ChinaU.S.TradeBalancefromtheNationalIncomePerspect

China-U.S. Trade Balance from the

National Income Perspective

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Li Xinru (李鑫茹)1, Chen Xikang (陈锡康)2, Duan Y uwan (段玉婉) 3 and Zhu Kunfu (祝坤福)4

1,2

Academy of Mathematics and Systems Sciences (AMSS), Chinese Academy of Sciences (CAS); University of Chinese Academy of

Sciences (UCAS); Key Laboratory of Management, Decision and Information Systems, CAS 3

School of International Trade and Economics, Central University of Finance and Economics (CUFE)4

Research Institute for Global Value Chains (RIGVC), University of International Business and Economics (UIBE)

Abstract: This paper calculates the China-U.S. trade balance from the national income

perspective based on an input-output model that differentiates domestic and foreign-invested companies. The result shows that due to different degrees of dependence of both countries on foreign production factors such as foreign capital for the manufacturing of export goods, only 87.7% of the domestic value-added created by China’s exports to the U.S. in 2012 was China’s national income, whereas 96.2% of value-added in U.S. exports to China was U.S. national income. In the comparison of total export volume and export value-added, the home country’s national income created by exports can more realistically reflect a country’s gains from trade. In 2012, China’s trade surplus with the U.S. stood at 102.8 billion US dollars in national income terms, which is 61% and 22% smaller than the results in gross and value-added terms, respectively. The implication is that the traditional trade balance accounting method seriously exaggerates the China-U.S. trade imbalance.

Keywords: national income, China-U.S. trade balance, input-output model, foreign

direct investment

JEL Classification Codes: C67, D21, F14, F21DOI:1 0.19602/j .chinaeconomist.2019.5.06

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Correspondence: lixinru@

Acknowledgement: This study is supported by the National Natural Science Foundation of China (NSFC) projects (71473244, 61873261 and 71704195) and the Fundamental Research Funds for the Central Universities, the University of International Business and Economics (CXTD7-06).

1. Introduction

Rapid growth in China-U.S. trade since the 2000s has been accompanied by an increasing bilateral trade imbalance. According to data from the U.S. Department of Commerce, the U.S. trade deficit with China amounted to 347 billion US dollars in 2016, which represented 47% of US total trade deficit. Tremendous trade deficit is a detriment to bilateral economic, trade and political relations, giving rise to frequent trade frictions between both countries - such frictions may escalate under the current U.S. administration that sees trade deficits as a high priority.

In the context of economic globalization, trade balance based on total trade volume cannot reflect a real picture of value distribution. Under the global value chain theory, academics called for correcting trade balance data with value-added in exports (Johnson, 2014; Johnson and Noguera, 2017; Koopman et al., 2008, 2014; Wang and Sheng, 2014). Value-added in exports is concerned with gross domestic product (GDP), which includes return to foreign production factors that does not go into a home country’s income. Based on the balance of payments, Wang and Xing (2007) estimate that the share of