Tag Archives: trade wars

Lies, Damn Lies And Trade Statistics

Screenshot of charts showing how China-US trade balance discrepancy disappeared after the 2018 start of US tariffs on Chinese imports.

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,

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Beijing-Taipei Relations Get Prickly

Pineapple plantation in Minhsiung, Taiwan, 2017. Photo credit: FredN, CC BY-SA 3.0 via Wikimedia Commons

WORD ARRIVES FROM our man in fruit and veg that Taipei is not taking the rough end of the pineapple, as the Australians say, when it comes to Beijing’s ban on Taiwanese exports of the large juicy tropical fruit to the mainland.

At the start of this month, the General Administration of Customs started refusing entry to Taiwanese pineapples, citing pests. Taiwanese pineapples are susceptible to some forms of mealybugs and thrips. However, Taipei’s view is that the incidence is minimal and that China is indulging in fake biosafety by banning all pineapples, and that the action is political.

Zhu Fenglian, a spokesperson for the Taiwan Affairs Office of the State Council, counters that calling the move political smears the mainland, which does not get either side anywhere.

Taiwan consumes around 90% of the pineapples it grows, exporting the remaining 10%, overwhelmingly to the mainland. Our man tells us that Taiwan is the world’s sixth-largest exporter of pineapples with a 3% share of the global market, a trade worth some $65 million in 2019 and growing fast. China buys around four-fifths of Taiwan’s fresh and frozen fruit exports in normal times.

Taiwanese have responded to the pineapple ban by clearing grocery shelves and market stalls of local pineapples, while restauranteurs are doing their bit by adding pineapple to their recipes. Japanese and Canadian diplomats have been photographed next to pineapples in support. It was a Canadian who first thought of putting pineapple on pizza, apparently. Who knew?

The hashtag #FreedomPineapples has appeared on social media, echoing the #FreedomWine hashtag that emerged in Australia during that country’s recent contretemps with China. It is also a more distant echo of Freedom fries, as some Americans re-branded French fries in the wake of some perceived slight by Paris after 9/11.

China’s main fruit exports to Taiwan are apples, but it was a small trade worth barely $6m in 2019, so tit for tat retaliation seems unlikely. After pineapples, sugar apples are next largest fruit export to the mainland from Taiwan, which has developed a pineapple-flavoured hybrid as if the knobby, custard-flavoured fruit is not sweet enough in the first place.

If Beijing chooses to escalate from prickly to knobby, this could get very sticky indeed.

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Civil Unrest Is A Great Leveller In China-US Relations

THE PART OF US President Donald Trump that is a gift to China keeps on giving.

The president’s ‘law and order’ response to outbreaks of violence in many cities across the United States following the death of an African-American man under the knee of a white police officer has let Beijing undercut any pretence on Washington’s part of occupying the high ground over the crackdown on protest in Hong Kong.

State media have been quick to play up the civil unrest in the United States and the systemic racism behind it (although skirting China’s problems with racism against blacks and other minorities, and its own iron-fist policing when necessary). They have also been swift to compare the contradictory praise by US officials afforded to protesting Hongkongers with the condemnation of ‘rioters, looters and anarchists’ at home.

Hu Xijin, the ever acerbic editor of the bombastic Global Times, tweeted:

I highly suspect that Hong Kong rioters have infiltrated American states. Attacking police stations, smashing shops, blocking roads, breaking public facilities, these are all routine in their protests. Vicious HK rioters obviously are mastermind of violent protests across the US.

Beyond Hu’s sarcasm, US-China relations continue to fray. Bloomberg reports that Beijing has told state companies, including Cofco and Sinograin, to suspend purchases of US agricultural imports, needed to satisfy the Phase One of the US-China trade deal signed in January, while it assesses the possible impact of the Trump administration’s’ sanctions against China for imposing a national security law on the city.

This could prove somewhat of a cat and mouse game. To switch the analogy, the thunder of a Trump threat has broken, but the lightening of action may take some time to strike.

The time pressure is more intense on the US side. The president has to show tangible results from the stuttering trade deal before November’s US presidential election. Beijing has until the end of 2021 to fulfil its side of the agreement.

That makes it more likely that the US side would tear up the trade deal should it come to that, but China would probably shed few tears if it did, providing the finger of blame is pointed at Washington. However, it is such a modest deal — this Bystander likes the description of it as a ‘bamboo agreement’, ie, hollow on the inside — that it is probably not worth either side killing it.

Meanwhile, Hong Kong police have banned this year’s candlelight remembrance of the events of June 4, 1989, which has been held in Victoria Park every year since 1990. Public health concerns over a large gathering are the reason given, and the organisers plan to hold the vigil online.

Yet it is not difficult to imagine with Beijing tightening its grip on the city that in future Hong Kong will publicly commemorate Tiananmen Square in the same way it is on the mainland, which is to say not at all.

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Beijing’s Currency Wars Playbook

Beijing will play its usual defense against the moves in the U.S. Senate to twist China’s arm to appreciate its currency against the dollar: vociferous denunciation of Washington for turning protectionist and initiating “trade wars” while patiently waiting out the start of any serious hostilities, calculating that the threat of them will eventually recede.

The denunciation has duly come with Foreign Ministry spokesman, Ma Zhaoxu, saying the bill now in front of the U.S. Senate proposing punitive measures against any country that is shown to be manipulating its currency — for which read China — “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties”. He told U.S. Senators to abandon protectionism and stop politicizing economic issues. He also told them to “stop pressuring China through domestic law-making”. Co-ordinated sentiments have been expressed by the central bank and the commerce ministry.

While perhaps nobody outside the U.S. Congress really believes that a sharp revaluation of the yuan on its own will eradicate America’s trade deficit with China or create the new domestic jobs the U.S. is having such trouble generating, Beijing will know that even if the Democratic majority in the U.S. Senate passes the bill, the legislation will likely founder in the Republican controlled House of Representatives. Even if it does not, it is highly unlikely to survive a presidential veto. That is the past pattern of such proposed legislation. Support for this year’s bill appears to be stronger, helped by its narrower provisions and the background of sluggish U.S. growth and joblessness, but the odds remain long that it will become law.

At the very worst from China’s point of view, and the bill does become law, it will be cheaper politically for Beijing to fight any punitive measures through the WTO than it would to be seen to capitulate to foreign pressure. Meanwhile, it can bide its time, letting the gradual appreciation of the yuan that has been underway since June last year (up 7% against the dollar since then and 10% against the euro) ease the U.S. pressure, which is anyway likely to abate after next year’s U.S. elections. Simultaneously, it buys more time for the economy, particularly the export-manufacturing sector, to adapt.

China’s policymakers are quite happy for the yuan to appreciate. It will help them both fight inflation and restructure the economy. They just want do it to their timetable, not Washington’s–and they have the playbook to do that.

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