Between 2005 and 2007 China’s accumulated huge trade surpluses and played a major part in the rise of global imbalances. The US and China have repeatedly come in conflict over the imbalance in bilateral trade.
The Great Trade Collapse reduced the Chinese surplus in dollar terms (lowering exports and imports by the same percentage reduces the imbalance mechanically) but then something unexpected happened – the surplus did not return when the crisis passed. Since the crisis erupted in 2008, China’s trade surplus has declined rapidly. As a percentage of GDP, this surplus jumped from 2% in 2004 to 7% in 2007 and was back to 2% in 2011 (Figure 1).
Figure 1. China's trade imbalances 1985-2011 (in percentage of GDP)
Source: Authors’ calculations from China Statistical Yearbooks and Customs Statistics.
What has caused these large fluctuations?
The pattern of China’s trade sheds some light on this question and shows a combination of external and domestic factors. ‘Processing trade’ accounted for the largest part of the ballooning trade surplus in the mid 2000s, as foreign firms set export bases in China to serve a strong international demand. Richard Upward et al. (2010) have made clear that new entry of processing firms accounted most of the increase in China’s export boom in the 2000s. At the same time, China’s ‘ordinary trade’ switched from a small deficit to a surplus, because Chinese firms built up large production capacities in two capital intensive sectors, ‘Machines’ and ‘Steel products’, which turned from net importers to net exports.
Since 2007, a reversal has occurred: assembly trade surplus has narrowed while ordinary trade balance has turned into a deficit. The collapse of international trade in 2008-2009 has severely hit China’s export sector and the ratio of exports to GDP contracted from 36% to 28% between 2007 and 2011, processing and ordinary exports being equally affected. The import side shows two contrasted trends: imports for processing remained durably depressed because international demand remained weak and their share in GDP was down from 12% to 6%; by contrast ordinary imports rebounded quickly as the stimulus plan launched late 2008 has boosted domestic demand. In 2011, ordinary imports (aimed at domestic demand) reached 14% of GDP, a ratio higher than before the crisis and which is comparable to that of the US or Japan.
The deterioration of China’s terms trade has contributed to the rebalancing. Between 2007 and 2011, China’s import prices increased by 30% and export prices by 16%. In real terms, imports were up by 40% and exports by 34%. China plays a more and more important part in international trade. In 2010 its share in global exports of manufactured goods reached 16%, a threshold close to that of world leading exporters (Japan and Germany) when they peaked. With more than 12% of world imports in 2011 against 3.5% a decade ago, China has become a major source of international demand. If we consider only ‘ordinary’ imports, their share rose from 2% of world imports in the early 1990s to 9% in 2011 (Figure 2).
Figure 2. Major importers, share in world imports (excluding intra-EU trade, %)
Source: Authors’ calculations from China’s Customs Statistics and WTO.
Bilateral balances have remained large
China’s trade surplus with the US, which had declined in 2009, has rebounded in 2010 and 2011 above its 2007 level. The trade surplus with the European Union has remained almost unchanged, but China has turned to a deficit with Germany and increased its surpluses with most other European countries. China’s deficits have deepened also with countries in Asia, the Middle East, and in Africa (Figure 3).
Figure 3. China's trade balances by regions, 2007-2011 (US$ billion)
Source: Authors’ calculations from CEPII-CHELEM-International Trade database.
China’s trade deficits with Asia come mainly from processing trade. As a part of the ‘Asian factory’, China imports components from its neighbours and exports the processed goods to the rest of the world (Baldwin and Carpenter 2010). China’s deficits with Africa and the Middle East stem from its growing need for raw materials as well as from higher prices. Energy and raw materials amounted to 28% of China’s total imports in 2010, against 22% in 2007. The dependence of several primary goods exporters on Chinese demand has reached significant levels. In 2010, Chile, Australia, Kazakhstan, and Peru directed respectively 26%, 25%, 22% and 14% of their exports to China.
China’s demand for manufactured goods has pulled the Asian economy growth and strengthened the dynamics of regional integration. In 2010, exports to China amounted to 11% of GDP in East Asia excluding Japan (against 4% in 2000). Our research shows that the ratio reached 13% in Korea, 17% Malaysia, and 23% in Taiwan (Lemoine and Ünal 2012).
By contrast, the US and the EU economies have remained much less oriented towards the Chinese market. Exports to China amounted to about 0.6% of GDP in the US and in most EU countries in 2010. Germany is an exception with exports to China representing 2% of GDP as German exporters have been very successful in taking advantage of China’s expanding domestic demand. It is worth noting that over the past 10 years China has increased its imports of consumer goods faster than any other product category, and German exporters have strengthened their position in this market (cars). The rising purchasing power of the most affluent Chinese households has also benefited, to other European exporters of up-market goods, although to a lesser extent.
China’s economy itself depends to a significant extent on the advanced economies (US, Japan, and the EU received 44% of its exports in 2011). In the first quarter of 2012, the Chinese exports to US hardly increased (13% in value, year on year) and declined to the European Union (-1.8%), leading to a sharp deceleration of China’s overall exports (7.6% against 26.5% in first quarter 2011) which has contributed to slow down its economic growth. As the external demand remains weak, it is more necessary than ever for China to sustain domestic demand and household consumption.
Upward, Richard, Zheng Wang, Jinghai Zheng (2010): “Weighting China’s Export Basket: An Account of the Chinese Export Boom, 2000-2007”, University of Nottingham Research Paper, 2010/14.
Baldwin, Richard and Theresa Carpenter (2010), "A 3 bloc dance: East Asian regionalism and the North Atlantic trade giants”, Singapore Economic Review, 55(1):1-21.
Lemoine, Françoise and Deniz Ünal (2012), ”Scanning the Ups and Downs of China’s Trade Imbalances”, CEPII Working Paper, N°2012-14, June.