At NPR, Robert Koopman, Zhi Wang and Shang-Jin Wei explain:
First, it means that the U.S. trade deficit with China and Mexico is not as large as meets the eye. What's more, the United States' deficit with countries that make component parts — such as Japan — is probably understated. Yes, U.S. imports from all of Asia over the last 15 years have slightly declined, while China's share of U.S. imports has increased rapidly. But it's not that the world has stopped importing Japanese, Korean, and other countries' products; China is just "indirectly" exporting them instead by buying international components, assembling them, and then shipping them abroad.
Second, understanding that "Made in China" doesn't quite mean what we think it means helps clear up a mystery. Since the economic crisis began, China's exports have dropped significantly, but the impact on its GDP growth, oddly, appears muted. What's going on? Given the low share of domestic value added in China's exports, the Chinese economy's true dependence on exports is only half as large as the headline trade data would lead one to believe. The pain of a reduction in China's exports is shared with other economies that supply components, such as Japan, Korea, Taiwan, Singapore and Hong Kong. For example, for every iPod that the United States decides not to import, the "decline" in recorded exports from China is $150 — but only about $4 of that value was added in China. In other words, China's GDP declines just $4 for each lost $150 iPod. Japan, on the other hand, contributes about $100 to the $150 value and takes the far bigger GDP hit from "China's" decline in exports.
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