Estimate Hong Kong Re-export Markups and Reconcile Trade Statistics from China, Hong Kong and Their Major Trading Partners -- A Mathematical Programming Approach Zhi Wang United States International Trade Commission* Mark Gehlhar United States Department of Agriculture Shunli Yao China Center for Economic Research, Peking University * The views expressed in this presentation are solely those of the presenter. It is not meant to represent in anyway the views of the U.S. International Trade Commission or any of its individual Commissioners..

Presentation Outline Issues and Objectives Literature Review Model Specification Steps to Implement the Model Preliminary Results Conclusions and Future Work

China and U.S. Merchandise Trade Balance,

Literature Review: International Trade Statistics China-U.S. Joint Commission on Commerce and Trade (JCCT), 1995; Statistics Canada, 2002, 2005 Fung and Lau, 1996, 1998, 2001, 2003, 2004 Feenstra et al., 1999, 2004 Schindler and Beckett, 2005 The literature to date consistently shows that the re- export activities in Hong Kong are one of the major contributing factors to the statistical discrepancy.

Major Issues There are significant discrepancies between trade statistics reported by China and its partners, especially at commodity level, but adjustment in the literature to date is only made at the aggregate level There is no well developed consistent relationships between trade statistics reported by trading partners in a world in which transshipment and re-export activities have become increasingly important Re-export markup estimates are ad hoc and varies considerably, as a result, substantial inconsistencies still exist after adjusting trade via Hong Kong even at the aggregate level in recent years

Literature Review: Computational Economics Constrained matrix-balancing as a procedure to solve under or over determined estimation problems. It is a core mathematical structure in diverse applications: Estimating input-output tables and inter-regional trade flows in regional science Balancing of social/national accounts in economics Estimating interregional migration in demography Analysis of voting patterns in political science Treatment of census data and estimation of contingency tables in statistics Estimation of transition probabilities in stochastic modeling Projection of traffic within telecommunication and transportation networks Reconcile international trade statistics reported by partner countries

Objectives Develop and implement a formal model to estimate Hong Kong re-export markup and reconcile trade statistics from China, Hong Kong and their partners simultaneously in a consistent optimization framework. To apply the model to 2004 bilateral world trade data in GTAP sector classification to produce Hong Kong re-exports adjusted trade flows contributing to version 7 GTAP database.

Basic Ideas of the Adjustment Framework To apply this procedure as a data reconciliation tool (solve over determined estimation problem), three pieces of information are needed: Initial estimates of the same economic variables from different sources (in national economic accounts, estimates of the same variables can often be obtained from income, expenditure or production data; in international trade, export and import reported between partner countries;…). An accounting framework and other constraints (demands have to equal supplies, components have to sum to totals, global balance of trade equal to zero, …). Reliability information on the initial estimates (standard error, ranking index, …)

Problems of Proportional Adjustment in International Trade Statistics Country Name China direct exports to Partners Hong Kong domestic export to partner China re-exports to partner via Hong Kong Partners total imports from China Partner imports with Hong Kong origin Statistical discrepancies Mozambique Benin Togo Kyrgyz Republic Malta Luxembourg Venezuela Sudan Singapore12,6842,0953,45616,0123, United Kingdom14,9523,5876,84926,2063, Korea Rep27,8102,1172,83229,5853, Germany23,7532,7526,90540,6792, Japan73,2224,30211,97793,5891, United States125,11817,70735,587208,1539,

Key Assumptions Hong Kong is the only entrepot between China and its partner countries All reporting countries, including China, can correctly identify the country of origin of their imports, whatever the imports are directly from the partners or indirectly from Hong Kong, but can not determine the final destination when exports leave their ports.

Mirror Relation among U.S., China and Hong Kong Reported Trade Statistics Eastbound Flows China reported total exports to U.S. (fob) + Hong Kong reported domestic exports to U.S.(fob) Hong Kong Reported re-exports of China originated goods to U.S. (fob) China indirect Export to U.S. via Hong Kong Hong Kong’s markup for re-export China originated goods to U.S U.S. reported imports originated from China (fob) U.S. reported imports originated from Hong Kong (fob) + =

Mirror Relation among U.S., China and Hong Kong Reported Trade Statistics Westbound Flows U.S. reported total exports to China (fas) U.S. Reported Total exports to Hong Kong (fas) Hong Kong reported re-exports of U.S originated goods U.S. indirect exports to China via Hong Kong Hong Kong’s reported re-export U.S. originated goods to other countries China reported imports of U.S. originated prodicts (cif) Hong Kong reported imports of U.S originated products (cif) + + fob/cif adj fob/cif adj - - -

Notation and Conventions DX: Direct exports between custom regions RX: Indirect exports via Hong Kong between custom regions TX: Total exports between custom regions TM: Total imports between custom regions DM Direct imports between custom regions RXM: Re-export markups cif: CIF/FOB margins rate wex: a country’s total exports wmx:a country’s total imports Superscripts denote custom regions, subscripts denote commodities and years; Capital letter denote variables, lower latter denote parameters; Variables with a 0 in the end denote initial estimates for that variable; An additional “w” before the variable indicates the reliability measure for that variable; Exports are measured on a fob basis, imports are measured on cif basis.

