in the 2015 act aren’t perfect—no measures are. The threshold for the bilateral trade balance is genuinely problematic. It lets small countries with a propensity to intervene in the foreign exchange market off the hook for one. And even if you think there is sometimes valuable information in the bilateral trade data (many don’t), the bilateral balance really should be assessed on a value-added basis.* But the current 3 percent of GDP current account surplus and 2 percent of GDP in intervention thresholds are certainly reasonable. Those criteria show that China should have been singled out for “enhanced engagement” from 2005 to roughly 2012, but not since. But all criteria can be gamed. And I worry a bit that China has been revising its current account data with the goal of keeping the headline external surplus down—it is hard to overstate the number of times the details of China’s services data have been revised since 2014.*** So Cole Frank and I looked at what would happen if some of the Treasury criteria were changed, or more realistically, augmented.**** For example, looking at China’s overall goods surplus alongside the current account surplus might sense if you have doubts about the current account numbers. China’s good surplus was a bit over 4% of its GDP in the last four quarters of data (4% of China’s GDP is close to $500 billion, a significant sum). Or you could China’s surplus relative to global GDP to try to get a sense of how China’s surplus is impacting its trading partners (a better measure is world GDP ex China, but doing that takes a bit more effort, especially if you intend to track more than one country). That also could put China’s current account surplus back in the zone of concern: But, as the Trump Administration now seems to recognize, there is no realistic way of getting around two facts: (1) China recently has been selling not buying reserves, so its intervention mechanically has served to limit the pace of depreciation, and (2) both China’s goods surplus and its current account surplus are heading down, so the Chinese overall policy stance isn’t obviously impeding balance-of-payments adjustment. All this said, I would note that nothing tends to burn through reserves quite like a controlled depreciation. A significant portion of China’s reserve sales are a result of the fact that China has managed its currency in ways that helped generate the expectation that it wanted a gradual weakening of its currency. If China can stabilize expectations (and limit outflows from the state banks), its reserve sales might fall off fairly quickly.*****
- There are data limitations here. The last OECD numbers on Chinese value-added in Chinese exports (around 70 percent) are from 2011. Things have changed since then, with Chinese value-added rising relative to China’s total exports. More and more high-end components are now made in China, even if they are not made in China by Chinese firms (see Bob Davis and Jon Hilsenrath of the WSJ; “China, once an assembly platform that sucked in commodities and manufactured goods from abroad, put them together and reshipped them, is now producing much of what it needs domestically. Benjamin Dolgin-Gardner, founder of Hatch International Ltd., an electronics manufacturer in Shenzhen, China, says he now uses Chinese-made LCD screens rather than ones made elsewhere in Asia for the tablets he produces. Memory chips for MP3 players are also made in China rather than imported from Japan and South Korea”). The famous Apple example now deceives—the relevant concept here is China’s share of total manufacturing value-added, not China’s share of the profit on the sale of an iPhone. Fun factoid: the New York Times reporting suggests that iPhones for sale in China are technically made offshore, in a bonded zone, then exported to Ireland (in a legal sense) before being legally imported into China from the bonded zone after downloading the needed software from Ireland (or wherever Apple now has parked its “global” IP rights)…an interesting example of modern global value chains.