Production-Driven and Non-Production-Driven Bilateral Trade Balance: Assessing Trade Deficits between the United States and China and the COVID-19 Epidemic

Abstract

This study aims to look deeper into the long-standing phenomenon of the United States’ large trade deficits with China by examining both countries’ bilateral trading structures (character). In this investigation, we, for the first time, redefine the traditional bilateral trade balance (BTB) ratio based on economic impact content as production-driven BTB (${\mathrm{X}}^{\mathrm{\text{pd}}}$) and non-production-driven BTB (${\mathrm{X}}^{\mathrm{\text{npd}}}$). This is done because, while the former undergoes an economic activity within the United States, the latter doesn’t. The traditional ratio, i.e. total export/total import, doesn’t technically allow such an investigation. Hence, the proposed methodology of this study, using these two new forms of BTBs, may provide new perspectives to this phenomenon for U.S. policymakers. The main empirical finding may make it imperative to analyze the US BTB with China using the methodology proposed because the independent variables of the study’s models have different effects on ${\mathrm{X}}^{\mathrm{\text{pd}}}$ and ${\mathrm{X}}^{\mathrm{\text{npd}}}.$ For example, while real depreciation in the USD improves ${\mathrm{X}}^{\mathrm{\text{npd}}}$ for 13 industries, the same change in the USD improves ${\mathrm{X}}^{\mathrm{\text{pd}}}$ for only seven. Additionally, this methodology allows U.S. policymakers to compare/review the US BTB based on economic impact contents through ${\mathrm{X}}^{\mathrm{\text{pd}}}$ and ${\mathrm{X}}^{\mathrm{\text{npd}}}$ separately. Last, it can be interpreted that the United States benefits from decreasing trade-policy uncertainty in the United States.

Keywords:

• Production-driven bilateral trade balance
• non-production-driven bilateral trade balance
• nonlinear ARDL approach
• US-Sino trade

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Re-exports consist of commodities of foreign origin that have previously been admitted to U.S. Foreign-Trade Zones (FTZ) or entered the United States for consumption, including entry into a CBP bonded warehouse, and which, at the time of exportation, are in substantially the same condition as when imported (CB, 2021b).

2 Goods that are grown, produced, or manufactured in the United States, and commodities of foreign origin that have been altered in the United States, including changes made in a U.S. FTZ, from the form in which they were imported, or that have been enhanced in value or improved in condition by further processing or manufacturing in the United States (CB, 2021b).

3 The model in Equation 2(2) $$\frac{X_{\mathit{\text{US}}-\mathit{\text{CHN}}}}{M_{\mathit{\text{US}}-\mathit{\text{CHN}}}}=\frac{X_{\mathit{\text{US}}-\mathit{\text{CHN}}}^{\mathit{\text{pd}}}}{M_{\mathit{\text{US}}-\mathit{\text{CHN}}}}+\frac{X_{\mathit{\text{US}}-\mathit{\text{CHN}}}^{\mathit{\text{npd}}}}{M_{\mathit{\text{US}}-\mathit{\text{CHN}}}}={\alpha }_0+{\alpha }_1{Y}_{{\mathit{\text{US}}}_t}+{\alpha }_2{Y}_{{\mathit{\text{CHN}}}_t}+{\alpha }_3{\mathit{\text{RER}}}_{\mathit{\text{CNY}}-{\mathit{\text{USD}}}_t}+e_t$$(2) is presented in a non-log form to clearly illustrate this study’s proposed methodology. However, the model is estimated in logarithmic form.

4 For further detailed information, visit www.policyuncertainty.com/methodology.html.

5 USA Today, Miami Herald, Chicago Tribune, Washington Post, Los Angeles Times, Boston Globe, San Francisco Chronicle, Dallas Morning News, New York Times, and Wall Street Journal.

6 The Renmin Daily and the Guangming Daily.