Mirror Relation among U.S., China and Hong Kong Reported Trade Statistics Eastbound Flows China reported direct exports to U.S. (fob) fob/cif adj + Hong Kong reported domestic exports to U.S.(fob) Hong Kong Reported re-exports of China originated goods to U.S. (fob) China indirect Export to U.S. via Hong Kong Hong Kong’s markup for re-export China originated goods to U.S U.S. reported imports originated from China (fob) U.S. reported imports originated from Hong Kong (fob) + = - =

Consistency Constraints in the Model Consistency Constraints in the Model There are 16 consistency constraints in total Five for Eastbound trade, five for Westbound trade, four for China-Hong Kong bilateral trade, and two for global exports and imports The first constraint in both East and Westbound trade is intended to isolate the statistical discrepancies with re-export markups, and defines two side of the mirror-trade statistics in each directions in the presence of entrepot trade The rest of the constraints define trade variables in the first constraint and give the mathematical relations between observed and unobserved trade statistics

Basic Consistency Constraints Eastbound flows: China and Hong Kong export to partners Partner reported imports from China and Hong Kong after fob/cif adjustment should equal the sum of China reported exports to the partner, Kong Kong reported domestic exports, Hong Kong re-exports for China originated goods to the partner, plus a statistical discrepancy China’s total exports to partner equals China’s direct exports plus Hong Kong’s re-exports for China minus Hong Kong’s re-export makeup Hong Kong’s domestic exports to a partner equal its total exports to that partner minus its re-exports for all other countries to the partner plus its markup earnings from re- exports

Basic Consistency Constraints Eastbound flows: China and Hong Kong export to partners

Mirror Relation among U.S., China and Hong Kong Reported Trade Statistics Westbound Flows U.S. reported direct exports to China (fas) U.S. Reported Total exports to Hong Kong (fas) Hong Kong Reported Total re-exports of U.S originated goods U.S. indirect exports to China via Hong Kong Hong Kong’s reported re-export U.S. originated goods to other countries China reported imports of U.S. originated products (cif) Hong Kong retained imports of U.S originated products (cif) + - fob/cif adj fob/cif adj fob/cif adj = =

Basic Consistency Constraints Westbound flows: partners export to China and Hong Kong Sum of U.S. reported exports to China and Hong Kong equals the sum of China and Hong Kong reported imports originated from U.S. after fob/cif adjustment, minus Kong Kong re- exports for the U.S. to China Hong Kong’s domestic use of imports plus its re-exports for a partner minus re-exports markup equals Hong Kong’s total imports from that partner China’s direct imports from a partner equal China’s total imports from that partner minus Hong Kong’s re-exports to China for that partner adjusted by Hong Kong’s re-export markups

Basic Consistency Constraints Westbound flows: partners export to China and Hong Kong

Basic Consistency Constraints Global balance Actual exports from China and Hong Kong to all their partners after adjustment should still equal to the sum of their reported total exports to the world China and Hong Kong’s imports and Hong Kong’s re-exports minus re-exports markup after adjustment should still equal the sum of China and Hong Kong’s total imports from the world

The Adjustment Problems Adjust a given set of initial trade statistics according to the following objective function to satisfy the 16 consistency constraints:

Theoretical Properties Statistical interpretations underlying the model differ when different reliability weights are used Estimation of Hong Kong’s re-export markups, rearrange sources and destinations of China’s and Hong Kong’s exports and imports, adjust bilateral trade balance for China and all its partners are made in a consistent simultaneous manner, thus impose global consistence to the adjusted trade data In all but the trivial case, posterior estimates derived from entropy or quadratic loss minimand will always be closer to the unknown, true values than the associated initial statistics The choice of weights in the objective function has a large impact on the estimation results

Why Adjusted Estimates Better? D0: Initial estimates W variance matrix of initial estimates, A coefficient matrix of all linear constraints AD* = 0 The BLUE : D * will never be worse than D0 with equal or smaller variance

