China s Shrinking Trade Surplus

With the global economy recovering, China s trade surplus began to grow.

Its global surplus in processing trade in 2010 totaled 322 billion.

The expert indicated that Korean OFDI had led to a trade surplus because of intra firm trade.

From 2005 to 2008, China s bilateral surplus with the United States increased by 41 , and its trade surplus with Europe more than doubled.

It even began to tax exports in order to reduce the trade surplus.

In fact, China s trade surplus decreased by 6.4 in 2010 compared to 2009.

So its trade surplus continues to soar at the expense of other countries.

China s growth currently relies on an undervalued currency and a huge trade surplus.

CAMBRIDGE China s current account surplus the combination of its trade surplus and its net income from foreign investments is the largest in the world.

As an immature debtor borrower, its trade balance and current account are also in deficit as a mature debtor borrower, its trade balance enters surplus and, as a debtor repayer, its current account moves to surplus.

CAMBRIDGE China s undervalued currency and huge trade surplus pose great risks to the world economy.

But China s trade surplus with the US is not primarily due to undervaluing its currency.

This makes the renminbi chronically undervalued and assures China of a persistent large trade surplus.

Finally, the worsening of China s terms of trade will play an even more fundamental role in reducing its trade surplus in the future.

Given that it has been running an investment income deficit, a trade surplus, and current account surplus, it seems that it should be classified as a debtor repayer.

Such a revaluation would also discourage exports and encourage imports, thereby reducing China s chronic trade surplus.

Germany , Europe s largest exporter, has a very large trade surplus with the rest of the world.

China s pursuit of a high saving, large trade surplus economy in recent years embodies mercantilist teachings.

Since 2009, China s trade surplus has dropped significantly, which many in China hail as progress in rebalancing.

So China continues to run a giant trade surplus, and the US continues to spend and borrow.

Until recently, the region maintained a trade surplus with the US, but with liberalization, the region will increase imports of more affordable goods, thereby turning the surplus into a deficit.

As a result, China s trade surplus with the US rose from 83 billion in 2001 to 258 billion in 2007, just before the recession. So far in 2009, China s surplus has accounted for 75 of the total US non oil goods trade deficit.

With a trade surplus of 190 billion and the income from its nearly 3 trillion portfolio of foreign assets, China s external surplus stands at 316 billion, or 6.1 of annual GDP.

Once deficit countries take aggressive measures, it is usually trade surplus countries that suffer the most from international crises caused by trade and capital flow imbalances.

With China s US trade surplus reaching 200 billion last year, American sentiment is growing to take strong measures.

Discussion of China s currency focuses around the need to shrink the country s trade surplus and correct global macroeconomic imbalances.

As a result, the trade surplus continued to fall, to 20.4 billion, fueling growing concern about a Chinese slowdown.

In the first seven months of 2010, China s trade surplus was 84 billion, down 21.2 from January July 2009.

A more likely scenario is that China will continue to have a trade surplus (though much smaller) and an investment income deficit, mirrored by America s trade deficit and investment income surplus. If both countries have balanced current accounts, their balance of payments positions can be sustainable.

Indeed, if foreign owned enterprises exports are deducted from the total trade volume, the surplus vanishes, because both the overall balance of merchandise trade and the balance of trade in services normally run deficits.

China has yet to discover and adopt an alternative growth strategy that does not rely on a large trade surplus.

China s purchases of American debt effectively transferred the official reserves gained via China s trade surplus back to the US market.

And Germany recorded a trade surplus of 175 billion in the 12 months through August, whereas Spain has run a trade deficit of 84 billion in the past 12 months.

The US has complained about China s current account (trade) surpluses but, as a percentage of GDP, Germany s surplus is even greater.

China represents a massive challenge even for countries, such as Brazil, that have achieved a significant trade surplus up to now.

And lagging household income clearly contributes to China s trade surplus, because low domestic consumption tends to keep exports higher than imports.

By definition, without a change in the saving gap, there will be no change in the trade surplus, and vice versa.

While the increase in investment reduced the saving GDP ratio, the resulting increase in imports lowered the trade surplus GDP ratio.

And an unwillingness to trade away export led growth is having the same effect on the East s surplus countries (especially China).

When demands for China to adjust its exchange rate began during George W. Bush s administration, its multilateral trade surplus was small.

This large, steady fall in the country s trade surplus makes the Chinese government hesitant to allow the RMB to appreciate significantly, for fear of the lagged impact on the trade balance.

And that decline follows a 30 drop in China s trade surplus in 2008, owing to the global financial crisis and subsequent recession.

The worsening terms of trade have been a major factor contributing to the decline in the current account surplus in recent years.

Over the past several years, much attention has focused on the role of China s trade surplus in creating today s global financial imbalances.