Trade Balances in China and the US Are Largely Driven by Domestic Macro Forces
IMF Blog, September 12, 2024
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- Authors: Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, Krishna Srinivasan, Rodrigo Valdes
- Published: September 12, 2024
Macroeconomic forces: core findings
- China’s widening trade surplus and the growing US trade deficit since the pandemic are best understood through macroeconomic fundamentals rather than primarily through trade or industrial policy.
- China’s trade surplus increased substantially at the beginning of the pandemic driven by surging exports of medical equipment and a global shift toward goods consumption; domestic demand in China weakened starting in late 2021 due to a large-scale property market correction and repeated lockdowns in 2022.
- Household saving rates in China increased and investment contracted; at the same time global demand was boosted by significant dissaving, particularly in the United States where the fiscal deficit grew substantially relative to the pre-pandemic era and the household saving rate halved.
- China’s trade balance now stands at between 2 percent and 4 percent of gross domestic product, depending on the methodology.
- At its peak during the “China Shock” of the 2000s, China’s trade surplus was around 10 percent of China’s GDP.
- China now accounts for a substantially larger share of the global economy, so even a smaller surplus relative to its economy implies sizable spillovers as a share of global output.
- The United States and China together account about one-third of the global current account balance.
Model analysis and quantitative results
- Stylized simulations using the IMF’s Group of Twenty model attribute the recent external developments to:
- Negative domestic demand shocks in China (property market downturn, low household confidence).
- A dissaving shock in the United States (elevated government and personal spending).
- Model outcomes versus observed changes:
- China’s current account surplus is boosted by about 1.5 percentage points, close to the increase seen in the data relative to its pre-pandemic level.
- China’s persistent surge in domestic saving leads to a large depreciation of its real effective exchange rate, consistent with data since 2021.
- The US current account balance deteriorates by around 1 percentage point in the model, close to the decrease seen in the data relative to its pre-pandemic level.
- A persistent decline in US domestic saving leads to a rise in US real interest rates that broadly offsets the negative effect of increased Chinese saving on global rates.
- Two lessons emphasized by the analysis:
- Unlike the 2000s, there is no global savings glut this time; global real rates outside China have increased, not decreased.
- The contribution of the Chinese saving shock to the US external balance is small, and the US dissaving shock’s contribution to China’s trade balance is also small—external surpluses and deficits in both countries are mostly homegrown.
Policy implications and recommendations — China
- Homegrown surpluses and deficits call for homegrown solutions and appropriate macro settings.
- Sustained growth in China requires addressing long-standing domestic imbalances, notably:
- The property sector’s continued drag on activity.
- Challenges of an aging population.
- Attempts to stimulate growth through the external sector are likely to face significant headwinds given the economy’s size and the view that an export-led growth model is no longer the economy’s blueprint.
- Recommended multi-pronged strategy:
- Implement a policy package to make the property sector adjustment less costly.
- Use a demand-side stimulus focused on households.
- Undertake reforms to structurally strengthen safety nets, reduce income inequality, and improve resource allocation.
Policy implications and recommendations — United States
- External balances in the United States will benefit from a significant fiscal adjustment.
- Possible fiscal adjustment measures include:
- Raising indirect taxes.
- Progressively increasing income taxes.
- Eliminating a range of tax expenditures.
- Reforming entitlement programs.
Subsidies, industrial policy, and trade spillovers
- China implemented around 5,400 subsidy policies from 2009 to 2022, which is equal to about two thirds of all the measures adopted by G20 advanced economies combined.
- China’s subsidies are concentrated in priority sectors such as software, automobiles, transportation, semiconductors, and green technology.
- China produced 8.9 million EVs in 2023 (about two-thirds of annual global EV production) and exported 1.2 million EVs; EV exports account for about 1 percent of Chinese goods as of now.
- Staff analysis finds subsidies have measurable but modest sectoral effects:
- After introduction of a subsidy, China’s exports of subsidized products are 1 percent higher than those of non-subsidized products.
- Imports of subsidized products are lower, indicating some domestic substitution.
- The estimated effects suggest industrial policies have a limited impact on aggregate external balances, though they do generate international trade spillovers in subsidized sectors.
- Data limitations hinder full assessment:
- Lack of data on legacy subsidies, on the monetary value of subsidies, and on how they are financed and deployed prevents a full aggregate impact assessment.
- The World Trade Organization’s recent Trade Policy Review of China noted that lack of transparency on subsidy policies in China hinders comprehensive assessment; steps should be taken by the authorities to address these data gaps.
Multilateral trade rules and policy guidance
- Industrial policies are being ramped up in many countries, including the United States; emerging economies retain a large number of such measures.
- Industrial policies can generate sizable negative spillovers in trading partners by undercutting competitiveness and market access in other countries, exacerbating trade tensions.
- To avoid undue distortions, industrial policies in all countries should be confined to narrow objectives where externalities or market failures prevent effective market solutions and be consistent with international obligations.
- Where industrial policies distort the level playing field, redress is appropriate through WTO-consistent tools; multilateral trade rules allow remedies via multilateral dispute settlement or countervailing duties.
- Longstanding and newly exposed gaps in international trading rules—shaped by global value chains, the global importance of state-influenced economies, and the challenge of climate change—need to be addressed.
- Unilateral responses through tariffs, nontariff barriers, and domestic content provisions are identified as the wrong solutions; they raise risks of retaliation, policy uncertainty, weakened multilateral trading system, weaker global supply chains, and increased geo-economic fragmentation.
- Recommended course: governments should come together to strengthen WTO rules and norms in these areas.
Source: IMF blog post by Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, Krishna Srinivasan, Rodrigo Valdés (September 12, 2024).
Content in this bundle
- Subsidies, Trade, and International Cooperation; April 22, 2022
- s458_sum_e