Since July, Sino-US trade disputes have increasingly clouded the world. The US has imposed high tariffs on not only China, but also Canada, Japan, Mexico and the European Union, intending to trap the world in the swamp of trade war, regardless of the consequences.

An important argument of Trump's attack is that his country has a serious deficit with the above-mentioned countries. China will undoubtedly be attacked. But the statistical methods once used in the 20th century need to be updated to reflect the real trade value in the 21st century.

The saying that China and the US have a huge trade deficit is even more untenable. Due to the development of globalization and the division of labor, the past algorithms the US used to calculate the trade surplus and deficit have not been adapted to the new era.

By contrast, the analysis system of the Global Value Chain (GVC) can better explain the nature of the current world trade pattern. Covering the production and service links of goods, the GVC is a transnational production network of the producing, processing, selling and recycling of connected areas. To ensure the operation of the chain, undertaking different functions, participating enterprises capture different types of profits and actively coordinate with major suppliers and multinational corporations.

The US ignores the division of labor among the value chain and hardly knows the trade deficit varies greatly depending on the way of computing. According to US statistics, the sum of the US-China trade deficit in 2017 was $375.2 billion, which is $275.8 billion, accounting for 47 percent of the total Sino-US trade in goods, counted by the General Administration of Customs of China. The Sino-US trade deficit is mainly determined by the divisions of labor in the market and the different positions in the GVC.

From 1989 to 2015, US imports from Hong Kong, Taiwan and South Korea fell to 1.8 percent from 36.9 percent, but from the Chinese mainland, rose from 11.7 percent to 38.6 percent at the same time. Its deficit amount did not decrease, but the deficit countries had changed. From the perspective of GVC, the conclusions drawn by the US-China trade deficit are very different.

In the era of global value chains, the production process of a certain product is carried out in different countries or regions, different from the traditional algorithm which is all counted in the exporting countries. According to the Chinese Academy of Sciences, the trade surplus between

China and the US, calculated by added value in 2010-2013, was 48 percent to 56 percent lower than that calculated in traditional ways.

Among the products exported from China to the US, the cost of patents and brands paid to third countries is not included in the trade deficit. Many Chinese products are at the low end of the GVC. China is known as the world’s factory and most of the production is labor-intensive. The middle and upper reaches of the value chain belong to foreign companies that provide brands and technology.

According to Chinese statistics, in 2017, 61 percent of China's trade surplus was from processing trade. The world factory has the lowest profit, but in calculating the trade surplus and trade deficiency, the accounts of all the profits of the products are counted in China, which makes China’s actual profit limited, but a huge surplus on the surface.

There is a huge deviation in the so-called "trade deficit" data: the income of US enterprises in China is not included in the US trade volume, and the huge income of the US subsidiary in China for its parent company is counted in China's trade volume, which has increased the data.

In addition, the data on Sino-US trade is based on the geographical location of importers and exporters, but which country has obtained the final income is not shown. According to the latest data from the Bureau of Economic Analysis, US companies' total sales in China in 2015 were $373 billion, including $223 billion for Chinese subsidiaries and $150 billion for US exports to China.

Similarly, the total sales of Chinese companies to the US in 2015 were $403 billion, of which $10 billion was completed by China's subsidiary in the US and $393 billion through export sales which was not calculated in the US trade deficit.

In the case of Apple, for example, which is set up in China, its $140 billion in overseas market revenues in 2015 were not included in US exports, according to Chinese customs statistics. If Apple’s value-added gains in Greater China are included in US exports, they will increase by 13.1 percent and the bilateral trade deficit will shrink by 6.7 percent.

What’s more, Apple's mobile phones assembled and manufactured by Chinese Apple manufacturers mainly import semiconductors and other parts from countries such as the US, South Korea and Japan. Most of the profits are obtained by them, but are calculated as Chinese income in the final calculation which has become a huge part of the Sino-US trade deficit. This is merely one company, Apple. If all similar companies are counted, this number will be even bigger.

After Trump announced the tax reform policy, Apple announced that it will repatriate $350 billion in overseas revenue. A large portion of the number should be counted in China's account, its largest overseas market.

Problems also occur in the US caliber statistics. The US generalizes the transit trade of Hong Kong and other places into China, but in fact there are trade transshipments to other economies. Moreover, the country calculates the amount of exports based on the FOB price and the amount of imports based on the CIF price, and doubles the cost of handling, transportation and insurance into the US-China trade deficit, which are the reasons why the trade deficit is too high.

On the other hand, apart from misusing the calculation method, the US automatically shields its huge surplus with China in service trade. The so-called "US-China trade deficit in 2017 totaled $375.2 billion" but this only included trade in goods and did not reflect trade in services. Service trade represented by tourism, study abroad and investment immigration has also been ignored for a long time.

As the different division of labor, the surplus in the added value of service trade is concentrated into the US, while the deficit is shifted to China, which is also concluded by the positions of Chins and the US in the GVC.

In 2016, the US service trade surplus was $250.6 billion and China’s service trade deficit was $242.6 billion, both ranking first in the world. According to data from the Ministry of Commerce, the US service industry's exports to China have increased five-fold in the past decade.

In 2016, the US trade surplus with China in education, tourism, intellectual property, transportation, commerce, finance and other services reached $55.7 billion, accounting for 23.1 percent of China's total trade deficit, which was about 40 times that of 2006. But this part of the trade volume is not counted in.

Moreover, with the improvement of China's consumption power and the expansion of the market, the US surplus in the service sector will become larger and larger.

In terms of the tourism projects, accounting for 56 percent of US exports to China, the number of tourists of the mainland of China visiting the US reached nearly 3 million in 2016, an increase of 15 percent, and consumer spending reached $33 billion, up by 9 percent, according to the data released by the US Department of Commerce in August 2017.

In terms of education, the number of Chinese students studying in the US in 2016 was 328,500, which ranked first among the number of source countries, accounting for 31.5 percent of the total number of international students studying in the US, according to the American International Education Association. Assuming that they spent an average of $45,000 per year, Chinese students brought some $15.9 billion in revenue to the US in 2016. In contrast, there were only 20,000 Americans studying in China.

In terms of skilled immigration, based on the data of the US EB-5 Investment Immigration Industry Association, the total number of EB-5 applications in 2016 was 13,273, of

which 10,948 were Chinese households, running up to 82.48 percent, who were still the main force to apply for EB-5.

As can be seen from the above information, China's service trades in studying abroad, tourism, investment immigration, etc. are in a state of deficit. Therefore, if the Sino-US service trade is included, the trade deficit can be reduced sharply.

Obviously, the trade deficit has become the most effective handle for  Trump pursuing unilateralism and implementing the strategy of “America First”. Its seemingly "just and rational" appeal can be blessed by public opinion inside and occupy the moral high ground outside.

Nevertheless, if we evaluate it from a more realistic evaluation system, we can find the fatal consequences caused by the "technical operation" of the Trump administration. The trade statistics approach employed hundreds of years ago can neither explain nor solve any of the problems we face today. The analytical framework of the GVC should be used to effectively analyze international trade situation and to better deal with the international economic and trade problems, by a win-win situation of cooperation, rather than a confrontational attitude.

Wang Huiyao is president of the Center for China and Globalization. The views expressed do not necessarily reflect those of China Watch.

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