Chinese New Year Resolution

Chinese New Year Resolution

The Wall Street Journal (16 Dec 2010) cited an interesting research paper from the Asian Development Bank Institute in Tokyo on China’s trade balance with the USA. The researchers examined the trade in parts for an iPhone. The traditional measure of the trade balance shows that the US paid the full value of iPhone exports from China to the US of USD1.9 billion in 2009.

But a value-added approach shows that China paid over USD1.3 billion to Japan, Germany, S. Korea and others to import the parts and components of the iPhone that China assembled in-country. China managed to add just USD48 million in value to the iPhone in assembly and packing work. Because of rounding and exchange rates, the sum value-added total comes to nearly USD1.4 billion not USD1.9 billion, but the point is made. The US is paying indirectly to Japan, Germany, S. Korea and others 96.5% of the value of the iPhones imported from China. Trade critics of China think China sees USD1.9 billion, but China only sees net USD48 million.

Smoke and mirrors bedevil trade stats, especially when they enter the political arena. Well over 90% of China’s ICT exports are from US-owned companies manufacturing or assembling in China, taking advantage of low costs. This of course is bound to change as China’s own capacity to add value grows and its cost structure grows alongside; the US and other foreign companies will start to shift locations to other low cost territories, such as Indonesia and, if it can sort out its infrastructure issues, even the Philippines. Vietnam was attracting FDI but recent data suggests this is faltering at the moment. India always remains an option.

These are the realities on the ground, and a decade can see so many changes. The threat of China, which displaced the previous threat of Japan, will be displaced by the threat of somewhere else sooner or later, and China will be seen rather as an attractive market place and a repository of much of the world’s debt.

So in 2011 with the Year of the Rabbit coming up, here is a New Year’s resolution worth considering: eat salad, let the numbers speak for themselves; and give up on cooking the numbers and adding a pinch of salt and a lacing of pepper to make them artificially hot. Stay health, wealthy and wise in 2011.

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