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China’s Exaggerated Semiconductor Trade Deficit No Justification for Mercantilist Policies

As ITIF has long argued, China pursues an autarkic, indigenous economic growth and innovation development strategy, particularly with regard to high-tech products. For example, in the semiconductor sector, China has launched a $100 billion National IC (integrated circuits) Industry Development plan designed to significantly increase domestic IC production and to reduce China’s imports of semiconductors—by half in 10 years and entirely in 20 years. To justify its mercantilist industrial development policies China claims hardship: we import too many semiconductors. This argument has been broached again recently given the potential merger between two semiconductor companies, one of which, Western Digital, has a major Chinese stockholder. This simplistic analysis needs to be called out for what it is—false—and a façade for a policy which breaches rules China agreed to when joining the WTO.

One reason China has tried to give for its aggressive and mercantilist IC industry development plan is that it runs a “large” trade deficit in semiconductors—$232 billion in 2013—which supposedly justifies efforts to replace foreign imports with domestic production, but this rationale is wrong on several levels. First, this simplistic narrative fails to account for the fact that around half of these semiconductor imports are re-exported—with value-added during assembly and manufacturing—from China as part of global production networks for cell phones, tablets, and other electronic products.

In fact, China’s trade deficit in semiconductors actually represents evidence of the global economic system working. Indeed, the world’s largest exporters of ICT products are also the largest importers of these products, explaining why, among countries who are members to the Information Technology Agreement (ITA), the top ten ITA-exporting countries are the exact same as the top ten ITA-importing countries. This is exactly the case with China. Semiconductors are China’s top import because its top exports are electronics products which use semiconductors. In 2013, China exported $174 billion in telecommunications equipment, including cellphones, $161 billion in computers, $115 billion in semiconductors, $38 billion in liquid crystal devices, and $29 billion in parts for electronic products. It is also why China runs a huge overall trade surplus in IT products.

More importantly, the fact that China has a trade deficit in semiconductors is simply irrelevant and not an acceptable rationale to justify an industrial development strategy that would seek to intentionally limit imports of foreign technology products. From 2002 through to the end of July 2015, China accumulated a $3.3 trillion trade surplus in goods with the United States. China also enjoys a large trade surplus—$54.5 billion in the first half of 2015—with the United States in advanced technology products. Yet there was little or no push in the United States to replace trade from China. In joining the World Trade Organization (WTO), China agreed to a system in which it exports to the world products and services in which it has a comparative advantage and imports products and services from other countries when their enterprises enjoy a comparative advantage in their development, as is the case with semiconductors.

China’s mercantilist approach to semiconductors breaks the rules it agreed to in joining the WTO. Moreover, if China doesn’t like it semiconductor trade deficit, it should focus on good policies (e.g. investment in scientific research/education/etc.) to make its domestic semiconductor sector genuinely more globally competitive. China’s use of this import deficient figure reflects a mercantilist approach to trade, that it is a zero-sum game. This mercantilist strategy undermines the global trading system. It is time for the United States to adopt a new policy of ‘constructive confrontation’  to push back against such damaging and misguided trade policies.

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