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.