By Zhao Zhongxiu & Sun Jingying

China's sustained trade surplus has produced concern in many quarters recently and has triggered calls from some countries, notably the [United States], pressing China to revalue its currency and to rein in policies supportive of its domestic industries. However, analysis shows that China's trade surplus, which has kept increasing for about 20 years, is the result of China's reform and opening-up drive and of introducing preferential policies to attract investment: It has little to do with the RMB exchange rate.

By Zhao Zhongxiu & Sun Jingying

China's sustained trade surplus has produced concern in many quarters recently and has triggered calls from some countries, notably the [United States], pressing China to revalue its currency and to rein in policies supportive of its domestic industries. However, analysis shows that China's trade surplus, which has kept increasing for about 20 years, is the result of China's reform and opening-up drive and of introducing preferential policies to attract investment: It has little to do with the RMB exchange rate.

Evolving Towards Basically Balanced Trade
China's trade surplus started getting noticeable in the late 1990s and accelerated rapidly in the 21st century, reaching a peak before the international financial crisis began to impact [...] trade in 2008. [After] 2008 the trade surplus fell somewhat, and the gap narrowed further in 2010.

China's trade surplus in 2010 was US$183.1 billion, a year-on-year drop of 6.61 percent, and the second successive annual fall. The narrowing of the margin was mainly caused by China's dynamic domestic economy as the effects of China's import expansion strategy have become more apparent. With the lifting of processing trade restrictions, which had been imposed to curb exports, imports of processing trade-related bulk raw materials increased correspondingly.

In 2010, China's trade surplus accounted for 3.1 percent of its GDP. Some experts have predicted that the proportion will drop to 1 percent in 2011. We remember vividly that in his letter to the G20 summit last year, Timothy Geithner, U.S. Treasury Secretary, called upon member countries to formulate quantitative targets to improve the current account imbalance and to bring down the proportion of the current account surplus/deficit to GDP to under 4 percent by 2015. Whether China supports this idea or otherwise, judging from the present situation, the drastic decrease in the percentage share of China's trade surplus in its overall GDP will become a trend, indicating a basically balanced development trend in China's foreign trade.

China's import and export trade data for 2010 indicate that the growth mode of China's foreign trade is being transformed and upgraded. In 2010, while processing trade maintained steady growth in imports and exports, there was a rapid increase in general trade imports and exports, replacing processing to account for half of the total trade volume. In terms of export structure, in 2010 China's traditional bulk commodity exports maintained good growth momentum and exports of electromechanical products with high added-value increased by 30.9 percent, accounting for about 60 percent of the gross export value.

In the first six months of 2010, the total value of China's general trade was US$679.49 billion, a leap of 46.5 percent, an increase of 3.4 percentage points over that for overall trade for the same period; the deficit in general trade was US$37.09 billion, in contrast to a surplus in general trade of US$6.35 billion in the first six months of 2009, which indicated that China's foreign trade strategy of adjusting the structure, and improving the balance had achieved a positive result. Since July 15, 2010, China has cancelled tax rebates on 406 tariff items including partial types of steel and non-ferrous metal processing materials, demonstrating the central government's determination to adjust the export structure.

In addition, the proportion of China's trade surplus to the total trade sum decreased from 11.6 percent in 2008 to 8.9 percent in 2009, and it dropped even further to 6.2 percent in 2010. It is predicted that the proportion will continue to decline in 2011, with China's foreign trade becoming more balanced.

As regards the type of commodities, primary products are in deficit on the whole, and manufactured goods are in surplus in general. Of the primary products, food products, live animals for food use, beverages, and tobacco products have a trade surplus, and the rest have a trade deficit. Of the manufactured goods, miscellaneous manufactures, machinery and transport equipment, textile products, rubber products and mining products have a trade surplus. In terms of industrial classification, the vast majority of the trade surplus has been created by communications equipment, computer and other electronic equipment manufacturing, textile and garment, footwear manufacturing, textiles, leather and fur products sectors.

In 2010, clothing, shoes, and luggage products accounted, as they have traditionally done, for an important proportion of all export products. Aside from this, the export value of high-tech products reached US$492.4 billion, representing 31 percent of total exports and displaying the clear effect of favorable policies introduced by the Chinese government in recent years.

Huge Impact of FDI on Export Growth and Trade Surplus
China's trade surplus stems from economic globalization and transferred industrial links, not global economic imbalance.

