There is a theory in statistics that says different methods used to tabulate and analyze the same set of data will yield different results. This applies perfectly to international trade.
For some time now, the United States has been pressuring China to reduce its "huge trade surplus". But do the methods used to tabulate and analyze data give us the true picture of China-US trade? Let facts speak for themselves.
Rules of origin are widely used today to determine a product's country of origin for purposes of international trade. But the rules of origin method, which originated in the 1940s, has little room for processing trade and transshipments, which are rampant in the international market today.
That is why the analyses of data through rules of origin fail to give the true picture of international trade. And that is why China has a huge trade surplus with the US.
Several experts have said that if China-US trade figures are analyzed using a method other than the rules of origin, China's trade surplus with the US would drop by at least 40 percent.
An article in Paris-based Le Figaro has quoted the World Trade Organization (WTO) as saying that China's trade surplus with the US is over-estimated by about 50 percent. WTO Director-General Pascal Lamy has said that the most important part of international trade is not the imbalance but value addition.
The use of rules of origin to analyze processing trade tends to distort the true picture and produce erroneous results, which has been the case with China's foreign trade. Value addition in China's exports is very low because most of the materials and spare parts used to make them are imported. But the US ignores this and counts the whole product as made in China.
Take a Barbie doll for example. China exports them for $2 each. But in the US, they are sold for $9.99 each. The Chinese company making it spends 65 cents on importing materials, $1 on transportation and management, and gets to keep 35 cents, including labor costs. But rules of origin make it seem that China gets $2 each for Barbie dolls.
Besides, multinational corporations and their internationalized production methods are making international trade borderless, which too has made China's trade surplus look huge on paper. Last year, about 56 percent of China's total exports came from foreign or foreign-invested companies operating in the country, and the value of their exports made up 65 percent of China's total trade surplus. But they are considered part of China's exports and China's trade surplus.
China's exports are exaggerated and imports are undervalued. Many foreign-invested companies have their factories in China, from where their products enter the domestic market directly. These products should be counted as imports, but they are not.
Liquid crystal display (LCD) screens for TV sets, computers and other electronics are an apt example of such products. In 2009, several multinationals increased the production of LCD screens in China through structural adjustment. This led to a drop in China's LCD screen imports by 20.7 percent. But was that actually a fall in imports?
All this shows that using rules of origin to analyze China's foreign trade data cannot give the true picture of international trade as it is today. The profit distribution of all sides in the trade should be clear and the analytical tool changed or improved to present a clearer picture of China's foreign trade.
But it is also important for China to expedite the transformation of its economic development mode and upgrade its industries so that it is considered more than just the "factory of the world".
(China Daily 12/25/2010 page5)