Causality Relationship between the US—China Trade Balance and the US and Japan Direct Investment in China

This study aims to examine the relationship between the surges of the US & Japan direct investment into China and the growth of the U.S. trade deficit with China. This empirical study is based on the Johansen Co-integration test, Error Correction Model, and Granger causality test during the period 1980—2006. The results show that the rapidly growing U.S. trade deficit with China is directly linked to the growth of U.S and Japanese multinationals; FDI has a significant positive impact on the export-promotion and negative impact on import-substitution of China industries. This article uses regression analysis to examine the impact of the U.S. direct investment into China on the growth of US manufacturing exports and imports with China in recent years, based on the extensive gravity model and Panel data estimation techniques. The estimation results are consistent with direct investment in China by US firms primarily serving to boost China's exports to the United States while displacing, at least to some extent, the export of goods to China by firms based on the United States, further worsens US trade deficit with China.