China’s Foreign Trade Imbalance

From: English Edition of Qiushi Journal Updated: 2011-09-20 00:00
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    As China has opened wider and wider to the outside world in recent years, China’s trade with other countries has been constantly expanding, resulting in a rapidly growing trade surplus. This has had a major impact on China’s international balance of payments and even affected operation of the whole Chinese economy.

    I. Changes in the trade imbalance

    The trade surplus is closely related to the stage of China’s economic development. The relation between Chinese imports and exports has gone through three stages since 1981.

    The first stage lasting from 1981 to 1989 was one in which China carried a trade deficit. China was just starting to implement its policy of reform and opening up during this period and had a pressing need to import advanced foreign technology and equipment. The country’s foreign exchange reserves were low and import volume expanded faster than export volume. During this period, export volume grew at an average annual rate of 11.5% while import volume grew by 13.2% a year. Overall, there was an average annual trade deficit of US$7.71 billion, amounting to US$46.26 billion over the 6-year period. 

    The second stage lasting from 1990 to 1996 was one in which China had a small trade surplus. Leading up to the early and mid-1990s, growth in China’s foreign trade and export volume accelerated, development of processing trade got off to a good start and the export volume of some industrial products reached a significant scale. In 1990 China stopped accumulating a trade deficit as it had done consecutively for a number of years and that year it had a trade surplus of US$8.74 billion. China’s export volume grew by an average annual rate of 16.3% compared to a rate of 13% for import volume. In 1993 China had a trade deficit of US$12.22 billion, but overall there was an annual average trade surplus of US$9.25 billion, totaling US$55.51 billion for the 6-year period.  

    China’s total trade volume has jumped to number three in the world.  / Chart supplied by Xinhua

    The third stage from 1997 to 2008 was one in which China’s trade surplus grew rapidly. China’s economy has grown rapidly since 1997 and its reform of the foreign trade and foreign reserve system produced marked results. Foreign trade growth was fairly rapid, especially after the country’s accession to the WTO, foreign investment increased by a large margin, and import and export volume both experienced rapid growth, resulting in a tremendous increase in the trade surplus at an annual average of US$ 90.38 billion, or US$ 1,084.59 for the whole period.

    II. The main factors causing the trade surplus

    Accumulation of a trade surplus is a common phenomenon for developing countries undergoing industrialization against the backdrop of globalization. China’s trade surplus is currently reflected on the surface in the area of trade, but in essence it is actually the result of a combination of factors including the difference between the economic structures and development stages of China and other countries and shifts in the international division of labor against the backdrop of economic globalization.   

    China’s constantly increasing international competitiveness is an internal cause for the country’s trade surplus. China has been successful in taking advantage of opportunities presented by economic globalization and shifts in international industry, and making full use of the country’s abundant labor supply and full range of industries since the institution of the policy of reform and opening up. In addition, the country has gradually developed a world-class manufacturing base through the use of foreign investment and strong efforts to develop processing trade. China’s volume of trade in manufactured goods now exceeds that of the US and Japan and accounts for 10% of the total global volume, with over 1,000 products now rank number one in the world in terms of export volume. It could be said that China’s foreign trade surplus is the inevitable result of the growing overall competitiveness of Chinese industry.

    Shifts in the pattern of international industry comprise an external cause for the trade surplus. Economic globalization accelerated at the start of the 1990s and a new international system of the division of labor began to take shape. China made full use of its relative strengths to take advantage of the opportunities presented by the shifts in the pattern of international industry to take on a great deal of the shift in industry. Foreign-funded enterprises played a guiding role in this process. The result of this process was most obviously manifested in the constantly growing impact of foreign-funded enterprises on the trade surplus.  

    The processing trade is the structural cause for the increase in the trade surplus. The trade surplus for the processing trade in 2008 was US$296.778 billion, nearly equivalent to the entire trade surplus of US$295.46 billion. On one hand, the value added of exports compared to imports in processing trade is inevitable. On the other hand, the level of manufacturing in China has risen considerably in recent years along with the country’s economic development and improvement in the industrial structure, resulting in continuous improvement of supply chain and rapid extension of industry chain of processing trade, which has also helped to promote an increase in the trade surplus in China’s processing trade. 

    Domestic and international trade restrictions are the policy-related causes for the increase in the trade surplus. China’s foreign trade policy has long been concentrated on exports, resulting in the formation of a fairly comprehensive policy package to promote and regulate exports. In comparison, the formation of import regulatory policy has lagged behind and cannot fully meet the requirements for vigorously increasing import volumes. On the other hand, European countries and the US, the countries that comprise the main source of the trade imbalance and the world leaders in science and technology, have instituted many restrictions on the export of high technology to China resulting in sluggish growth in exports of hi-tech products to China.

    Differences in standards for compiling statistics provide a technical cause for the growth in the trade surplus. Factors such as entrepot trade (including trade going through Hong Kong), differences in the calculation of import and export prices between China and other countries and differences in compiling statistics in the country of origin tend to artificially inflate the scale of China’s foreign trade surplus to a certain extent. The statistical discrepancy is greatest between China and the US. China calculated the total volume of exports to the US in 2008 as US$170.86 billion, but the US calculated total imports from China in 2008 as US$266.33 billion, a difference of US$95.47 billion so that the US claimed a trade deficit 1.56 times as large as the trade surplus claimed by China.

