IV. Promoting Basically Balanced Growth of Foreign Trade

IV. Promoting Basically Balanced Growth of Foreign Trade

The primary factors determining whether a country's foreign trade is in surplus or deficit are its economic structure and the international competitiveness of its products or services. China does not pursue a foreign trade surplus intentionally. There has been a certain amount of deficit in China's services trade for a long time, and the trade in goods was in deficit for most of the years prior to 1990. After 1990, with large-scale industrial outsourcing and relocation, China enhanced its competitiveness in manufactured goods. Growth in exports overtook that of imports, turning the overall deficit to a surplus in trade in goods. In 2005 China's surplus in trade in goods reached 100 billion U.S. dollars for the first time, which was followed by vigorous growth for four consecutive years. In 2008 the surplus hit 298.1 billion U.S. dollars, the highest point in history, before slowing down gradually. The surpluses in trade in goods for 2009 and 2010 were 195.7 billion U.S. dollars and 181.6 billion U.S. dollars, down 34.4 percent and 7.2 percent year-on-year respectively. In 2010 China's surplus in trade in goods accounted for 6.1 percent of the total import and export volume and 3.1 percent of the GDP. Of the nine nations with the largest trade balances (favorable or unfavorable), China was not high up in the league table in terms of the two ratios.

The fact that China is enjoying a surplus in trade in goods reflects its position in the international division of labor at the current stage. China has now relatively big advantages in the processing and assembling of industrial products, and is the largest producer and exporter of industrial products. The United States, European Union and some other countries and regions are the major end consumer markets. With the transfer of large numbers of labor-intensive processing and assembling sectors to China from Japan, Republic of Korea, Singapore, Taiwan, Hong Kong SAR and other nations and regions, their surpluses with the United States and Europe were also transferred to China. The result is that while China is currently enjoying a surplus in trade in goods primarily with the United States and Europe, it also has long-term trade deficits with Japan, Republic of Korea, ASEAN and other major intermediate producers. In 2010 China's surpluses in trade in goods with the United States and the European Union were 181.3 billion U.S. dollars and 142.8 billion U.S. dollars, respectively, and its total deficit in trade in goods with Japan, Republic of Korea and ASEAN was 141.6 billion U.S. dollars. The deficit in trade in goods between China's mainland and Taiwan reached 86 billion U.S. dollars. To produce and export industrial products, China needs to import large quantities of primary goods, thus creating a deficit in trade in goods with certain exporters of primary goods. It is the country's different level and status of participation in the international division of labor in manufacturing and the services industry that leads to China's big surplus in trade in goods but a long-term deficit in services trade.

China's surplus in trade in goods mainly comes from foreign-invested enterprises and processing trade. With the spread of economic globalization as well as the refinement of the division of labor and the development of economies of scale, an increasing amount of international trade - intra-industry trade or processing trade based on value-chain specialization - is predominated by multinationals. Since the adoption of the reform and opening up policy in 1978, China has experienced rapid growth in attraction of foreign direct investment. For a fairly long period of time the import and export business of foreign-invested enterprises and processing trade mainly operated by foreign-invested enterprises accounted for about 50 percent of China's trade volume in goods, and were also the major source of the country's surplus in trade in goods. In 2009 and 2010 the surplus in trade in goods created by foreign-invested enterprises reached 127 billion U.S. dollars and 124.3 billion U.S. dollars, respectively, accounting for 64.8 percent and 68.4percent of the total surplus of China's trade in goods in the two years. Processing trade surplus of foreign-invested enterprises in the same period hit 264.6 billion U.S. dollars and 322.9 billion U.S. dollars, significantly higher than the country's total trade surplus for 2009 and 2010. While foreign-invested enterprises and processing trade enjoyed a big favorable trade balance, the import and export of China's state-owned enterprises, general trade and other forms of trade were in deficit.

The limits on certain high-tech trade set by developed countries also affect the trade balance between China and some of its trading partners. As China is currently accelerating its pace of industrialization, it needs to import advanced equipment and technologies from developed countries. Unfortunately, some developed countries, sticking to their old way of thinking, impose various restrictions on the export of high-end equipment and advanced technologies to China, resulting in slow growth in the export of these sectors. To a certain extent such limits hinder China's imports from these countries, posing an unfavorable impact on bilateral trade balance.

As China turned its trade deficit into a surplus, the country improved its international balance of payments and enhanced its resistance to external risks. However, the sharp increase in surplus also created trouble for the Chinese economy. The large volume of RMB input in export settlement complicates macroeconomic control, and the rapid expansion of China's surplus in trade in goods also results in more trade frictions between China and its trading partners, as well as persistent pressure on the RMB to appreciate.

The Chinese government attaches great importance to the imbalance in the development of foreign trade, and has adopted a series of policies and measures to curb overheated surplus growth. First, it proactively adjusts the economic structure, strives to expand domestic demand, and especially increases investment in projects to improve the people's livelihood and stimulate household consumption. Second, it enacts a series of policies to expand imports, simplify the procedures of import administration and import payment, lower the temporary tax rates on certain imported commodities, improve the import promotion system and facilitate import businesses. Third, it has adjusted the export tax rebates policy, lowered or cancelled export tax rebates for some products that consume too much energy and cause serious pollution and certain resource-based products. Fourth, it has amended the prohibited and restricted categories of processing trade, expanding the scope of the prohibited category and promoting this sector's restructuring and upgrading. Fifth, it has changed the situation of the pegged exchange rate of the yuan against the US dollar since the Asian financial crisis, and adopted the administered floating exchange rate system based on market demand, and adjusted it with reference to a basket of currencies from July 21, 2005. During the period from the exchange rate reform in July 2005 to the end of August 2011, the nominal exchange rate of the yuan against the dollar appreciated by about 30 percent.

China's measures to promote balanced foreign trade growth have achieved obvious effects. The nation's surplus in trade in goods has been on a steady decline since 2009, and the proportion of surplus in the total import and export trade volume and the GDP also started to drop in 2008, moving toward a balance in foreign trade. China's efforts not only serve the development of its own economy, but are also practical moves to promote the structural adjustment and the rebalancing of the global economy.