in the game is made in the design, financing, shipping and marketing stages rather than in the manufacturing stage. China is identified as the producer, however, because it is the manufacturing stage that defines from what country these goods originate when they are exported.

It is rather unfair. China gets trouble for a trade surplus in goods made in China but these goods are actually only processed in China rather than fully made in China. The bulk of the money is certainly not made in China. The reason that things have developed this way, however, is a financial one.

Getting the money side of equation right in consumer goods is a very complicated and risky process. What sort of return on equity should one expect in manufacturing? What is a proper financing charge for a manufacturing venture?

The answer is that no one really knows for sure, which means this sort of thing is best left to the marketplace to determine. The difficulty for the mainland  is that it does not have a financial marketplace in its domestic currency.

The only way to get around this is to conduct the business in a foreign currency and let the foreigner handle it, which is what  Beijing has done.

And that is why foreign-invested enterprises account for almost 60 per cent of the nation's exports and directly owned foreign enterprises for almost 40 per cent of it. Mr Bo is absolutely right. China makes the goods and the foreigner makes the money.

But if he wants to know why, he would do best to look in a mirror. His own government's reluctance to accept a free financial market is principally to blame.



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Bo Xilai

Uncle Sam's nephews make the profits while China does the work