Addressing Trade Imbalances

Abstract: In the second quarter of 2024, the global manufacturing industry rebounded, while inflationary pressure remained. Domestic broad-based fiscal efforts weakened, with the slowdown of fiscal revenue and expenditure growth as well as sluggish social financing expansion. The highlights in China's economy were mainly manifested in the continued improvement in industrial production and exports, while insufficient demand remained the main challenge, with the nominal GDP growth rate further declining and the sense of accomplishment from economic growth yet to be improved. In the second quarter, the consolidated fiscal capacity of local governments further declined, and the growth rate of local government-led expenditures  dropped, dragging down the expansion of society-wide expenditures and revenue growth. The risks ahead lie in the negative feedback between revenue and expenditure growth and its complications as well as increased trade frictions. The response is to fully complete broad budget spending, lower policy rates, stabilize the housing sector, and grasp the pace of debt reduction.

China has experienced three continuously expanding trade surpluses since 2000. Behind them, 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.