China’s Trade DEFICIT — that’s right, deficit

Last month China had a trade deficit of $31.5 billion.  That is not a large sum, but if sustained for a year it would lead to an annual deficit of over one-third of a trillion US dollars.  The monthly deficit was China’s largest since at least 1989.  Exports still grew over the same month last year, but not as much as expected; however, imports grew far faster.  This was largely due to the rising costs of raw materials.  Up to 2000, China was a net exporterof oil; today it is the world’s largest importer.  China is also the world’s largest producer of coal — yet this year it overtook Japan to become the world’s largest coal importer as well.

In short, China’s growth model, which had been based on using its abundant coal and water resources and low-cost labor to produce cheap manufactured goods for export, and which produced decades of trade surpluses leading to a $3 trillion cash reserve, is no longer viable.  The rising cost of imported equipment, consumer goods, and raw materials has pushed China’s current account into deficit, a trend that will likely continue as China’s further growth in production is aimed mainly at its domestic market.

This is healthy for the world in the long run; China could not run huge trade surpluses indefinitely, and running a deficit will allow other deficit nations (mainly the US) to reduce their own imbalances.  Yet in the short term, it is another sign of the inevitable slowing of China as a motor of global economic growth.  One has to hope that the TIMBI nations – Turkey, India, Mexico, Brazil, and Indonesia — along with Africa and the Middle East, can continue their 5%+ annual growth rates for another decade or two.  Otherwise, the past pattern of global growth — driven by both the US and Europe growing at 2-3% and China growing at 10% — will have no successors.

Reasonable expectations for the future are that the US economy will grow at 1.5-2.5% per annum, while Europe will be lucky to grow at all in the near future, and 1-2% per year longer term in Europe would be very good given its rapid aging, debt overhang, and austerity policies.  If China’s growth rate falls from 10-11% to 7-8% or further, we will definitely be looking to other countries to pick up the slack.   Otherwise the global economy could be in for a bout of prolonged stagnation.

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About jackgoldstone

Hazel Professor of Public Policy at George Mason University
This entry was posted in The Global Economy and tagged , . Bookmark the permalink.

2 Responses to China’s Trade DEFICIT — that’s right, deficit

  1. Pingback: Ingo in China

  2. William Ray says:

    I don’t know anything about international finance except what I read in the Nelson Report, but as far as literary analysis, you must be a boy wonder. Indeed, the Stratford Monument is a fraud start to finish, as is the First Folio introductory matter which adverts to it (like Dick Cheney adverting to the NY Times’s Elizabeth Miller articles, who was fed the information by Dick Cheney?). Check David L. Roper’s ‘To Be or Not To Be’ for a de-construction of the Stratford dedication in English, which follows the Latin flim-flam. Isn’t it comforting that the big bamboozle came in with the nation-state and slept on the living room couch for centuries?

    best wishes and keep up the good work,
    William Ray
    wjray.net

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