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  • Aug 30, 2014
  • Updated: 7:11pm
Monitor
PUBLISHED : Thursday, 14 February, 2013, 12:00am
UPDATED : Thursday, 14 February, 2013, 5:07am

Claims China is world's No 1 trading economy are nonsense

The high import and export numbers are distorted by domestic firms fiddling taxes and the country's heavy involvement in processing trade

If you believe the media reports, China passed another milestone last year, overtaking the United States to become the world's biggest trading economy.

According to data from Beijing's customs officers, China's total imports and exports of goods reached US$3.87 trillion in 2012.

In contrast, figures from the US Commerce Department show that America's international goods trade was worth just US$3.82 trillion.

Hooray! China beats the US by US$50 billion.

Except there's a problem: the figures are nonsense.

The most obvious way they are wrong is because China's import and export numbers are heavily distorted by domestic companies fiddling their taxes.

Under mainland regulations, exporters of electronic gadgets and other widgetry can claim a value-added tax rebate worth 17 per cent of the goods' value.

What's more, under the Closer Economic Partnership Arrangement, no tariffs are charged on goods imported into the mainland from Hong Kong, provided the importer claims a relatively small component of value was added in the city.

As a result, mainland companies ship huge quantities of goods to Hong Kong, where their value is marked up by around 20 per cent before they are re-imported back into the mainland.

With this dodge, the scammers not only get their tax rebate when they export. By over-invoicing the re-imports, they get to circumvent the mainland's capital controls and ship money offshore, either to invest in international markets (or Hong Kong's properties) or to round-trip back into the mainland as foreign direct investment, which qualifies them for yet more tax breaks.

Figures from the Hong Kong government show the city was responsible for re-exporting some US$116 billion worth of stuff from the mainland back to the mainland last year, a 13 per cent increase over the year before (see the first chart).

If we assume the mainland importers claimed that 17 per cent of the value of their purchases was added in Hong Kong, which is in line with the Trade Development Council's figures, then we can estimate that the value of the mainland's total goods trade - both exports and imports - last year was exaggerated by some US$212 billion.

As a result, it looks very much as if China still lags some US$160 billion behind the US in terms of its international trade in goods, with just US$3.66 trillion of combined imports and exports in 2012, compared with America's US$3.82 trillion.

But even those figures are dubious. That's because much of China's international commerce consists of processing trade. High-value components from developed economies get imported, bolted together by low-paid workers in China's factories, and then re-exported to their final markets.

As a result, China's contribution to the total value of the goods it exports is low by international standards.

Infamously, one 2011 study estimated that China's share of the value added in a made-in-Shenzhen iPad with a US retail price of US$499 was just US$8.

Overall, according to the trade in value added database compiled by the Organisation for Economic Co-operation and Development, the foreign value-added share of China's exports amounted to 26 per cent of their face value in 2009. For US exports, the proportion was 11 per cent.

That makes a huge difference to the raw trade numbers. In 2009, the foreign value-added content of China's exports was worth almost US$400 billion, compared with US$160 billion for US exports (see the second chart).

Adjust the gross trade numbers to allow for this difference, and it soon becomes apparent that China is still a long way from becoming the world's largest trading economy in any meaningful sense, despite what last week's headlines may have claimed.

tom.holland@scmp.com

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pgb
It is interesting when talking about the China-US trade imbalance these same numbers are used to "prove" China is "manipulating" its currency and is practicing mercantilism but when the question arises about the leading trading nation, the numbers become misleading, inaccurate and irrelevant to "prove" that China is not close to being the leader. The only consistency seems to be whatever puts a negative perspective on China's position.....neither pro-US or pro-China is expected, simply a reasonable fact-based balance.
pslhk
I agree with the observation of dienamik
-
What’s expected is not a pro China attitude
but a reasonable band of neutrality and relevance
all in perspective accounting for daily journalism
-
Tom H irritates because of his pointed inflation of irrelevance
What matters if China’s or isn’t number one trading economy?
-
Whether out of ignorance of prejudice,
he dirverts attention from econo-human significance,
dwelling on ventilating sarcasms
hiding his shallowness by juggling half-baked statistics
that he actually doesn’t understand
-
SCMP’s 3 China bashing musketeers are
SV - a paywrite
TH - simpleminded
FC - shifty
-
In contrast, VdK seems free of the musketeers' insufferable self-righteousness
jayb
just think how amazing this is. hong kong, a china territory (albeit 1 country 2 systems), allows china bashing on one of territory's major news media. last time i checked, there was no US bashing on major US media, you may have Obama bashing or Bush bashing but never US bashing on major US media.
serpiente
There is one additional point to be considered: some countries, including China, have a peculiar way for gathering information for trade. For example, a Chinese company buys in the USA some produce, let us say, from Costa Rica. The Central American company that exported that produce to the USA count it as an export to the USA; it cannot count it as an export to China or in any case to a third country. In China, however, that produce purchased by a Chinese company in the USA and imported into China will count as an import from Costa Rica! Many countries have expressed dissatisfaction with Chinese statisticians because their methods give the impression of bigger imports than real ones from some of its trading partners. And to be fair, China is not the only one using this peculiar statistics "method".
captam
For a start, trade reporters and commentators should cease using the US Dollar as a measure of value for imports and exports. The exchange rate for US dollar is manipulated by the World's single biggest currency manipulator, not China as US politicians like to say, but the American FED which continues to 'print' money.
jayb
the PRINT should not be in quotation. as it is really printing we are doing.
dienamik
as usual, China bashers only have an issue with existing systems when China gets ahead. Tom Holland is a racist hyper China basher. i already called him out on his selective bs for the patent article. why this m o r o n is allowed to keep writing here is surprising. im lodging a complaint against SCMP this second.
whymak
Quite a points made here by Mr. Holland are factual and accurate. Your pejoratives are highly inappropriate. I have argued with him off and on, especially one time with his distorted accounts of the Opium War. But that's all water in the bridge.
Although I am not shy calling a racist when I see one, I don’t detect any racism in Mr. Holland’s column. You can berate columnists and readers for slandering China and her people, but you should not expect everyone to be pro-China.
Who is #1 in international trade is just a spitting contest. Trade is just one of many indicators. Rest assured that China’s growth is now an important economic engine for the world. Without China, the world might have had another Great Depression. In 2009, the world owed half its economic growth to China.
The question I raise about Mr. Holland anecdotal accounts -- low Chinese value added in exports – is its irrelevancy. Tax arbitrage, what are imports, exports, or re-exports, etc. will cancel one another out and have no place in the bottom line of GDP accounting. When the final numbers are tallied, the surplus in the current account is absolutely real. It’s part of China’s GDP.
Yes, Mr. Holland has forgotten the big picture.
 
 
 
 
 

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