Accounting for the China-US Trade Imbalance: An Ownership-Based Approach

Abstract

Measuring the size of China's trade surplus with the U.S. has always been controversial among academics and policy makers. The issue becomes more complicated with unprecedented impact of foreign direct investment on the bilateral trade between China and the U.S. Any proposal about China-US trade policies has to be able to explain the implications of this impact. This paper examines the trade imbalance between China and the U.S. under the ownership-based framework. It extends the baseline model developed, respectively, by NAS, Julius and BEA into a three-country framework, consisting of the domestic economy, the foreign economy and the rest of the world. The paper also experiments with the simplified form of this new framework by estimating the size of the China-US trade imbalance. The results of the study show that non-US foreign direct investment in China is mostly responsible for China's trade surplus with the U.S. In 2003, 71.5 percent of China's trade surplus with the U.S. could be attributed to non-US foreign direct investment in China. As a result, China's ownership-based trade surplus was surprisingly smaller than that measured with conventional cross-border method. In 2003, for instance, China's ownership-based trade surplus with the U.S. was $11.9 billion, only 20 percent of the conventional cross-border measure. It is believed that the approach adopted in this study is capable of revealing more information than both NAS-Julius-BEA approach and the conventional trade accounting method.