What China-Vietnam trade balance figures miss, misstate and mask

Scales askew

What China-Vietnam trade balance figures miss, misstate and mask

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From recent headlines alone, it would be reasonable to conclude something odd is afoot along the China-Vietnam border.

In late January, Vietnamese authorities discovered approximately three metric tons of cats smuggled into the country from China for their meat, and proceeded to bury the lot as a precaution against disease. Months later, Chinese police in several provinces seized more than 100,000 tons of putrid meat that had slipped across the border from Vietnam. But the biggest aberration might be the fact that due to the nature of smuggling, none of these shipments' values made it into the trade balance calculations for either country.

A Vietnam National Assembly meeting held in June laid out the baffling discrepancies in cross-border bookkeeping. Where Vietnam claimed that its 2014 trade deficit with China was US$28.9 billion, China reported US$43.8 billion. That is a difference of nearly US$15 billion, and such discrepancies have plagued China’s trade relationships with other nations as well. Most notably, the gap between 2014 Chinese and US trade data was US$105.6 billion as revealed (pdf) by the US Congressional Research Service. But other data need not be so severely skewed to damage popular understanding of trade relations.

At the center of these events sits a troubling opacity surrounding China's national trade balance: In May the country's  trade balance reached a surplus of US$59.49 billion, at least according to the General Administration of Customs. But if trade balance is meant to be an indicator of the flow of goods between nations that illustrates one country's dependency on another, such drastically different claims as those above bring into question the fundamental accuracy of one side, the other or both. Answering which is more accurate requires closer scrutiny of the many economic and political factors that influence a nation's official statistics.

Meat of the problem

The meat smuggled into China alone had an estimated worth of at least RMB3 billion, or roughly US$480 million that was left out of the trade balances of both countries. That may not seem like much compared to the full size of China’s trade surplus, but tally up the number of nations that China trades with and the discrepancies grow large enough to suggest that the figures on which policymakers and businesses base major decisions might not reflect reality. Worse, there are still numerous other cases that have not made international headlines, and countless others that go undiscovered.

The border-crossing spot of Cau Tay, infamous in Vietnam for its regulatory flexibility, provides a glimpse of the true scope of the countries' smuggling problem. Yuk Wah Chan, associate professor with the Department of Asian and International Studies at the City University of Hong Kong, writes in Vietnamese-Chinese Relationships at the Borderlands that smuggling is as above-board a business as any at this rendezvous point. The benefits are shared by many, and at little cost. Smugglers pay officers for admittance across the border where profits are made; officers turn a blind eye to the benefit of both parties.

Heightened security and tighter regulation could eliminate some instances of smuggling, but incentives and a black market for illegal goods will never disappear entirely with so many vested interests.

Shuffling the deck

A 2009 joint report by members of the US International Trade Commission and Kennesaw State University notes that, “there are a number of incentives for firms to misstate the invoice price of an export-import transaction... These incentives can give rise to discrepancies in trade data, because there are multiple authorities involved, and there may be an incentive to tell different things to authorities in different countries.” But in the eyes of many officials, inaccuracy is a small price to pay for favorable-looking trade statistics.

In Sino-Vietnamese trade, China can benefit from reporting a lower number to Vietnamese authorities because underreporting lowers the tariffs being charged. Were this the case, Vietnam’s bilateral trade numbers could be expected to total billions of dollars lower than China’s. And they do. Compounding this issue is the fact that Vietnam likewise stands to benefit from underreporting imports. Imports detract from national GDP, and by artificially deflating import numbers Vietnam can boost its own apparent economic performance with few immediate consequences.

The Federal Reserve has also asserted that China's main trade intermediary, Hong Kong, introduces further confusion. In a 2005 report titled “Adjusting Chinese Bilateral Trade Data: How Big is China’s Trade Surplus?” the organization attempted to reevaluate China’s trade balance with the US by factoring out Hong Kong’s influence. Said territory acts as a re-exporter of goods through which any items bound for the US from China may pass. Thus there is a good chance that either the US or China (or both) will record Hong Kong as the export or import destination.

The Fed has managed to account for the majority of the two countries' trade discrepancy in the past, but over time Hong Kong’s calculated role (pdf) shrank from explaining 60% of the discrepancy in the 1980s to only 18% in 2007. Why the numbers still differ is another unknowable attesting to the fact that trade balance data is flawed, narrow, and unreliable—a crucial shortcoming for any globalized economy.

Scratched records

Not only is trade balance an unreliable economic indicator, it may also be understating cross-border debt. For nations with large trade deficits that are likely dependent on imports from other countries, any changes to the cross-border flow of goods could have a substantial impact on consumption and behavior. If trade deficits are actually much larger than what is officially recorded due to smuggling and other issues – as in the case of Vietnam and China – the ramifications of certain economic changes could be far greater than expected.

Yet crackdowns on smuggling can only go so far and, as with the case of the buried cats, can breed future complaints. While reports on trade gaps stretch far into the past, those gaps have widened, not narrowed. And, as is the case for Hong Kong, a greater span of that gap is now often left unexplained.

That doesn't necessarily spell imminent catastrophe for the global economy.  “A country’s economic state is not only determined by the trade balance or the balance of payments in general,” said Imad Moosa, a professor of finance at the Royal Melbourne Institute of Technology. “Perhaps more important are growth, inflation, and unemployment.” And with multiple economic indicators at hand, one need not rely entirely on the odd report of smuggled felines to counterbalance endemic inaccuracy—assuming, of course, there isn't anything wrong with China's other official statistics. 


Author: Annemarie Chen (@ChenAnnemarie)

Editor: Hudson Lockett (@KangHexin)