All is not what it seems when it comes to China's trade figures

If double-counting in transshipments and over-invoicing are stripped out of the calculations, US remains a bigger trading power than China

PUBLISHED : Thursday, 09 January, 2014, 11:51pm
UPDATED : Friday, 10 January, 2014, 8:37am

China's trade figures for December are not out yet, but already the local media is trumpeting that the country is the world's greatest trading power, with the United States beaten into second place for the second consecutive year.

Look at the raw numbers, and China's achievement appears truly impressive, especially considering that its economy is only about half the size of America's.

According to customs data, over the 12 months to November, China's gross trade with the rest of the world - exports plus imports - was worth a mighty US$4.1 trillion.

In contrast, the US could only manage a shade less than US$3.9 trillion. Hooray, China is No1.

Unfortunately, however, there are a few problems with China's claim of primacy; so many, in fact, that it is hard to know where to start.

When Beijing releases China’s trade figures, take them with a hefty pinch of salt

First, let's ignore the inconvenient truth that the biggest trading economy in the world is neither China nor the US, but actually the euro zone, whose goods trade with the rest of the world over the 12 months to October - the latest month for which figures are available - came to US$4.8 trillion.

Let's ignore another awkward problem, too. If you look not at the raw numbers for goods trade but instead at balance of payments data combining the trade in both goods and services, a different picture emerges.

According to this measure, in the first half of last year, China's trade with the rest of the world came to US$2.2 trillion. Over the same period, the US notched up a thumping US$2.5 trillion. So if you include services, the US is still on top.

Still, we're ignoring that and looking only at the bald numbers for goods trade.

Alas, things here are not quite what they seem either.

For one thing, many of the shipments that show up in mainland China's customs figures aren't really foreign trade at all. They are cargoes of goods transported from one mainland port to another through Hong Kong.

Over the 12 months to November, these transshipments were worth US$158 billion. Allow for double-counting - on the way out and going back in - and these amount to 7.5 per cent of China's headline trade. Strip them out of the customs data, and China's international goods trade slips to US$3.8 trillion, behind the US figure.

We can't stop there though. China's trade figures are also exaggerated because exporters habitually over-invoice their shipments in order to channel foreign hot money into the country's financial system in contravention of Beijing's controls on capital flows.

According to a report published this week by Washington lobby group Global Financial Integrity, China's exports in the first quarter of last year were over-invoiced by a hefty US$54 billion.

Adjust the headline figures to allow for this chicanery, and China's foreign trade falls further to about US$3.6 trillion.

But even that doesn't give us a representative picture because what really counts is not how much stuff you ship, but the economic benefit you gain from those shipments.

So many of China's exports consist of high-value components manufactured elsewhere that, according to the Organisation for Economic Co-operation and Development, only 67 per cent of its gross exports actually consist of value added in the country itself. The comparable figure for the US is 89 per cent (see the chart).

Try to allow for this, and China's goods trade with the rest of the world drops in value to about US$3 trillion. The value of US trade comes to about US$3.7 trillion.

Those last figures are intended as illustration rather than a serious assertion.

Even so, the point is that where it matters, the US is still a bigger trading economy than China - at least for the time being. So when in the next few days Beijing releases China's trade figures, take them with a hefty pinch of salt.