The Evolution of China Trade

May 2nd, 2012 at 8:17 am

Here’s an important development worth keeping an eye on: Ed Porter’s take on China’s shrinking trade surplus (Porter’s done a great job so far picking up the NYT’s Economic Scene slot).

I’ve written frequently on China’s currency management as an impediment on our manufacturing exports, and it’s not a coincidence that our manufacturers are doing better as the yuan has appreciated.  Good ol’ FRED has the picture, clearly showing the dollar peg and times of revaluation:

Other reasons for the decline in China’s trade surplus include:

–Increasing costs in China, particularly labor and transportation

–Greater domestic investment by the Chinese which has drawn in more imports

–Great Recession meant global consumers bought fewer Chinese exports

–Internal inflation has accentuated the appreciation of the yuan to foreign currencies.

Part of this is just the natural evolution of a very large, very important economy moving down the path from emerging to more advanced status.  For one, it becomes tougher to maintain imbalances that have historically defined China’s economic landscape, including persistent large trade surpluses, under-investment, particularly in public goods, low consumption and high poverty.

How, and if, these balances unwind is critical to not only China’s future, but everyone else’s too.  Porter’s got a mixed view:

China’s economy is in a peculiar spot. Its surplus has shrunk drastically, but without any of the reforms needed to transform China into more of a consumer economy that relies less on exports. In fact, household consumption has fallen consistently as a share of the economy since the early 1990s.

This path leads nowhere good. Further investment booms may continue to shrink China’s trade surplus. But they come at a high cost: more resources wasted on empty buildings and unused roads.

Fortunately, China’s leaders appear to understand the need to change. The 12th five-year plan begun last year is centered on the goal of raising family incomes, shifting to an economy more reliant on the production of services and building the kind of safety net that gives the Chinese people the confidence to spend some of their vast savings.

If these reforms are actually made, China could be on a more sustainable path of economic growth that would increase the well-being of regular Chinese. And American senators would have to blame somebody else for the nation’s trade deficit.

Final point: The piece mentions the China currency bill currently stalled in the House, intimating that perhaps such legislation won’t be needed if this recent float keeps up.  I’ve advocated for this legislation, and regardless of movements up and down in China’s currency and trade surplus, we still need this bill.  If we never have to invoke it against unfair trade subsidies, so much the better.  But when it comes to China currency management, there’s nothing wrong and everything right with an insurance policy.


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