China's trade surplus

China's trade surplus is growing, raising concerns about the propriety of its trade policy and the possibility of retaliatory measures from the rest of the world. Citing the customs bureau, the Xinhua news agency reported on 10th January that China's trade surplus during 2006 soared by 74 percent to hit a record $177.47 billion from its previous high level of $101.9 billion in 2005.
The steep rise during the recent years could be gauged from the fact that it has sky-rocketed more than fivefold from $31.98 billion in 2004. The trade surplus for December, 2006 alone was as high as $21 billion. Evidently, the increase in surplus was due to a faster growth in exports than imports. While Chinese exports rose by 27.2 percent to $969.08 billion, imports grew by 20 percent to $791.61 billion during 2006.
Most analysts believe that Chinese trade surplus would continue to grow during 2007 though the rate of increase could be slower due to a sharp increase in energy and resources costs, along with policies that will force the companies to be kinder to the environment. These factors would increase the cost of the production and reduce exports to a certain extent. Nonetheless, the trade surplus would continue to be huge in the coming years.
The extent of surplus has been a major concern for China's major trading partners, particularly the United States. China's trade surplus with the United States stood at $116.2 billion in the first 10 months of 2006, up 25.2 percent over the same period of 2005. China's critics say that yuan is being kept drastically undervalued, giving Chinese exporters an unfair advantage by being able to sell their products in overseas markets more cheaply.
For their part, Chinese officials insist that Washington is partly to blame due to U.S. restrictions on exports of high-tech and security-sensitive goods, besides its failure to boost low U.S. savings rate. Whatever the arguments on both sides, while China's trade surplus continues to grow, U.S. trade deficit does not show any sign of receding. For the first 11 months of 2006, the overall U.S. trade deficit stood at $701.6 billion despite falling oil prices compared with $652.5 billion for the same period of 2005 and appears well on course to surpass last year's annual record of $717 billion.
The yawning gap between exports and imports of China's major trading partners of the world is definitely a cause of concern and evoking howls of protests from the deficit countries, especially the United States. If the trend continues, it could threaten the world trading order and undermine the international monetary system.
Obviously, the deficit countries would be tempted to adopt protectionist policies and the world trade would shrink, hurting the global growth prospects. The developing countries would particularly be hit hard because of lower exports to the developed countries. Clearly, such unwholesome prospects need to be avoided at all costs with the right mix of policies.
The primary responsibility of restoring a reasonable balance in the world trade lies with both China and the United States which are experiencing the highest trade imbalances. China needs to encourage domestic consumption and imports through a host of policies, particularly an upward adjustment in its exchange rate.
At present Chinese currency is managed against an undisclosed basket of currencies and allowed to move only by 0.3 percent each day. Although it has gained by 3.2 percent against the U.S. dollar in 2006, this appreciation has not made any impact on the trade balance. Some analysts believe that the Chinese currency is undervalued by as much as 30 percent. This may be an exaggeration, but there is no doubt about the inappropriateness of the present exchange rate to bring a balance in China's external accounts.
The U.S. also needs to understand that there is a limit to profligacy. So far it has been able to finance its deficit because the U.S. dollar is a reserve currency and other countries are prepared to hold US treasury bills and other dollar-denominated financial assets. Seen closely, both U.S. and China have a big stake in maintaining an orderly world trade regime, which can only be ensured through a proper understanding, requiring a shift in strategies. While China needs to adopt an appropriate exchange rate, the U.S. must curtail its domestic consumption which is presently being financed by sucking in foreign savings.
It needs to be realised that all the major world trading nations are sailing in the same boat and only mutual cooperation could guarantee a prosperous future. The need for this is all the more acute because the Doha round of world trade talks is now almost stalled and regional trading groups are increasingly being advocated. If all parameters are allowed to drift in the wrong direction, the future of economic globalisation and integration of the world economy would obviously be at stake.