Are the forces that cause China's trade surplus with the USA good?
| Pages | 43-53 |
| Date | 09 February 2010 |
| DOI | https://doi.org/10.1108/17544401011016672 |
| Published date | 09 February 2010 |
| Author | Jonathan E. Leightner |
| Subject Matter | Economics |
China’s trade
surplus with
the USA
43
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 3 No. 1, 2010
pp. 43-53
#Emerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401011016672
Are the forces that cause
China’s trade surplus with the
USA good?
Jonathan E. Leightner
Johns Hopkins-Nanjing University Center, Nanjing, People’s Republic of China
and Augusta State University, Augusta, Georgia, USA
Abstract
Purpose – This paper aims to conceptually argue that China’s trade surplus with the USA is not
good.
Design/methodology/approach – Net exporters (like China) give up cur rent consumption in order
to gain claims against future production. This paper argues that the reasons why China is trading
current consumption for claims on future production are not good.
Findings – There are strong reasons to believe that China’s trade surplus with the USA is not
healthy for either China or the USA.
Originality/value – Other scholars have discussed the trading of the present for the future that is
involved in trade surpluses, but no one (to the author’s knowledge) has discussed when such a trade
is good or bad.
Keywords Surpluses, Trade balances, Consumption, China, United States of America
Paper type Conceptual pap er
I. Introduction
By the end of 2008, the Chinese government had accumulated over 2 trillion dollars worth
of foreign assets (reserves) of which at least 1 trillion is US dollars or US government
securities. This is the largest accumulation of US dollar assets by a foreign government in
the world for all of history. Governments fix their exchange rates below equilibrium by
selling their currencies on the international market for US dollars (or for gold or for some
other currency), which they then accumulate. Thus, China’s accumulation of over one
trillion dollars is prima facie evidence that China’s exchange rate is artificially fixed below
its market clearing rate. Whether or not this makes China a ‘‘currency manipulator’’
depends on how you define ‘‘currency manipulator.’’ ClearlyChina strongly objects to such
a label (Zhang, 2009). Ronald I. McKinnon wrote on April 20, 2006 Wall Street Journal
article, entitled ‘‘[Is China a] currency manipulator?’’ His answer is‘‘No.’’ McKinnon argues
that the fundamental cause of the US trade deficit with China (or the Chinese trade surplus
with the USA) is US excess consumption and Chinese excess savings.
If ‘‘excess savings’’ is defined as producing more than is being domestically
purchased and ‘‘excess consumption’’ as purchasing more than is being domestically
produced, then obviously trade surpluses are synonymous with excess savings and
trade deficits with excess consumption. However, the present paper says something
more profound than just these definitions. Most impor tantly, excess savings gives the
trade surplus country a claim against the future. The excess consumption of the trade
deficit country either uses up what was accumulated in the past or creates obligations
against the future. The rest of this paper is organized as follows. Section II of this pap er
will explain the role of excess consumption and excess savings in internationa l trade.
Section III discusses why the Chinese save so much and whether or not that savings is
good. Section IV examines whether or not the USA going deeper and deeper into debt
by running persistent trade deficits is good. Sec tion V concludes.
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