China Now Has a Trade Deficit

China Now Has a Trade Deficit

Timothy Taylor 22/05/2018 6

A large share of the concern over China's effect on the world economy starts with large Chinese trade surpluses. But in the first few months of 2018, China's trade balance was negative (using the standard broad measure of the current account balance). That is, China had a trade deficit, not a trade surplus. For example, the Economist magazine reports: "China’s vanished current-account surplus will change the world economy" (May 17, 2018).  The South China Morning Post reports: "China’s first current account deficit for 17 years ‘could signal fundamental shift" (May 4, 2018).

Here's a figure showing China's pattern of trade imbalances since the late 1990s. Notice that although China's economic reforms and very rapid growth started in the late 1970s, its trade balance was fairly close to zero during late 1990s and early 2000s. Then China's trade surplus exploded in size before the Great Recession, fluctuated for a few years while gradually trending down, and then turns negative in early 2018.



There's a seasonal pattern in China's economy that exports tend to be lower in the early months of the year. Assuming the usual rise in China's exports later in the year, China may well end the year with a trade surplus, but it will be quite modest in size.

I have argued before that thinking of the trade balance as a measure of the unfairness of trade is economically illiterate. But if you are someone who holds that belief, then consider what it implies. You must believe that China was a fair trader in the late 1990s and into the early 2000s (near-zero trade deficit), then it exploded into large trade unfairness, and less but fluctuating trade unfairness, before now returning to trade fairness. Such an interpretation taxes credulity. But if China's trade surpluses are the rationale for imposing trade barriers on Chinese imports, that rationale does not presently exist.

It is vastly more plausible to explain China's trade balance patterns by looking at the entry of China to the World Trade Organization in 2001; the way a booming US economy sucked in Chinese imports before the Great Recession, but less so afterwards; how China's economy is shifting to higher imports of services; and a variety of other factors.

This article was first published in Conversable Economist.

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  • Jeff Baker

    China has registered its first quarterly current account deficit in nearly 17 years.

  • Krystle Dundas

    The trade deficit could signal a fundamental shift in China’s international payment position

  • Luc Gambino

    Beijing has moved towards a shift away from its reliance on exports for growth towards domestic consumption

  • Daniel Perry

    Since exports tend to be subdued at the start of the year, China is likely to return to a surplus in the coming months.

  • Thomas Griffiths

    The Yuan will become more volatile

  • Jack Dolman

    The Trump administration should press China to keep moving toward a transparent, market-based exchange rate.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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