U.S. Trade Deficit with China Underestimated According to New Study of “Value-Added Trade.”

U.S. Trade Deficit with China Underestimated According to New Study of “Value-Added Trade.”

A new study by the Economic Policy Institute (EPI) finds that, after accounting for net trade flows, the U.S. trade deficit with China is greater than has been suggested by both the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization’s (WTO).

According to EPI Director of Trade and Manufacturing Policy Research Robert Scott, new value-added accounting measures by both the OECD and WTO significantly and inaccurately underestimate China’s trade deficit with the United States.  In fact, China consistently under-reports its exports and over-reports its imports, resulting in a distorted picture of actual trade flows.

“China’s global trade deficits have been massively underestimated,” said Scott.  “This has allowed China to maintain an undervalued currency, which subsidizes all of its exports and acts like a tax on U.S. exports to China and the rest of the world.  In addition, the OECD-WTO value-added analysis is fundamentally flawed and should not be used, for example, in anti-dumping or other types of fair trade enforcement cases.”

According to Scott, OECD-WTO “value-added” estimates could incorrectly reduce the gross U.S. goods and services trade deficit with China by as much as 25 percent.  This is due in part to flawed methodology that does not accurately reflect how much of the goods coming into the United States from other countries actually originate in China.

The OECD and WTO valuations provide a distorted picture of U.S.-China trade, one that could adversely affect policymaking in Washington.  Said Scott Paul, President of the Alliance for American Manufacturing (AAM), “Every time the public’s focus and concern on trade policy becomes a problem for politicians, they try to cook the books.   First, it was just talking about exports, failing to mention that imports were swamping our markets and destroying our factories and our jobs.   Now, they want to change the way that the statistics get put together, claiming that their new approach is justified.   It’s only justified if you’re trying to sweep the problem under the rug.”

The EPI report, Value-added analysis of trade with China could weaken fair trade enforcement and increase job loss, suggests that the new data from the OECD and WTO could lead some in Washington to inappropriately lower targeted exchange rate adjustments for China’s currency that are needed to rebalance global trade flows.  The data might also inaccurately reduce antidumping and countervailing duty penalties imposed in response to measured import surcharges.

Said EPI's Scott of the OECD and WTO methodology, “This relieves pressure on China to revalue the renminbi and provides cover to the United States and other government and international institutions, which have consistently refused to identify China as a currency manipulator.”

AAM's Paul adds that China’s currency continues to be undervalued by as much as 30 to 40 percent, and a revaluation is needed to eliminate Beijing’s very large and rapidly growing global trade surpluses.  

Click here to read the full EPI report.