Why does China account for such a large part of the U.S. trade deficit?
Forget the renminbi. Nicholas Lardy says to look at changing patterns of economic activity within East Asia. Over the last 20 years, other East Asian countries have been transferring many of their assembly operations to China. They still make the parts, but these are increasingly assembled in China and exported from there to the U.S. and Europe.
In fact, although China's share of the U.S. deficit has grown, the overall share of key East Asian countries, including China, has shrunk.
Here's a selection from Lardy's essay, "China: The Great New Economic Challenge":
"...the growing imbalance is because China has become a leading location for the assembly of a broad range of manufactured goods, mostly by foreign firms that have relocated their assembly activities to China from other sites in Asia...
China's global pattern of trade - surpluses with the United States and Europe but deficits with most of its Asian neighbors - stems from China's rapidly increasing role in the global production chains of multinational corporations. China's openness to FDI, its trade policies, and its relatively abundant labor supply have made it the premier location for the assembly of manufactured goods for the global market.
But how does China's outsized role in global producton of manufactured goods lead to a pattern fo trade in which China runs trade surpluses with the United States and, to a lesser extent, the European Union, while running trade deficits with many of its Asian neighbors? The explanation lies in three characteristics of China's very large FDI inflows. First, Asian firms account for a much larger share of China's inward foreign investment than do European and American firms...
Second, Asian firms relocate to China primarily to use China as an export platform whereas most American and European firms invest in China primarily to sell into the domestic market...
Third, foreign firms producing for the domestic market tend also to source their inputs largely on the domestic market rather than from their home countries... In contrast, as Asian firms have relocated their assembly operations to China, they have continued to source needed high-value-added parts and components from their traditional suppliers, which tend to be located elsewhere in Asia...
Two-thirds of China's imports from Taiwan consist not of finished goods but of parts and components that subsequently are assembled into final foods in factories owned by Taiwanese firms. These goods then are exported, predominantly to the United States and Europe...
The result is that China has become the source of many goods the United States once imported from Japan, Hong Kong, Korea and Taiwan. As shown in figure 4.1, the share of the US global trade deficit asising from East Asian countries as a group has actually declined in the two decades since the bilateral deficit with China first emerged in the mid-1980s."
His figure shows that, in 1985, the US had no deficit in trade with China, but that over half of its overall trade deficit was with the Japan, Hong Kong, Korea and Taiwan.
In contrast, the figure shows that in 2003, when the U.S. deficit with China had grown to 22.7% of its overall trade deficit, the U.S. deficit with China and the other four countries, all together, had shrunk to 39.4% of its total trade deficit.
Lardy's essay is in The United States and the World Economy edited by C. Fred Bergsten (pages 126-129). You can read Lardy's essay online, along with the other chapters, but you can't print them out.
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