Fri, Jul 14, 2006 - Page 8 News List

China's limited options on trade

By Craig Meer

Trade statistics released for last month and the first half of the year by China's Ministry of Commerce on Monday revealed the country's continuing propensity to record large surpluses with the rest of the world.

The People's Republic of China (PRC) posted a trade surplus of US$14.5 billion last month, the largest monthly surplus on record. Exports last month were US$81.3 billion, up 23.3 percent year-on-year, while imports were US$66.8 billion, up 18.9 percent. Total exports for the first half of the year were US$428.6 billion, up 25 percent year-on-year, while imports were US$367.2 billion, up 21.3 percent, resulting in a heady trade surplus of US$61.4 billion.

If this trend continues, this year's trade surplus could come in at around US$130 billion, making it the PRC's largest annual surplus to date.

Trade surpluses, as in China's case, or deficits, as in the US' case, ultimately reflect the difference between savings and investment in an economy. Where savings are larger than investment, a surplus is the result.

China saves around 47 percent of its US$2.2 trillion GDP and invests somewhat less than that. With total trade worth around 40 percent of its GDP, it is only natural that the nation exports a lot more than it imports.

While the reason for China's trade profile is simple enough, its trading partners have had a tough time adjusting to it. Its exports have been rising rapidly precisely in those areas where countries like the US face well-organized and influential producer groups. Steel is the latest problem area, while textiles is an ongoing itch. Watch the sparks fly when China becomes a major car exporter.

Indeed, in the bilateral relationship between Washington and Beijing, trade has become the single largest irritant. In this context, the question needs to be asked: What can Chinese policymakers actually do about the surplus? The short and perhaps unpalatable answer is "not much."

Members of the US Congress have been arguing for nearly two years now that an artificially weak yuan is partly to blame for China's trading behavior. Despite the exchange rate revaluation and reform instituted by the People's Bank of China last year, the dollar peg remains more or less intact and the current exchange rate of US$1 to 7.98 yuan is certainly below market expectations.

But as economists like Nicholas Lardy and Ronald McKinnon have argued, the dollar peg is first and foremost an instrument of monetary policy in the PRC -- used as a relatively consistent measure of value in an environment where domestic money growth is both high and erratic -- and for much of the period from 1994 to 2003, the yuan was overvalued rather than undervalued.

Any sizable revaluation of the yuan, while making Chinese exports more expensive and imports cheaper, would be unlikely to change the nominal value of the surplus.

Absent a speculative attack on the Chinese currency, raising the value of the yuan would increase China's interest rates, reduce investment, slow the economy and reduce both exports and imports. If associated with a determined speculative attack, a revaluation would push interest rates to zero and leave the economy languishing in a low growth liquidity trap -- think Japan in the 1990s -- once again reducing both exports and imports. Either way, a large trade surplus would remain.

This story has been viewed 3569 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top