Empirical Advantages Convenience and details –Hong Kong's re-export markup rate, each country's re-exports via Hong Kong as percent of the country's total exports, and adjusted bilateral BOT between China, Hong Kong and their partners all are part of the model solution Completeness –Complete use of all information from official trade statistics Flexibility –The model permits a wider variety and volume of information to be brought into the adjustment process than is possible with scaling methods such as RAS Incorporation of data reliabilities in a systemic way –The weights in the objective function reflect the relative reliability of a given trade flow. Trade statistics with higher reliability should undergo less adjustment than trade statistics with lower reliability

Five Key Steps to Implement the Model Obtain initial estimates Calculate initial Hong Kong re-export markups Estimates of fob/cif margins Country and commodity aggregation The choice and estimation of reliability weights

Observed and Derived Trade Statistics East bound trade Observed China’s direct exports to partner countries Hong Kong’s total exports to partner countries Partner’s total imports from China Partner’s imports of product originated from Hong Kong Derived China’s total exports to partner countries Hong Kong’s domestic exports to partner countries Partner countries’ direct imports from China Partner countries’ total imports from Hong Kong

Observed and Derived Trade Statistics West bound trade Observed Partner countries total exports to Hong Kong Partner countries direct exports to China China’s total imports from partner countries Hong Kong’s total imports from partner countries Derived Hong Kong’s imports from partner countries for domestic use China’s direct imports from partner countries Partner countries’ total exports to China Partner countries’ exports for Hong Kong’s domestic market

Data Source All data are from China: Customs General Administration, 8-digit Harmonized System (HS) Hong Kong: Census and Statistical Department, 8- digit HS United States: Census Bureau, 10-digit HS; Other Partner Countries: World Integrated Trade Solution (WITS) managed by the World Bank, 6- digit HS, more than 150 reporting countries.

Reliability of Reported Trade Statistics Mirror trade statistics are the major data source to estimate the reliability weights Econometric analysis of discrepancies between the two "reported" trade data of the same trade flows provide estimates of data reliability

Auto regression with dummy variables e is the mirror trade statistics discrepancies b is the symmetric bias dummy variables represent events have a significant impact on the reporting practice in the two data reporting countries (change of commodity classifications, implementing better custom information systems, enforcing effective anti-smuggling programs, ect.) the variance:

Country and Commodity Aggregation 42 GTAP merchandise sectors aggregated from original data at 6 and 8 digit HS level 215 countries identified in the GTAP global bilateral trade data base, while only 157 countries reported at least one year of their exports to or import from China and Hong Kong during 2002 to 2004 First aggregate all the non-reporting country into one block Then use two cut off criteria to separate the 157 reporting country into two blocks. The first block has 96 countries, including all single countries in version 6 GTAP database and the sum of exports from China and Hong Kong to the world greater than 300 million dollars in 2004 identified either by China and Hong Kong reported data or their partner reported data. The second block is consisted of 61 remaining reporting countries, which aggregated to one other reporting country block. Include China and Hong Kong, the model has 98 countries.

Characters of the Initial Data Reported westbound trade is less problematic than reported eastbound trade. ( 20 of the 97 reported bilateral routines with more than 100% discrepancies in eastbound trade, only two routines in the westbound trade see such large discrepancies ) Trade with developing country partners shows greater discrepancies than developed countries in general Small trade flows often associate with large discrepancies than large flows. Extremely large discrepancies come from partners only have small trade values

Initial and Adjusted Re-export Markup Rate, from Partner to China, in %

Initial and Adjusted Re-export Markup Rate, from China to Partner, in %

Initial and Adjusted Re-export Earnings to China, Million of U.S. Dollars

Initial and Adjusted Re-export Earnings from China, Million of U.S. Dollars

Initial and Adjusted Retaining Imports in Hong Kong, Millions of U.S. Dollars

Reported and Adjusted Bilateral Trade Balance between China and Selected Partners Millions of U.S. Dollars

Reported and Adjusted China’s Net Exports to All Partners Except Hong Kong by Major Commodities, Millions of U.S. Dollars

Reported and Adjusted China-U.S. Bilateral Trade Balance by Major Commodities Millions of U.S. Dollars

Conclusions Preliminary result shows that the model developed in this study provides a flexible tool to estimate Hong Kong re- export markup and reconcile trade statistics from China, Hong Kong and their trading partners simultaneously to fully use all available official trade statistics.

Implications The model can be applied to reconcile direct and indirect trade for other regions of the world where transshipment creates major discrepancies. It not only provides a tool for the preparation of global trade data in future versions of GTAP database, but also contributes to the methodological development to estimate and reconcile discrepancies in international trade statistics when transshipment and re-export activities heavily diminish the ability of a country identifying its correct partner countries.

Future Work Missed and double counted transshipments through Hong Kong Reliability of Hong Kong’s re-export statistics Countries’ total exports, imports and supply- demand balance at global level Econometrically estimate reliability weights and fob/cif margins

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