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Business / Finance / Markets / Money

Some Thoughts on the Art of (Trade) War

Some Thoughts on the Art of (Trade) War

夫未戰而庙算胜者,得算多也;未戰而庙算不勝者,得算少也。

The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand. — Sun Tzu

Guess which sentence applies to which side in the incipient struggle?

So, here are a couple of graphs of data, on the US-China bilateral trade balance.


Figure 1: US-China trade balance (dark blue), US-China goods trade balance (red), US-China guesstimated goods value added trade balance (pink), US net exports (black). NBER defined recession dates shaded gray. 2017 data shaded orange. Source: Census, BEA, NBER, Oxford Economics Figure 7, and author’s calculations.

The more relevant (from an economic perspective) variable is the amount of value added traded. In an era of global supply chains, bilateral final goods balances can be misleading. The value added series takes into account the fact that about 50% of the final good exported from China incorporates foreign content. This more relevant series [which I have approximated — see Oxford Economics (2017) Figure 7 for exact figures through 2015] indicates the employment loss attributable to US-China trade is less than is suggested by the gross figure of nearly $400 billion.

Normalizing by GDP places the trends in context.


Figure 2: US-China trade balance (dark blue), US-China goods trade balance (red), US-China guesstimated goods value added trade balance (pink), US net exports (black), all expressed as a share of GDP. NBER defined recession dates shaded gray. 2017 data shaded orange. Source: Census, BEA, NBER, Oxford Economics Figure 7, and author’s calculations.

The US-China goods balance in value added looks much more stable as a consequence. Something to remember as we risk the global trading rules based regime for improvement in the US-China bilateral balance.

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