How East Asian Industry Transfer Affects the U.S.-China Trade Imbalance: Economic Mechanisms and Policy Implications

Abstract

Over the last three decades, the East Asian industry transfer has, via foreign direct investment (FDI), transformed China from an autarky into an integral player in the East Asian production chain. As a last-stage assembler in this value-added chain, China is maintaining an increasingly high trade surplus with the United States. The worsening U.S.-China trade disputes are addressed in such a politicized way that ”fair” trade has become the central issue of bilateral trade consultation. However, due to its enormous labor force and impressive macroeconomic prospects, China will continue to play its current role as a world assembly center. Our statistical analysis further substantiates the theoretical hypothesis that the East Asian industry transfer has a strong export transfer effect. Therefore, it is unlikely that the U.S.-China trade imbalance will be alleviated fundamentally in the next five to ten years. Trade disputes between Beijing and Washington will continue to be a big headache and both sides need to tackle the problem through more dialogue and negotiation..