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New America Foundation/Economic Growth Program Policy Analyst Samuel Sherraden has written a compelling, concise analysis of the decline in China’s trade surplus during the first quarter of this year.
Sherraden warns that the first quarter numbers should not be misunderstood as evidence of the kind of long-term economic rebalancing necessary to get the global economy on a better course.
From the conclusion of Sherraden’s analysis:
China’s trade balance has declined because China’s stimulus program intensified investment-led growth, increasing demand for commodities and capital goods. Based on our analysis, it is not evident that China has made progress toward rebalancing to a more consumer-oriented economy.
Indeed, there is a danger that if global demand recovers and China continues to neglect the needed structural reforms, China’s trade surplus will again increase. A rise in exports from the recovery of global demand could be combined with the withdrawal of the stimulus program that has driven the increase in imports to push China’s trade surplus back up to worrying levels. Excessive bank lending since the beginning of 2009 incentivized stockpiling of commodities and materials and the development of spare capacity. A tightening cycle could force enterprises in China to reduce imports and rely on existing commodity stockpiles and excess capacity to increase exports, leading to a rise in the trade surplus.
There is a danger, then, that the recent trade figures will temporarily reduce pressure on China to rebalance its economy. Given the likelihood that China’s investment-heavy stimulus will lead to a new surge in China’s net exports, it is even more important that the United States develop a strategy to encourage China to undertake structural reforms to rebalance its economy. Revaluation of the yuan, although no substitute for longer term structural changes, would be a good place to start.
You can read the full “Talking Points” here.
— Ben Katcher
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