CHINA’S TRADE SURPLUS with the United States either remained at near record levels or declined significantly following the launch of former US President Donald Trump’s tariffs war in 2018. Which it was depends on whose data you look at. China’s tells the first story; the United States’ the second.
But which is right, and why is there a difference? The New York Fed’s Hunter Clark and Anna Wong, writing on the bank’s Liberty Street Economics blog*, offer answers.
In short, US importers were evading US tariffs. Clark and Wong estimate that the success — and scale — of the efforts cost the United States $10 billion in lost tariff revenue last year.
There is usually a discrepancy between the two countries’ trade reporting. For example, for the decade up to 2018, the deficit with China that the United States reported was on average $95 billion a year larger than the surplus China reported with the United States. But in 2019, the gap started to narrow and last year, for the first time, it reversed.
There is a simple explanation for part of the long-standing discrepancy: China’s exports to Hong Kong that get re-exported to the United States. China counts then as exports to Hong Kong. The United States, not unreasonably, counts them as imports from China.
Two next two most relevant factors are misreporting of exports to get around China’s value-added taxes (VAT) and misreporting of imports to get around tariffs. Since 2018, there may also have been more trade routed through third countries to avoid the “made in China” label.
Clark and Wong say that misreporting of trade to avoid taxes would appear to be highly relevant since 2018. The United States imposed huge tariff increases on China, and that China responded with VAT rebated changes to help Chinese exporters offset the impact of the tariffs.
Unlike most countries, China does not fully rebate VAT on exports, effectively imposing an export tax. China increased the rebate four times in response to US tariffs. The net effect of these VAT policy changes was to incentivize increases in reported export values from China to secure the bigger rebates, both through less under-invoicing and through outright over-invoicing, Clark and Wong suggest, adding:
From the US side, it seems clear that US importers faced incentives to minimize tariff tax liabilities by finding ways to underreport import values from China, perhaps utilizing low-ball invoices provided by their Chinese suppliers. After all, the United States’ tariff hikes against China increased average tariffs on the country from 3 percent in mid-2018 to a peak statutory rate of 17.5 percent in September 2020.
Clark and Wong estimate that 17% of the decrease in the trade data gap is due to efforts to evade US tariffs, and 13% is due to China’s changes in VAT rebate rates. Determining whether to adjust the U.S.-reported or the China-reported data for misreporting they delicately say requires ‘some level of judgement.’
Given the administrative process for US tariff collection, we make the plausible assumption that the evasion of tariffs most likely shows up as underreporting of Chinese imports to US Customs Border Protection rather than a distortion in the data reported by China Customs.
They calculate that of the $88 billion decrease in the US-China trade data gap by the end of 2020, $55 billion was due to evasion of US tariffs and $12 billion due to overreporting or a decrease in underreporting of Chinese exporters to China Customs. When those sums are factored back into the trade data, the gap reverts to its historical levels.
Clark and Wong’s analysis implies that China’s trade surplus with the United States did narrow a bit after the imposition of tariffs from 2018 but not by anything like the magnitude suggested by US trade data — or claimed by the Trump administration in justification of its tariffs policy.
Trump famously said that trade wars are easy to win. The winners seem to be the ones best able to cook the books.
*Hunter L. Clark and Anna Wong, “What Happened to the U.S. Deficit with China during the U.S.-China Trade Conflict?,” Federal Reserve Bank of New York Liberty Street Economics, June 18, 2021,