The U.S. has been running large trade deficits with China. Many view this result as arising from the excessive purchase of goods that carry the “Made in China” label. Hale and Hobijn, in a recent Federal Reserve Bank of San Francisco Economic Letter, provide evidence to the contrary. They use data from several U.S. governmental sources to answer three questions:
- What portion of U.S. consumer spending comes from goods labeled “Made in China” and what portion from goods “Made in the U.S.”?
- What part of the cost of goods labeled “Made in China” comes from valued added in China in contrast with what portion arises from valued added by U.S. economic activity?
- What part of U.S. consumer spending comes from direct purchases of goods imported from China or from intermediate inputs that came from China?
Their answers are as follows:
- 2.7% of U.S. personal consumption expenditures come from goods labeled “Made in China” and 88.5% come from goods “Made in the U.S.”
- Of the 2.7% noted above, approximately 1.2% reflects the direct cost of imported goods. in other words, 55.6% of goods labeled “Made in China” can be attributed to services added in the U.S.
- The total imported content of personal consumption expenditures that comes from goods and services imported from China equals 1.9% of which 0.7% can be attributed to intermediate inputs from China.
Given these results, why is it the common perception that a much larger portion of goods consumed in the U.S. come from China. The answer can be inferred from Table 1 in the report, which indicates that 35.6% of clothing and shoe expenditures bear the label “Made in China” and 20.0% of furniture and household equipment bear the same level. These two categories, however, only account for 3.4% and 4.7%, respectively, of U.S. personal consumption expenditures.
These data suggest that our concern with the purchase of imports from China is overblown and that a tariff on Chinese goods will have modest, if any, effect on aggregate U.S. personal consumption.