By Mei Xinyu

The US Department of Commerce on November 10 forecast that its trade deficit with China will reach an astonishing US$200 billion by the end of this year. Rob Portman, the US trade representative, also pinpointed the deficit at that figure, about US$40 billion more than 2004, at a press conference last week.

What should we make of this sensational forecast?

According to statistics provided by China's customs authorities, in the first nine months, the country's trade surplus with the United States was US$81.3 billion. Based on that figure, the whole year may see the surplus stand at US$108.4 billion, roughly half of the US forecast, if the trade environment does not change drastically.

The explicit statistical inconsistency between the US and Chinese statisticians is once again brought into the spotlight.

The incongruity has long been an issue facing the trade officers of the two nations.

This problem emerged in the 1980s. In 1982, for example, Chinese statistics showed the country suffered a trade deficit of US$2.08 billion with the United States while the US side concluded it enjoyed a trade surplus with China of only US$403 million. In 1990, according to the US side, its trade deficit with China, for the first time, exceeded US$10 billion and continued to soar in the coming years. According to Chinese statistics, however, the country saw its trade balance change from deficit to a surplus only from 1993.

As the bilateral trade volume grows rapidly, the statistical gap has widened continually in recent years. Meanwhile, the US current account deficit from the early 1990s has ballooned and has not improved even today. Last year, its global deficit of trade in goods amounted to US$665.5 billion and is expected to exceed US$600 billion again this year.

According to the International Monetary Fund (IMF), the United States' current account deficit will take more than 6 percent of its gross domestic product (GDP).

Against this backdrop, if the Sino-US trade imbalances in the 1990s only had academic implications, the current situation has gone well beyond that sphere and had explicit and realistic ramifications.

The issue is actually seriously distorted by some technical factors. Hong Kong, for example, has been taken as a port for Sino-US trade. Volume of Chinese mainland's transit shipments to the United States via Hong Kong is counted completely in US statistics. It is unreasonable because the added value produced during the transit shipments has not been enjoyed by the Chinese mainland.

Another example is the different pricing methods for goods in Sino-US trade.

China uses the "freight on board" (FOB) method to calculate its exports while the United States counts its imports through the "cost, insurance & freight" (CIF) method. The large amount of Chinese goods carried to the US market are mainly freighted through foreign shipping companies and insured by overseas insurers. While the CIF method is used to calculate China's exports, the value beyond what is calculated by the FOB method would fall into pockets of international shipping and insurance companies, a large part of which are US-based. China does not enjoy that part of the revenues.

It is obvious that the calculation difference means the US side has significantly overvalued China's exports to its market.

The two sides have agreed to set up a working group to co-ordinate the statistical techniques and hammer out the real volume of Sino-US trade balance that can be accepted by both. Although the work will take much time and energy, it is not a "mission impossible." Sensational exaggeration and overestimation on the scale of US trade deficit with China would, besides misleading the media and the public, do nothing in helping find a real solution to the problem.

At root, the Sino-US trade imbalance lies in the deposit-investment mechanism in the two nations.

In the United States, its low national savings rate coupled with strong consumption has made a huge current account deficit almost inevitable. In contrast, China's problem lies in its high national savings rate and weak domestic demand, which combined leads to a current account surplus.

Solution to the trade imbalance between the two countries, therefore, requires both sides to make efforts. For Washington, it should figure out ways to raise its national savings rate; for Beijing, how to stimulate domestic demand and consumption holds the key to reducing its trade surplus.

It should be noted that in solving the bilateral problem, China should not be overwrought; that is, it should not be pressed to shoulder the costs of adjustment that are disproportionate with its status as a developing country.

It would be both ridiculous and ineffective to rely on a developing country like China to pay for the domestic economic restructuring of a developed nation.

According to the IMF, compared with such solutions as raising savings rates in East Asia or boosting growth in Japan or euro zone economies, reduction in US fiscal deficits would be the most effective method for solving the global imbalance between savings and investment and current account disparity. If the US savings rates could be raised by 1 percentage point, its current account deficit would narrow by an amount equal to 0.5 percent of its GDP.

This is the most effective solution.

Note: the author is research fellow with the Chinese Academy of International Trade and Economic Cooperation attached to the Ministry of Commerce

(China Daily November 23, 2005)