A Mathematical Programming Model to Estimate Re-export Markup and Reconcile Trade Statistics from China, Hong Kong and the United Sates

A large share of China’s trade with the U.S. and with the world passes through Hong Kong. These Hong Kong re-exports are not clearly differentiated in either the U.S. or Chinese trade data, leading to conflicting measures of bilateral trade balances. It is quite incredible that much of current debate on China’s exchange rate and US trade policy towards China are greatly influenced by the US trade deficit with China, the actual size of the US-China bilateral trade deficit is not actually known! For example, a comparison of trade statistics from China Customs, U.S. and Hong Kong Census shows a statistical discrepancy between China & Hong Kong reported exports to the United States and U.S. reported imports from China & and Hong Kong of about $40.5 billion in 2004, even after taking into account China’s re-exports via Hong Kong to the United States. As the role of Hong Kong in US-China trade declines over past decades (The share of Hong Kong re-export to US for China as China’s total export to US decline from more than 50 percent in the mid 1990s to less than 25 percent in recent years), the annual growth in the statistical discrepancy has been rapid--from less than 3 percent in 1997 to nearly 20 percent of total US imports from China & Hong Kong in 2004. To resolve this puzzle, this paper developed a mathematical programming model with both accounting and behavior constraints, based on detailed Chinese, Hong Kong and U.S. statistics on imports, exports and re-exports, to adjust U.S.-China trade data for re-export markups and accounting differences from 1995-2004. Preliminary result at one digit HS level shows that the model is able to eliminate the discrepancy efficiently under different error structure assumptions, Hong Kongs re-export mark-up rate and each countrys re-exports via Hong Kong as percent of the countrys total exports are part of the model solution. Therefore, the model provides a flexible tool to reconcile trade statistics from China, Hong Kong and the United Sates simultaneously. The model is implemented in GAMS and used for production of the Hong Kong re-exports adjusted trade flows contributing to version 7 GTAP database.