Step-by-Step Trade Solution

Step-by-Step Trade Solution

By Xu Hongcai (China Daily) (China Daily 03/14/2012 page10)

Basically, the Sino-US trade imbalance is a reflection of the global economic imbalance. But that should not be taken to mean it is a simple issue.

US congressmen blame the Sino-US trade imbalance on the exchange rate of the renminbi and claim China is responsible for the US' high unemployment. Even though renminbi non-deliverable forwards depreciated in the Hong Kong market, they still claim the renminbi should appreciate 20-40 percent. This is ridiculous.

One reason China's current account surplus has increased since 2002 is its exports were boosted by external demand stimulated by the irrational exuberance of US consumers, the price of global energy and resources and the US Federal Reserve Board's over-easing monetary policy after the Sept 9, 2001 terrorist attacks.

Also, following China's entry into the World Trade Organization in 2001, international capital flowed into China, resulting in the fast growth of its processing trade surplus. China also tailored its economic institutions to meet WTO rules and thus successfully improved its supply efficiency.

From a structural point of view, China's trade surplus exists only in its processing trade. In general trade, China actually has a trade deficit. The reason is China's dual economic structure and cheap labor force. Besides, the economic structure in China and the US are different. China's trade surplus is a result of insufficient domestic demand. It is achieved at the sacrifice of workers' interests. Processing takes up 50 percent of China's foreign trade and this provides little profit for Chinese companies; most of the benefits go to multinational corporations. 

The US trade deficit is the result of insufficient saving and overspending by government and households. The US' national savings rate has decreased from 13 percent in the 1990s to less than 1 percent today. The US urgently needs to increase savings and restrict governmental expenditure, while China needs to adjust its income distribution in order to increase domestic demand. 

Lastly, it should be noted that the proportion of China's current account surplus to GDP is actually dropping. The trade surplus to GDP ratio in China has gradually increased since 2001, and reached a peak of about 8 percent in 2008. Thereafter, it has gone down step by step. In 2011, it was about 2 percent, which is lower than the commonly accepted international standard of 3 percent. 

To sum up, in the process of globalization, China has provided low price commodities for global consumers. As a result, global citizens have enjoyed lower living costs and low inflation rates, and the world economy has enjoyed sustainable development. China's huge contribution should be recognized and commended by the international community. 

There are three possible ways to appreciate the real exchange rate of the renminbi. 

First, allow one-off substantial appreciation of the nominal renminbi exchange rate while keeping wages low. This would mean the cost of China's commodities for foreign currencies would rise, exports would be drastically reduced, and the trade surplus would decline. But in my view, this solution would have a huge negative impact on China, as it would lead to unemployment and the stagnation of China's economic transformation. Generally, the profits of labor-intensive enterprises are small, and even a moderate appreciation of the exchange rate will make life difficult for these enterprises. It would also decrease residents' incomes and thus consumption. 

Second, China's land, rents, resources and wages all increase. So even while the nominal exchange rate might remain unchanged, the real exchange rate will rise. As a result, product prices and exporting costs will rise. And thus trade surplus will be reduced. However, this is not feasible in the current global context. 

Third, the so-called double-gradual policy of gradual wage increases and gradual appreciation of the renminbi. Nominal exchange rate adjustments and relative price increases will lead to a rise in production costs for domestic enterprises, and, as a result, the trade surplus will gradually drop. But, China's wage increases and the appreciation of the renminbi should be controlled to maintain stable, sound and sustainable economic development. 

In his State of the Union address, US President Barack Obama argued that the US should block Chinese products entering into United States and make China appreciate the renminbi. But in China, everyone knows the story of Great Yu Controls the Waters of Yellow River: Yu's father spends nine years building a series of dikes to block the water, but fails; Yu makes lots of channels to guide the water and thus succeeds. 

Obama also argued that the US should not increase its products' share of the Chinese market or expand trade cooperation with China. Yet in the 12th Five-Year Plan period (2011-15), China's imports are expected to reach $10 trillion. With such a huge cake, the country that shares more will grow faster and increase its employment. The US has restricted exports of high-tech products to China, which provides a lot of business opportunities for countries such as Japan and Germany. 

The Obama administration's biggest headache is creating jobs. But this is impossible if it tries to go back to the US' traditional labor-intensive and resource-intensive industries. Instead, the US should highlight its competitive advantages in knowledge-intensive and technology-intensive industries. 

So, I would like to offer some advice to President Obama: ease the restrictions on high-tech exports to China, encourage and expand Chinese investment in the rebuilding of US infrastructure, and combine the low-cost advantages of China's talent with the US' hi-tech advantages in the energy and environmental industries. 

By strengthening bilateral trust and economic cooperation, the US will be able to share the fruits of China's economic development.

(The author is the deputy director of the Information Department of China Center for International Economic Exchanges.)