(Bloomberg) – In early 2020, a highly unlikely anomaly in world trade data began to emerge: China said it was selling more products to the United States than the US reported buying from China.
It was a reversal of the normal pattern and a product of the two countries’ trade war, but not an intended consequence. Instead, it was likely due to misreporting from both exporters in China and importers in the US, according to new research by economists at the Federal Reserve.
Companies in the US could pay lower tariffs if they reported a lower value of imported goods from China, while companies in China could get higher returns of value added tax if they over-reported the value of exports, argue economists.
Generally, the import value of a good when it enters a country must be greater than the value of the same good when it leaves another country. This is because import prices generally include the cost of freight and insurance, while exports do not.
Until February 2020, this was the case for bilateral trade between the US and China. US imports of goods from China were always considered to be of higher value than China’s exports to the US However, since March the opposite has been reported in almost every month.
The report highlights the difficulty of winning trade wars with economic barriers such as tariffs, contrary to claims by former President Donald Trump that victory would be easy. The distortions also reinforce arguments against Trump administration officials that US tariffs were fundamentally rebalancing the skewed trade relationship between the world’s two largest economies, in which the US has long run a large deficit.
Misreporting by US and Chinese companies explains most of the shrinking trade deficit between the US and China since the two sides began imposing tariffs on each other in 2018, argue Hunter Clark and Anna Wong, economists at the Fed. The trade balance shrank by US $ 88 billion in 2020 compared to 2017, according to his calculation. Of this deficit, $ 55 billion is derived from US tariff evasion, $ 12 billion is due to misreporting to obtain higher Chinese VAT refunds, and the remaining $ 20 billion is unexplained.
“The trade conflict had a much smaller impact on the US bilateral trade balance with China than appears at first glance when we look at US data,” they wrote. Underreporting of US imports also means that about $ 10 billion in tariff revenue may have been lost, they estimated.
China’s latest trade figures also show slow progress in meeting the purchasing targets agreed with the US under the trade agreement. Since January 2020, Chinese imports of manufactured goods, agriculture and energy amounted to almost $ 157 billion, or about 41% of the goals agreed by the two countries.
Original Note: Trump’s Tariffs Led to Billions of Losses, Fed Research Shows
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