WTO chief downplays China-US trade imbalance

17  January 2013

With the changing nature of global trade, a new way to measure bilateral trade balances will see China’s surplus with the United States reduced by half, said World Trade Organization Director-General Pascal Lamy on Monday.

In today’s world, high-tech products are made around the world, with components and parts being manufactured in many countries, he said. The country where the final assembly takes place only contributes a small part of the final value of the product.

“If we were to measure trade in value-added rather than gross statistical terms, bilateral trade balances would look very different,” he said during his speech at the Brookings Institution, a Washington-based think tank.

He cited the example of the iPhone, which is assembled in China. Goods and services contributing to the phone’s final assembly come from 15 companies located in many different countries. China only gains 4 percent of the added value, but when a $400 iPhone is sold in the US, standard trade accounting lists it as $400 credit to China’s side of the ledger and $400 debit for the US.

“WTO economists believe that China’s $295 billion trade surplus with the United States would be reduced by nearly half if two-way trade were measured in valued-added terms.”

Given the importance of the China-US relationship for the world, he urged people to look at those numbers more closely.

In this year’s US presidential campaign, both President Barack Obama and Republican challenger Mitt Romney have voiced harsh rhetoric about China’s trade practices, blaming it for US job losses and the trade deficit. They also have criticized one another for outsourcing jobs to China.

Many US lawmakers and manufacturers have accused China of keeping its currency weak in order to boost exports. Romney has played tough on the China issue during his presidential campaign. He vowed that he would label China a “currency manipulator” once he got to the White House.

A recent PEW Research Center survey shows that most US citizens consider the large amount of US debt held by China, the loss of US jobs to China and the US trade deficit with China to be very serious problems.

The WTO chief affirmed that the US is still the world’s most popular investment destination, and said more jobs will be created here.

“The cost of labor is by no means the only variable companies consider when deciding where to manufacture or source their component,” he said.

He listed sound domestic polices, good education, adequate social services and infrastructure as critical elements in determining the flow of foreign direct investment.

“This explains why many companies building everything from aircraft and automobiles to furniture and padlocks have increased investment in US-based production facilities,” he added.

Earlier on Monday, when meeting with reporters, Lamy dismissed concerns about the increasing number of trade disputes between China and the US, saying they are a natural result of a maturing economic relationship, according to The Financial Times.

“Trade frictions are a statistical proportion of trade volumes, and trade disputes are a statistical proportion of trade frictions,” he said.