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Krugman has identified four reasons for China's persistent bilateral surplus with the U.S.: "Hong Kong, macroeconomics, value-added, and oil"

I want to expand a bit on "value-added" point, and link it to macroeconomics ...

China's traditional position at the end of Asia's electronics supply chain means that its bilateral surplus with the U.S. effectively embeds within it much of Asia's overall surplus (Vietnam may be playing the same role now too).

It isn't just that China is importing a lot of microchips, it is that China is importing microchips from countries that themselves run large external surpluses (Korea and Taiwan and Singapore especially)

As an aside, China's own surplus has ticked back up in the last few quarters, and (as measured, and it isn't measured well) is closer to $200b than $100b. Some of that is at the expense of the rest of Asia tho ...

Basically, think of the bilateral deficit with China as a reflection of the aggregate surplus that all of East Asia runs (over $500b, comparable to that of Europe) and you aren't far off

There is another supply chain point to make --

China (to simplify a bit) is kind of protectionist in some sectors (like autos), and doesn't import many finished manufactured goods. The bulk of its imports are oil, iron and ore, and integrated circuits (for now at least)

That's the famous supply chain ...

But it raises a puzzle. U.S. firms design something like 50% of the world chips, and China imports ~ $300 in chips, so why are U.S. chip exports to China and HK under $15b rather than $150b?

One part of the answer -

Some US firms only design the chips; they don't make them. They generally subcontract to Taiwanese and Korean fabs these days. US firms get the design profits (probably booked in a tax center) but the U.S. doesn't get the manufacturing value-add.
That tho has a policy component -- Korea and Taiwan have a host of policies that keep their currencies weak as well as industrial policies that support their chip businesses ...

and the US has a "make it abroad" corporate tax policy in a lot of ways
And for those chips still made in the U.S. (largely by Intel I think), they are often shipped to a third party (Malaysia for example, or Taiwan) for assembly and testing before they are shipped to China --

that also raises the bilateral deficit with China.
I have thought about this a bit in part b/c of another puzzle: When the US overall trade deficit in manufacturing was adjusting (the nominal deficit was flat from 04 to 13, which means it was falling as a share of US GDP), the bilateral deficit with China didn't adjust
(the bilateral deficit did stop growing as a share of US GDP, so there was an impact -- it just didn't reverse)
The exchange rate move that drove the broader rebalancing did still have an impact -- the bilateral balance with China stabilized as a share of US GDP-- it just didn't fall
And I think one reason for that was the limited adjustment in the rest of Asia ....

My more than two cents
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