China as a intermediate good producer - the supply chain argument

The trade imbalance between the US and China continues but as more economists study these numbers, the trade issues takes on a higher level of complexity. See Asia's supply chain: Implication for rebalancing in VoxEU.org.

China is increasingly becoming the intermediate supply chain provider for all of Asia. Trade is becoming more vertically integrated which explains the steep changes in 2009 trade flows. Vertically integrated trade also means that the trade activity between China and the US is not just a function of bilateral exchange rates but also related to the costs of goods coming into China. The global imbalance problem is not a bilateral issue, but one for all countries in Asia because they are part of the supply chain. Trade will be less sensitive to the yuan exchange rate. An appreciation of CNY will not mean that the Chinese bilateral trade surplus will decline.

Recent estimates of value added effects on trade also show that the US-China imbalance is about 40% smaller than expected. See The value-added content of trade.Trade is hard to account for in the real world. A cell phone can be assembled in China but most of the parts are coming from anther country. The value-added between the parts and the assembly is what represents the increase in trade but the entire value of the cell phone is what will be booked for bilateral trade. hence, the value-added is much less than what may be reported.

The trade issue has to be viewed through a micro lens of products and dollars moving. Trade also has to be viewed through the macro problem of savings flows. We have to move away from gross trade imbalances.