Hunter L. Clark and Anna Wong

The United States’ trade deficit with China has narrowed significantly following the imposition of additional tariffs on imports from China in several waves from 2018 – or at least based on the data American trade. Chinese data tells a much different story, with the bilateral deficit nearing all-time highs at the end of 2020. What’s going on here? We find that (as also discussed in a related note), much of the deficit decline recorded in U.S. data was due to successful efforts to evade U.S. tariffs, with an estimated $ 10 billion loss in tariff revenue in 2020.

There was an unprecedented change in the trade balance gap after 2018
The United States’ reported bilateral trade deficit with China in the decade prior to 2018 was on average about $ 95 billion higher than the deficit implied by China’s reported trade surplus with the United States, and this gap had been positive for several decades. However, this statistical gap narrowed considerably with the onset of the trade dispute between the United States and China in 2018, and even reversed the sign in 2020, as shown in the left panel of the graph below. This narrowing was almost entirely due to a disagreement in statistics between the growth rates of U.S. imports from China as reported by the United States and what Chinese data indicates that China was exporting to the United States. As a result, for the very first time, China’s reported exports to the United States had become larger than the United States’ reported imports from China in 2020, as shown in the right panel of the graph. Hereinafter, “trade data gap” will refer to imports reported by the United States from China less reported exports from China to the United States.

Three major factors traditionally explain the differences in China’s trade with its trading partners. The best known, and traditionally the most important for the United States, is trade through Hong Kong, in which re-exports of Chinese origin are correctly reported in US import statistics as originating from mainland China, but are not not shown in mainland China. Chinese exports to the United States. However, incorporating Hong Kong trade into this analysis does not change the basic picture presented in the graph.

Two other factors that have been widely studied in China’s trade involve misreporting Chinese exports in response to changes in value added tax (VAT) policies in China, and misreporting import statistics to avoid tariffs. Other, possibly less important factors that could have caused the change in the trade data gap between the United States and China include the routing of trade through third countries to avoid the ‘made in China’ label, in which there could be a disagreement between national statistical authorities on the country of origin of US imports; misrepresentation by businesses engaged in arm’s length trade; or Chinese companies trying to circumvent Chinese capital controls by inflating export figures.

Misreporting trade to avoid taxes seems to be very relevant given that the United States has imposed huge tariff increases on China and China has responded with sweeping VAT tax policies. On the US side, it seems clear that US importers have been given an incentive to minimize tax obligations by finding ways to underreport the values ​​of imports from China, perhaps using low-priced invoices provided. by their Chinese suppliers. After all, the United States’ tariff hikes against China pushed the average tariffs over the country from 3% in mid-2018 to a maximum legal rate of 17.5% in September 2020, as the line illustrates. blue of the following graph.

The role of Chinese VAT policies is less well understood and rather complex (more details are available in our related note). In summary, unlike most countries, China does not fully ‘reimburse’ value-added taxes on exports – which means that China does impose export taxes – and therefore its exporters have an incentive to do so. underreporting exports. These discount rates vary by product category and have historically been adjusted to affect macroeconomic or industrial policy objectives. Higher VAT refund rates (in other words, lower export taxes) reduce the incentives to under-invoice. In addition, companies that sell both domestically and abroad have long been known to engage in illicit tax minimization by over-declaring exports in order to obtain VAT refunds; the value of these plans increases when reimbursement rates are increased. In fact, in response to the US tariff measures, China has embarked on four sweeping waves of rebate rate increases (export tax cuts), as illustrated by the red line in the graph below. . As a result, the share of export products subject to zero net VAT rates has increased significantly from 5% of all goods in 2017 to around 50% at the end of 2019. The net effect of these changes in VAT policy has been to encourage increased declared export values. from China, both through less under-invoicing and outright over-invoicing.

We therefore believe that there are plausible reasons to expect changes in the misreporting patterns of imports and exports, both of which would be in the direction of explaining at least part of the evolution of the economy. trade data gap. The overall flows of the trade balance are in fact compatible with such a view. Since the changes in Chinese VAT rebates also apply to all Chinese export destinations, the observed change in China’s reported trade data gap with the United States is also expected to occur with other Chinese export partners. The left panel of the graph below shows that this is indeed the case. On the other hand, the US tariff increases against China were bilateral, so the change in the gap in trade data reported by the United States is expected to be largely a bilateral phenomenon between the United States and the United States. China. The right panel of the chart confirms this, with the gray dotted line identical to the red dotted line in the left panel and the gold line showing no corresponding trend in the data gap calculated for US trade with the United States. rest of the world.

Quantifying the effects of false invoicing and adjusting the trade gap
In order to quantify these effects, we consider the behavioral differences of four categories of goods. Namely, we are looking at goods affected by VAT refunds, US tariffs, both, and none. In this way we estimate that 17 percent of the decrease in the trade data gap is due to efforts to evade US tariffs and 13 percent is due to changes in VAT refund rates. In terms of value, these estimates translate into the following breakdown to explain the $ 88 billion reduction in the U.S.-China trade data gap by the end of 2020: (1) $ 55 billion of dollars due to evasion of U.S. tariffs, (2) $ 12 billion due to over-reporting or decreased under-reporting of Chinese exporters to Chinese customs, and (3) $ 20 billion for other reasons.

Determining where the misrepresentation adjustment should be made – whether in data reported in the United States or in China – requires a certain level of judgment. Given the administrative process of collecting US tariffs, we make the plausible hypothesis that tariff evasion is most likely manifested by underreporting of Chinese imports to US Customs Border Protection rather than by a distortion of the data declared by Chinese customs. This adds $ 55 billion to the US declared value of imports from China. The impact of changes in VAT refund rates that have increased over-declaration of exports and / or reduced under-declaration is almost certainly reflected in the data reported by the Chinese authorities. Thus, we subtract $ 12 billion from reported Chinese exports to the United States. These adjustments are shown in the left panel below.

Once we make these adjustments to the data reported by the United States and China, the trade data gap between the two series is much more like the historical gap. Has the US-China bilateral deficit narrowed or remained at its historic level? The truth seems to be that it has shrunk somewhat, but not to the extent indicated by the data reported by the United States (see the right panel of the graph). It therefore seems clear that the trade dispute had a much smaller impact on the US bilateral trade balance with China than it first appears when looking at the US data.

Finally, these calculations allow us to estimate to what extent the underreporting of imports at the US border may have reduced US tariff revenues. Tariffs have increased from $ 35 billion in 2017 to $ 66 billion in 2020. Our estimate of missing imports and an estimated tariff rate on these goods suggest that around $ 10 billion in tariff revenue may have been lost. in 2020 due to underreporting of imports.

Hunter L. Clark is Assistant Vice President of the Research and Statistics Group at the Federal Reserve Bank of New York.

Anna Wong is a senior economist on the Board of Governors of the Federal Reserve System.

How to cite this post:
Hunter L. Clark and Anna Wong, “What Happened to the US Deficit with China During the US-China Trade Dispute? », Federal Reserve Bank of New York Economy of the Liberty Street, June 18, 2021, https: // libertystreet economics.newyorkfed.org/2021/06/what-happened-to-the-us-deficit-with-china-during-the-us-china-trade-conflict.html.

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Warning
The opinions expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Warning

Federal Reserve Bank of New York published this content on June 21, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on Jun 21, 2021 06:14:00 PM UTC.



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