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Bustling Lianyungang Port on China's east coast has a long history of international trade. Photo by China Foto Press

China's surplus owes its existence to specific structural conditions. Processing trade is the principal form of foreign investment in China. In the late 1900s the surplus in processing trade began to rapidly overtake that of the general trade surplus, and processing trade bases supported mainly by foreign-funded enterprises were gradually formed across the country. Nowadays, the international division of labor has developed from product specialization to a chain operation that limits the various distributed modes of production for a single product across different countries and regions. This will inevitably generate trade between the countries involved in the product's intermediate stages. The principal beneficiaries of China's trade surplus are transnational corporations engaged in processing trade in China, for example in electronic goods. Fully 80 percent of China's 2010 trade surplus with the [United States] in 2010 was generated by such transnational corporations. These enterprises form an Asian production network, and not only profit hugely from labor and environmental cost advantages, but also export immense numbers of finished products to European and American markets. Thus a trade surplus manifests between China and these trading partners.

In addition, the proportion of the surplus generated by foreign enterprises to China's total trade surplus is now greater than the share generated by enterprises in other forms of ownership. This situation also has to do with the intermediate-product division of labor in international products, and is in line with the flow direction of international direct investment. Employing various forms of investment, transnational corporations allocate different links of the production chain for a particular product to different countries and regions. China, with its advantages of abundant cheap labor, preferential investment policies, stable political environment and relatively sound legal environment, has attracted huge foreign investment, and the growth trend of foreign investment will be maintained for some while.

In the globalization process China has become an important link in international industrial transfer, and an important destination for transferred manufacturing enterprises. Those foreign enterprises import raw materials, production equipment and key components into China, shift the processing and production elements there and then export the final products to their target markets. From China's import and export flow directions, it can be seen that a global industrial labor division pattern has come into being, in which East Asia is the component supplier, China is the processing and manufacturing base, and the [United States] and Europe are the key technology developers and major markets.

Changes in international division of labor have led to a stable situation of China's trade balance with other countries. China imports a large number of raw materials and semi-finished products from East Asian countries and regions. After processing and assembly, the finished products are exported to the American and European markets. This situation has led to a transformation of the original picture in which East Asian countries had a trade surplus with the [United States] and the E.U. into one in which the surplus is China's. Therefore, the China-U.S. and China-Europe trade surplus has increased dramatically. According to figures from China Customs, the China-U.S. trade surplus reached US$181.3 billion in 2010, and that with the E.U. topped US$142.7 billion. Meanwhile, China's trade deficit with Japan, ROK, ASEAN and Taiwan totaled US$227.6 billion.

Measures Adopted to Expand Imports
The year 2011 is the first year of China's 12th Five-year Plan for National Economic and Social Development, and foreign trade policies will emphasize transforming trade modes, adjusting trade structure, and promoting coordination, with the focus on promoting basic balance and steady growth of trade. However, there are still many uncertainties in China's trade environment, with favorable and unfavorable factors coexisting. Favorable factors for export include improvement of Chinese enterprises' international competitiveness, the gradual recovery of the global economy, and the possible growth of market demand after long being suppressed because of the financial crisis. Unfavorable factors for export include weak growth in household consumption caused by high unemployment rates in the developed countries, aggravated protectionism and uncertain impact of appreciation of the RMB on the structural adjustment of trade. For the foreseeable future, China will maintain the stability of its support policies for the processing trade, and will put emphasis on encouraging foreign-funded enterprises to establish headquarters and R&D centers in China, so as to accelerate the formation of domestic industrial chains.

The import expansion concept, gestating since 2007, has now become a national strategy. This year, China will adopt eight measures to encourage imports and promote balanced trade. One, in accordance with the requirements of its industrial policies, China will actively import resources, advanced technologies and key equipment. Two, China will properly cope with trade frictions and disputes and encourage imports from the main countries having trade deficit with China. Three, China will further optimize the import tariff structure, and guide enterprises to expand imports. Four, China will continue to promote convenience in trade and reduce import fees and costs. Five, China will constantly improve the public information service system for import, and improve transparency of policies. Six, China will sponsor various types of imported goods exhibitions, fairs, presentations, etc., to enhance international economic and trade cooperation and exchanges. Seven, China will actively employ a variety of financial, taxation and other means to support expansion of imports. Eight, China will continue to organize missions abroad to promote trade and investment activities.

In terms of implementation of policies, three aspects are involved: import tariffs on luxury consumer goods will be reduced, regulations will be relaxed on subsidized loans for import enterprises, as will the import quota system. Of these three aspects, reduction of import tariffs on luxury consumer goods would meet little resistance, as a most effective measure to expand domestic commercial service. The subsidized loans policy will mainly target large-sized mechanical and electrical products and high-tech goods, aiming to reduce the import cost. It is possible the import quota system will target bulk commodities such as cotton for those enterprises engaged in the processing trade.

Professor Zhao Zhongxiu is the Dean of School of International Trade and Economics, University of International Business and Economics. He serves as Assistant Chairman of China Association of International Trade. 

Dr. Sun Jingying is a research fellow in the School of International Trade and Economics, University of International Business and Economics. She earned her doctorate at Peking University.

 

Reprinted by permission of China Today, www.chinatoday.com.cn.

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