Myths about China’s Exports

News is out that China overtook Germany to become the largest exporter in 2009 (not surprisingly). Its share of world exports increased to almost 10 % – about the same slice as Japan’s exports in 1986. A recent Economist article predicts that if China continues its current pace, its share of the world’s exports will increase to about 25 percent in ten years.

As I dug deeper, however, I saw a different side of the story. China’s exports actually fell by 17 % in 2009. Its imports, fueled by a burgeoning middle class, have been stronger than exports, increasing by 27 percent while exports were falling. Contrary to the conventional view, exports are not the major driver of China’s economy – investments are. Net exports accounted for only 3 % of China’s GDP growth last year.

I expect China’s imports will continue to grow stronger than its exports in the coming years as a growing Chinese middle class will create stronger demand. In fact, the dynamics of US – China trade are already changing. While US exports to other major trading partners such as Canada and Mexico declined, its exports to China increased 13 % in 2009.

One might argue that if China hadn’t kept its currency artificially low, the U. S. could have exported more to China. According to U. S. Department of Treasure report on exchange rate, yuan has appreciated by 21 percent against dollar since July 2005. In 2009, China returned to a policy of maintaining largely stable yuan-dollar exchange rate. The appreciation of dollar in the past year has caused yuan to strengthen against other currencies.

I am all for fair trade and fair competition, and agree that China should allow its currency to appreciate and reflect the market price. But any attempt at protectionism to retaliate against China, such as the one suggested by Paul Krugman, is a recipe for disaster (iust because he won the Nobel Prize in economics doesn’t mean he is right). Trade is the only that can help us grow out of imbalance. Krugman went so far that he even blamed China for the US housing bubble. He might as well blame China for financing the Iraq war too.

Professor Joseph Stiglitz, the Nobel Prize-winning economist, explains in his book Making Globalization Work that the need for countries to hold reserves under the current global financial system causes money to flow uphill from poor countries to the rich. The United States receives most of the benefits of the reserve system, with all of those dollar reserves acting as low-cost loans to the US. Stiglitz indicates that the current global reserve system is self-defeating. Eventually, reserve currencies will depreciate, making them ill-suited for reserves. The reserve countries such as the United States are subject to the temptation to obtain low-cost loans and grow into debt, which causes significant instability in the world economy.

As addressed in my forthcoming book The Chinese Dream, re-balancing the global economy requires China and the U. S. to learn from each other: China to spend more and the U. S. to save more. China has made some efforts to increase domestic demand, such as incentives for people to purchase cars and consumer durable goods. The question Americans should ask is what they can do to stimulate their economy while increasing savings.

10 thoughts on “Myths about China’s Exports

  1. Hi Helen,
    I think it’s too early to make assumptions about China’s export and imports. Especially given the fact that the figures you mention regarding the exports are only about 2009. Factors such as the global financial crisis which is still on-going, should not be dismissed when stating that exports have fallen. Although exports might not be THE major driver for China’s GDP growth, it is A major driver and should thus also not be dismissed so easily.

    Regarding the imports I agree that they will probably increase in the long term, however, I am not sure whether they will outpace exports given that a) after the financial crisis ends the world will (assumably) increase its imports from China again and b) the Yuan is left to peg with the Dollar.

    These are my two cents.

  2. I agree with you. And I think that we need to consider China to be a kind of empire more than a country. All those middle class people behave differently than more remote others and +- differently than Beijing decrees. And the provinces act semi-independently.

  3. Sorry Helen, but your article was quite short and compared to The Economist article, also short on facts. You will need to substantiate your viewpoints with a lot more data. I agree with you that Paul Krugman should not be taken at face value simply because he is a Nobel Laureate, but he should be taken seriously because he substantiates his position with data, as does The Economist.

  4. Hi Ketan,

    I appreciate your feedback. I added more facts in my article about China’s exchange rate and dollar as a reserve currency.

  5. My coder is trying to convince me to move to .net from PHP. I have always disliked the idea because of the costs. But he’s tryiong none the less. I’ve been using WordPress on a variety of websites for about a year and am concerned about switching to another platform. I have heard excellent things about blogengine.net. Is there a way I can import all my wordpress content into it? Any kind of help would be greatly appreciated!

  6. Which is really unique standpoint, I haven’t imagined about this that way. I have to say I really like your blog, btw! Why really don’t you include some additional photographs and movies, that way it’ll be much more attractive into the visitor. Desire that will help!

  7. I am happy to find this post very useful for me, as it contains lot of information. I always prefer to read the quality content and this thing I found in you post,Thanks for sharing.

  8. I as well as my buddies happened to be reading through the great tips and tricks found on your web page then then developed a terrible feeling I had not expressed respect to the blog owner for those techniques. All the boys happened to be joyful to read through them and have in effect actually been using those things. I appreciate you for actually being well thoughtful and for selecting these kinds of ideal things millions of individuals are really desperate to understand about. My honest apologies for not saying thanks to you earlier.