    III. Several points concerning the trade imbalance

    Theoretically, whether or not a country can maintain a trade surplus is mainly determined by the international competitiveness of that country’s products or services. China’s ability to maintain a trade surplus in this stage is the result of the country responding to shifts in the international pattern of the division of labor and constant improvement in the international competitiveness of Chinese industry, and is therefore objectively inevitable to a certain extent. The issue of China’s trade imbalance should therefore be judged objectively and not looked at as simply a trade issue to be resolved by reducing export volume to relieve the pressure of trade imbalance. Instead, a combination of solutions should be applied, including expansion of import volume and overseas investment, to gradually reduce the trade surplus.  

    One, we need to improve the structure of Chinese foreign trade and accelerate efforts to adjust the pattern of trade growth. The basic approach to reducing the trade surplus is to continue adjusting the pattern of foreign trade growth and promote change of the structural model of imports and exports. We need to hold down certain exports, particularly those that consume high amounts of energy and resources and, are highly polluting and check the excessively rapid growth of low value-added exports. At the same time, we need to take measures to improve the industrial structure and upgrade technology on the basis of taking full advantage of the country’s relative superiority in its traditional labor-intensive industries and to increase the proportion of exports with high and medium-level technology content and high value added in order to raise the country’s position in the division of labor in the international industrial chain. 

    Two, we need to expand the volume of imports to improve the trade imbalance. First of all, we need to adopt more measures to stimulate the import of certain resource-type commodities, high and new technology products, and key parts and components. Second, as the opportunities present themselves, we need to increase imports of key energy sources and resource-type commodities in short supply in the country to replenish the country’s strategic reserves, thereby reducing the trade surplus and helping to alleviate trade frictions with the affected countries. Third, we need to set up and improve a system for promoting imports, strengthen financial policy support for promoting imports and actively work to encourage import of advanced foreign technology and services. Fourth, we need to make a thorough review of measures related to imports subject to tariffs and not subject to tariffs and open up markets and improve trade facilitation on the basis of equality and mutual benefit. Fifth, we need to speed up efforts to open the domestic market in services to increase imports of foreign services. 

    Three, we need to do more to help domestic enterprises “go global.” First, we need to transfer overseas some links in processing to overcome barriers to efforts to expand export trade resulting from the country of origin label. Second, we need to invest in the establishment of steady supply bases overseas for strategic resources and primary products trending towards short supply in China. Third, we need to encourage industries and enterprises with a competitive edge to “go global,” set up enterprises and divisions through overseas investment, and export excess production capacity, raw materials and parts and components to overseas markets. Four, we need to encourage qualified enterprises to set up overseas operations, purchase overseas enterprises, patents and brand names, and set up marketing networks for their own brands. Fifth, we need to encourage enterprises to transfer downstream processing capacity to promote the export of some processing equipment and upstream products and the transfer of some of the trade surplus.

    Four, we need to actively guide and promote transformation and upgrading in processing trade. First, we need to develop a mechanism for both encouraging and limiting entry into the processing trade and revise the scope of restricted and prohibited categories under processing trade. Second, we need to improve the classification of enterprises engaged in processing trade, raise requirements for approval to engage in processing trade and limit the number of enterprises allowed to engage in processing trade that use low-level processing technology or backward production techniques. Third, we need to optimize the structure of the processing trade by encouraging enterprises to move toward general trade and guiding enterprises engaged in processing trade to enhance supply chain and extend industry chain. Fourth, we need to encourage more processing trade to move to areas of the central and western region of the country with necessary conditions. Fifth, we need to set up a system for judging the social responsibility of enterprises, improve environmental and safety standards and strictly prevent the transfer of pollution through processing trade.

    Five, we need to improve the trade environment to reduce the pressure of trade imbalances. First, we need to expand multilateral and bilateral economic and trade interactions, strengthen communication and collaboration, and properly resolve trade imbalances and differences through discussion and negotiation on an equal basis. Second, we need to call on Europe and the US to promptly rescind trade policies that discriminate against China and create an excellent environment for expanding imports. Third, we need to actively address trade frictions and make good use of the government, industries and enterprises to head them off before they become serious and effectively respond to them. Fourth, we need to actively participate in the new round of WTO talks. We need to clearly oppose trade protectionism in the multilateral arenas, and ensure that China’s stands and demands are fully reflected, the rights and interests of enterprises are protected and national interests are safeguarded in the formulation of international trade rules.   

    Six, we must improve trade rules, taking full consideration of trade norms of all other countries. We need to improve China’s existing country of origin standard and method for compiling statistics as soon as possible in response to the shifts now taking place in international industry and eliminate misunderstandings and reduce frictions in order to objectively reflect the trade situation and trade interests of China and other countries. In addition, we should speed up efforts to set up a system with unified standards for compiling statistics on China’s trade in services that is in line with international norms in order to fully reflect changes in revenue and expenditure for routine items.

(From Qiushi in Chinese No.16 2009)

Note: Author: Vice-Minister of the Ministry of Commerce of the PRC

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