Zilin Cheng[1]
Overview
The prevailing notion that China's logistics costs far exceed those of the United States may be based on a misconception. The commonly used indicator—the ratio of total social logistics costs to gross domestic product (GDP)—could be an inadequate measure for assessing logistics expenses.
A stronger correlation exists between total goods supply and total social logistics costs, making their ratio, the unit goods logistics cost rate, a more suitable indicator for evaluating macro-level logistics costs.
In 2022, China's unit goods logistics cost rate was 9.0%, substantially lower than the 17.8% rate for the United States.
The critical importance of lowering logistics costs has been a key issue mentioned in both the 20th National Congress of the Communist Party of China and in the government work report passed in the recently concluded second session of the 14th National People's Congress. However, further discussion is warranted to determine a suitable metric for assessing logistics costs.
The mainstream notion that China's logistics costs are significantly higher than those of the USA is primarily based on the comparison of the ratio of China's total social logistics costs to GDP (approximately 15%) against that of the U.S. (about 8%). This view, however, does not reflect the real logistics costs of the countries. The crux of the issue lies in the weak correlation between total social logistics costs and GDP, making the ratio between the two variables an unsuitable metric for comparing logistics costs between China and the U.S.
I. The Ratio of Total Social Logistics Costs to GDP as an Unsuitable Measure of Relative Logistics Costs
Logistics costs can be viewed in absolute and relative terms, and the discussion in this report focuses only on the relative logistics costs between two economies, namely China and the U.S. From a microeconomic perspective, transport costs per ton-kilometer and the daily storage costs per ton (or per unit volume) are excellent indicators of logistics costs. However, due to significant variations in transport and storage costs across different transport modes and types of goods, these are not easily comparable at the macro level. Hence, the ratio of total social logistics costs to GDP emerged as a metric. GDP represents the total final outputs produced by all resident units within a country over a specific period (usually one year) and correlates well with many statistical indicators, thus is typically used as an anchor variable for standardization. While at first glance, comparing total social logistics costs to GDP appears unproblematic as all economic sectors require logistics services to some degrees, further analysis reveals two fundamental issues with this measure:
Firstly, final outputs accounted for in GDP can be either goods or services, but only goods require logistics services. Goods, comprising industrial and agricultural products, require extensive logistics services in the production, consumption, capital formation, and export processes. Although the service and construction sectors also utilize logistics services, the goods that require transportation and storage are still industrial and agricultural products, while the sectors' own products require only minimal logistics services. Evidently, logistics services are necessary for catering deliveries and the shipments of scientific research, literary and artistic works, and engineering design drawings. However, the volume of these services is negligible on the aggregated scale. In 2022, the value added by industrial and agricultural products in the USA was $3.816 trillion, or 14.8% of the GDP. In contrast, in China, it was RMB 49.423 trillion, representing 42.8% of the GDP. Although the USA's GDP is 41.6% higher than China's, its value added of goods is only 54.4% of the latter.
Secondly, it is the total output of goods, and not only goods corresponding to added value, that require logistics services. The total output of goods, encompassing intermediate consumption and added value, can be measured both in terms of added value and total output. Based on data published by the U.S. Bureau of Economic Analysis, the value added rate of the U.S. industrial sector in 2022 was 40.7%. In contrast, calculations from the input-output tables released by the National Bureau of Statistics of China show that the value added rate for China's manufacturing sector in 2020 was 25.1%. The marked difference between these rates indicates that each unit of industrial value added in China corresponds to a greater total industrial output, thereby necessitating more extensive logistics services.
Therefore, due to the limitations of GDP in capturing the demand for social logistics services, the ratio of total social logistics costs to GDP fails to provide an accurate reflection of logistics costs. While this metric may be acceptable for indirect domestic comparisons of logistics costs over time, due to relatively stable industrial structures and value-added rates within a single country, the significant differences in industrial structures and efficiencies between countries make it suboptimal for international comparisons. The significant differences in industrial structures and efficiencies between countries, such as between China and the U.S., lead to discrepancies. Specifically, the substantially higher demand for logistics services per unit of GDP in China, driven primarily by these differences, naturally results in a higher social logistics costs to GDP ratio in China.
II. Unit Goods Logistics Cost Rate as a More Accurate Measure of Logistics Costs
To accurately measure relative logistics costs, a metric with a higher correlation to the aggregated demand for logistics services is needed. Since both industrial and agricultural products require extensive transportation and storage, the total production of these products correlates strongly with logistics services. Imported goods, which also require transportation and storage, should be included as well.
By summing the total output of industrial and agricultural products with the total amount of imported goods, we obtain the total goods supply. This represents, roughly, the total amount of goods requiring logistics services within a country for a specific period. The strong correlation between the total goods supply and total social logistics costs indicates that almost all goods requiring logistics services are included in the total goods supply.[2] Dividing the total social logistics costs by the total goods supply yields the unit goods logistics cost rate, which is proposed as a more accurate measure of a country's logistics costs. This rate facilitates more meaningful international comparisons of logistics costs, despite variations in product structure, transportation methods, and tax structures between countries.
Data indicate that in 2022, China's total goods supply amounted to 19.75 trillion yuan, with total social logistics costs at 1.78 trillion yuan, resulting in a unit goods logistics cost rate of 9.0%.[3] In contrast, the United States had a total goods supply of 12.9 trillion dollars, with total social logistics costs of 2.3 trillion dollars, and a unit goods logistics cost rate of 17.8%.[4] Following the use of the unit goods logistics cost rate as the measure of logistics costs, it can be shown that logistics costs are significantly lower in China than in the U.S.
III. Policy Recommendations
1. Continue to Further Reduce Logistics Costs
Efforts to lower logistics costs should continue to be robustly implemented. Despite the unit goods logistics cost rate in China being significantly lower than that in the U.S., from a macro perspective, this does not imply that there is no need to further reduce logistics costs in China. Significant potential remains for improvements in transportation networks, enhanced transportation capacities and storage facilities, optimized transportation structures, increased transportation efficiency, and reduced storage times. These improvements could further lower the costs of goods transportation and storage.
2. Adopt Unit Goods Logistics Cost Rate as the Standard for Measuring Aggregated Logistics Costs
The analysis above demonstrates that the correlation between the total goods supply and total social logistics costs is stronger than that between GDP and total social logistics costs. This makes the unit goods logistics cost rate a more suitable indicator for evaluating logistics costs. Adopting this rate as the measure of relative logistics costs can enhance the motivating effect that appropriate statistical indicators may have on economic activities.
[1] Zilin Cheng is the Joint Executive Director of the National Bureau of Statistics - Peking University Data Development Center.
[2] Beginning inventory, recycled waste, scrap materials, and the movement of household goods and organizational relocations also require logistics services but are not included in the total goods supply. This exclusion is due to their high correlation with the total goods supply and the difficulty of obtaining accurate data on these items.
[3] The data on China's total social logistics costs were sourced from the National Development and Reform Commission. The total output data were calculated based on the industry value-added data for 2022 and the input-output table data for 2020 published by the National Bureau of Statistics (assuming a constant value-added rate). The data on goods imports were obtained from the Balance of Payments published by China's State Administration of Foreign Exchange.
[4] The data on the total social logistics costs for the United States were sourced from the 34th Annual State of Logistics Report. The remaining U.S. data were obtained from the U.S. Department of Commerce's Bureau of Economic Analysis, with half of the total output from federal, state, and local government enterprises included in the total goods output.
