The growing trade surplus in China and the widening trade deficit in the U.S. since the pandemic have reignited concerns about global economic imbalances. The debate over these trade shifts is often framed around China’s industrial policies aimed at boosting exports and maintaining growth, particularly in the face of weak domestic demand. Some experts worry this could lead to a “China Shock 2.0,” where a surge in Chinese exports could disrupt global industries and displace jobs.

However, this view oversimplifies the situation. A more comprehensive analysis shows that trade balances are primarily determined by macroeconomic factors, such as savings and investment dynamics, rather than solely by industrial policy. China’s current account surplus has grown not only because of its industrial policy but largely due to macroeconomic trends like reduced domestic demand and increased household savings. The U.S., on the other hand, has seen a decrease in household savings and a ballooning budget deficit, which has contributed to its trade deficit.

The pandemic initially caused a surge in China’s exports of medical equipment and other goods due to global demand for products over services. As China’s domestic demand weakened, particularly following a housing market correction and consumer confidence hits in 2022, its trade surplus expanded. Meanwhile, the U.S. saw a sharp decline in its savings rate as government spending increased post-pandemic, further worsening its trade deficit.

Recent macroeconomic modeling from the IMF suggests that these trends are closely tied to internal economic factors within both countries. In China, for example, the real effective exchange rate has declined as a result of increased domestic savings, leading to higher exports and lower imports. In the U.S., robust domestic demand and lower savings have worsened its current account deficit.

In short, while industrial policies like subsidies can have localized effects on specific sectors, such as electric vehicle production in China, the overall trade balances of both nations are largely shaped by deeper macroeconomic forces. Addressing these imbalances will require internal economic reforms rather than external trade adjustments. For China, this includes tackling long-standing issues such as the aging population and real estate sector woes. For the U.S., fiscal adjustments, such as tax reforms or reducing entitlement spending, could help improve its trade deficit.

Ultimately, global trade imbalances between these two giants are not solely the product of trade policies but reflect broader macroeconomic realities that require structural changes within their economies to achieve more sustainable growth.

Igor Spirido

Source:https://www.imf.org/