Abstract: China has experienced three continuously expanding trade surpluses since 2000. This article explains the reasons behind three instances of rising trade surpluses and evaluates the welfare impacts of trade surpluses from multiple perspectives. It also offers policy recommendations for addressing trade imbalances.
Using the hp filter, the trend factors account for roughly 3.5-4%, and the cyclical ones between plus and minus 2%. The trend factors include reasonable factors, as well as unreasonable ones due to market failures and policy distortions that curb domestic consumption and investment, while cyclical factors stem mainly from changes in domestic and foreign economic cycles and the impacts of counter-cyclical policy options.
China has a large room for improvement in investment and consumption. Trade surpluses at the expense of reduced domestic investment and consumption had a high opportunity cost. Besides, the real rate of return on overseas assets accumulated through trade surpluses was not high, lower than the real return on China’s assets most of the time. Last but not least, a continuously widening trade surplus would increase trade disputes and sanctions between countries.
Therefore, to address trade imbalance, it is necessary to reduce undue policy interventions and unreasonable factors by reducing or even eliminating market failures and frictions. Structural Policy Focus: first, improve the incentives of local governments by shifting investment and production subsidies to public welfare expenditures. Second, break down barriers to entry in the services sector and promote fair market competition. Third, promote the reform of the financial services industry to better serve corporate financing and residents' pension insurance. Cyclical Policy Focus: first, fully utilize counter-cyclical policies to maintain the flexibility of the RMB exchange rate. Second, stabilize the real estate market policy. Third, resolve debts of local governments in a well-paced manner.
