This week’s Chinese trade numbers can leave little doubt that the country’s trade surplus is unsustainable.
Herb Stein famously said that if something cannot go on forever, it will stop. If ever there was something that in the end has to stop, it has to be China’s ever-growing trade surplus. The real question is not whether this imbalance stops. Rather, it is when and how it stops.
Does China’s trade surplus stop growing as a result of a breakdown in the global trading system through a heightening of protectionist trade policies by its main trade partners? That would be damaging to both China and the world’s economies. Or does it end in a more benign manner through China reorienting its economy in coordination with its trade partners away from its current excessive reliance on investment and export growth to drive its economy?
This week’s Chinese trade numbers can leave little doubt that its trade surplus is unsustainable. In the first eleven months of this year, China racked up a trade surplus in excess of $1 trillion, or more than 20 percent higher than the corresponding period last year. That is something that no country has done before. This trade surplus is now in excess of 6 percent of China’s GDP and around 1 percent of world GDP.
A striking feature of China’s trade performance is that its exports have continued to increase at a rapid pace, despite being subject to a U.S. import tariff of close to 40 percent. While this year China’s exports to the U.S. have declined by 29 percent, its overall exports have increased by 5.5 percent. China has achieved this overall growth by redirecting its exports away from the United States to the Asian and European markets. On his recent visit to China, French President Emmanuel Macron has signaled that Europe would soon be forced to respond with trade measures to a China that was flooding Europe with its excess manufacturing output.
One way of looking at China’s large trade surplus is that it results from China’s unfair trade practices that gives rise to an unlevel international trade playing field. These practices include a whole array of state subsidies for Chinese manufacturers, including most noticeably those involved in high-tech endeavors like electric vehicle production, solar panels, batteries, and semiconductors. In addition, China follows a monetary policy that keeps its currency artificially weak to gain a competitive advantage.
A more fundamental way of looking at China’s large trade surplus is that it is a reflection of a basic imbalance between China’s savings and investment levels. At around 45 percent of GDP, China has among the highest savings rates in the world. That high rate is largely the result of the lack of a social safety net and of the demographic consequences of China’s former one-child policy. Those factors force Chinese households to save large amounts for their retirement. At the same time, the collapse of China’s property market over the last few years has caused a large drop in real estate investment. That drop has served to widen the country’s savings-investment imbalance.
The risk that China’s large trade surplus poses to the world economy is that it can invite a protectionist backlash by China’s main trade partners. It could do so as those countries introduce tariff and non-tariff trade barriers to shield their manufacturing sectors from the onslaught of a China exporting its manufacturing overcapacity abroad. The Trump administration has already slapped punitive import tariffs on China and threatens to take more action, should China’s bilateral trade surplus with the United States persist. Now Europe is making noises that it too will be forced to take trade action against China as that country diverts its exports away from the United States to Europe.
The preferable way for China to address its excessive trade surplus would be for it to do so in coordination with its main trade partners. China might offer to take active measures to strengthen its social safety net and to encourage household consumption with a view to reduce that country’s excessive savings rate. In return, the United States might commit itself to addressing its large budget deficit that is presently giving rise to its savings level falling well short of its investment level.
Unfortunately, at present there seems to be little appetite in either China or in its main trade partners for a coordinated solution to China’s trade problem that might address its underlying causes. This has to heighten the chances in the year ahead of further disruptions to the world trading system. That could constitute an important headwind to the world economic recovery.