There is new and important context to Secretary of State Hillary
Clinton's trip to Asia next week. New data make it clear that the
huge imbalances in the U.S.-China economic relationship are likely
to persist; they may even expand. With an agitated Congress and an
Administration with an unsteady position on open trade, this is a
dangerous development for bilateral economic relations.
No Sign of Improvement
The trade deficit the U.S. runs with China was just over $266
billion last year, a modest $10 billion more than in 2007. The
deficit in the fourth quarter last year was $3 billion more than
the fourth quarter of 2007. The December 2008 deficit expanded by
$1 billion over the December 2007 deficit. The financial crisis
slowed the growth of the Sino-American trade gap-it did not reverse
or stop it.
Las year, American imports from China stood at almost $338
billion, 5 percent more than 2007. Exports to China were $71.5
billion, an almost 10 percent increase. This is another unpleasant
reminder that American exports must greatly outpace imports for the
deficit to ever shrink.
Perhaps equally unpleasant is the composition of bilateral
trade. The mainstays of American imports-cell phones, assembled
computers, and various clothing-lagged. Instead, the biggest
absolute increment, at $2.4 billion, is found in iron and steel.
This immediately makes the "Buy American" provisions adopted by
Congress more sensitive.
On the export side, half of the American gains were accounted
for by soybeans, the top U.S. export in 2008. It is very unlikely
that kind of performance can be repeated. On the other hand, the
top American export in 2007-commercial aircraft and related
parts-saw a 30 percent decline in value. In light of the economic
crunch, Beijing has understandably asked national carriers to delay
aircraft purchases, so 2009 will see no improvement in that area.
What is less understandable is Beijing's drive-whether
deliberate or unconscious-to expand its trade surplus. When the
financial crisis erupted, there were wild claims that the PRC would
somehow be immune from the effects of the meltdown. Then, more
reasonable calls emerged for China to at least play a constructive
role in the global response. That role boiled down to increasing
imports, thereby replacing lost global demand with supposedly
robust Chinese consumption-a scenario that was dubious at best.
The actual results have borne out the most hardened skeptics'
worst fears. In August, the last month prior to the crisis becoming
acute, China ran a then-record aggregate surplus of close to $29
billion. That increased slightly in September, jumped with the full
impact of the crisis in October, and since then has stayed at
Over the past six months, China ran the largest six monthly
trade surpluses in world history. These surpluses have totaled a
stunning $211 billion. That is $211 billion that has been extracted
from global GDP and added to Chinese GDP, exactly the opposite of
the assistance-much less leadership-many hoped China would
Going the Wrong Way
The situation may get worse. In moving to stimulate its economy,
the PRC has more fully embraced harmful policies it clung to for a
decade, including round after round of export
support and an explosion in bank lending. In
January, Chinese banks made close to $240 billion in new loans,
one-third of the ostensible target for 2009. The state owns
essentially all of the formal banking system, and the large
majority of loans are to state-controlled firms.
Also in January, money supply measures representing consumer
spending slowed. At the end of December, personal savings were
expanding at a 25 percent annual clip. Firms now have much more
money with which to produce goods, but consumers are not devoting
much more money to buying them. The likely outcome is oversupply,
which plagued the PRC for years after the Asian financial
The internal results of that crisis and bout of oversupply were
deflation and shackled growth. The external result was broad
introduction of bank-subsidized Chinese products to the American
market. East Asian markets were shattered, but low-cost Chinese
goods were welcome in a U.S. economy growing fast enough to spur
inflation. From 1996 to 2000, China's trade surplus with the U.S.
more than doubled, and the nature of the Sino-American economic
relationship fundamentally changed.
It seems inconceivable that Chinese trade surpluses could move
higher than they have been the past six months. But the
PRC-sticking to what has worked for them in the past-is creating
conditions for exactly that.
The Burden Is on Washington
The burden is on Washington to make better choices than Beijing
has. The U.S. cannot simply block Chinese goods, as the mammoth
quantity of diverted products would cause the E.U. and the rest of
the world to raise trade barriers in response. These actions would
partly recreate the calamitous effect of Smoot-Hawley in 1930 and
bring the U.S. closer to a true depression. Alternately, a more
expensive renminbiwould not have the impact Congress
desires. The volume of loans being offered to state-owned
manufacturers would overwhelm the impact of a pricier currency.
The bank bailout, fiscal stimulus, and (worst) Buy American put
the U.S. on weak ground to call for liberalization. There is a way
forward, though the path is narrow. President Obama has the option
to strike the Buy American provisions from the stimulus package as
not in the national interest. Secretary of State Clinton can
communicate this intent in her upcoming visit to Beijing. At the
same time, she should also be frank: Without very strong, properly
directed action from China, congressional pressure will become
That action will be difficult for the PRC. The mass
subsidization of exports by state banks must quickly be curbed, and
negotiations for market access beyond WTO terms (for example, the
25 percent tariff and licensing barriers to foreign cars) must
begin in earnest when the Administration's international economic
team is finally in place. Such steps will certainly not erase the
trade imbalance but will keep it at a tolerable level. Otherwise,
China will continue toward provoking sharp and dangerous American
Derek Scissors, Ph.D., is
Research Fellow in Asia Economic Policy in the Asian Studies Center
at The Heritage Foundation.
Simple claims that China contributes heavily to
global growth overlook how trade is entered in GDP. Combining each
country's growth weighted by their economic size is misleading. A
trade surplus adds to GDP while a deficit subtracts. In GDP
accounting, a major portion of Chinese growth is thus at the
expense of the rest of the world, not in contribution to it. It is
in terms of true economic welfare that China contributes greatly,
through expanding the supply of goods and increasing
example, see "China Raises Garment, Textile Export Tax Rebate Rate
to 15%," China View, February 4, 2009, at http://news.xinhuanet
.com/english/2009-02/04/content_10763463.htm (February 13,
2009); Ministry of Commerce, The People's Republic of China, "China
Export Tax Rebate Net Widened," January 4, 2009, at http://english.mofcom.gov.cn/aarticle
(February 13, 2009).