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Tackling the Trade Surplus
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China's soaring trade surplus has unsurprisingly propelled trade officials from both the European Union and the United States to take turns visiting Beijing recently to find solutions to the trade imbalances between them.

However, fixated only on immediate reduction of their trade deficits, these foreign visitors have more often than not ignored the underlying driving force behind China's trade growth.

Also, busy explaining that the country has no intention of pursuing a trade surplus, Chinese officials have yet to recognize its rising trade power as a result of ongoing structural changes in the global production and trade system.

Much has been said about the importance and impact of China's entry to the World Trade Organization five years ago. But a greater understanding of the significance of China's integration into the world economy is still missing.

While its monthly trade surplus keeps hitting new highs, China's foreign trade in the first 10 months rose 24.1 percent year-on-year to reach US$1.43 trillion, surpassing the volume for the whole of 2005.

Given recent efforts to raise export taxes and cut import tariffs, policy-makers ostensibly do not take comfort in the surging trade volume.

Rocketing exports of goods, the production of which involves mass consumption of energy and resources as well as heavy pollution, will seriously hinder the country's pursuit of sustainable growth. A customs duty that discourages energy- and resource-intensive exports is needed to push domestic enterprises to raise their energy efficiency and environmental awareness.

A ballooning trade surplus will certainly add to the tensions between China and its major trade partners. But it is not a result of protectionism. Instead, it stems from China embracing economic globalization, expediting specification across borders in line with each country's comparative advantages.

As the most populous country in the world, China benefited hugely from its competitive labor cost during its rise as a global manufacturing power. And so far, most Chinese exports are from the processing trade.

By adding value to materials or components that they process with cheap labor, Chinese export businesses make profits, no matter how thin their margins might be.

Hence, until the country's labor cost rises considerably, foreign companies will find China an ideal place for manufacturing. In fact, the huge inflow of foreign investment in recent years bears full testimony to China's appeal as a cost-cutting manufacturing base.

This structural change in the division of labor across the globe cannot be dealt with using instant cures. It requires long-term efforts to adapt industries in China and other countries to the new economic landscape.

(China Daily November 16, 2006)

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