China Trade Surplus and US Deficit Hit New Records, Driving Global Instability

ecKey Points

• China’s global trade surplus is heading for a new all-time high this year. Based on the first seven months of data, we estimate the full-year surplus will reach a record $886 billion.
• The U.S trade deficit will also set records this year, at an estimated $1.13 trillion trade deficit and a $1.34 trillion goods trade deficit.
• The U.S. and China continue to mirror each other on trade, with each country posting figures over $100 billion in a single month for the first time ever: a $107.7. billion deficit for the U.S. in March this year, and a $101.3 billion surplus for China in July.
• However, the Section 301 tariffs have cut China’s share of U.S. imports from 22% five years ago to 17% this year, reducing U.S. dependence on China.
• The record China trade surplus and U.S. trade deficit are leading to worsening global imbalances, as acknowledged by the IMF in an August report. Global imbalances increase the risk of global financial crises or depressions.
• The growing U.S. trade deficit continues to deprive the U.S. of good jobs and good industries. It depresses productivity growth, contributes to stagnant household incomes, and growing income inequality.

While the world economy struggles with skyrocketing energy prices, excessive inflation, and a likely global recession, China is heading for record exports and a record trade surplus, propelled by Communist Party pressure on exporters and global consumer demand. At the same time, the U.S., almost its mirror image on the trade front, is heading for record imports and a record trade deficit, propelled by U.S. consumer spending, retailer stockpiling, and an overvalued (and still appreciating) dollar, all of which make the U.S. the target market of choice for global importers.

Data from China’s Customs Administrations shows that, for the first seven months of this year, China’s exports reached $2.06 trillion, up 14.6% on the same period last year. Its imports are up just 5.3%, leading to a goods trade surplus of $482 billion. That surplus is up 57.5% on the surplus for the first seven months of 2021.

Using World Bank data, last year’s China trade surplus was $562.7 billion. If recent trends for 2022 continue to year-end, China could finish the year with a goods trade surplus of $886 billion. That would be well above its previous all-time high trade surplus ($576.2B in 2015) and a global record trade surplus.

Economist Michael Pettis has argued that China’s accelerating export growth is due to conscious policy choices by Chairman Xi and the Communist leadership. Pettis wrote that Xi is trying to drive the Chinese economy away from what he calls “inflated” economic growth and towards “genuine,” “sustained,” or “healthy” economic growth. Inflated growth refers largely to growth achieved through real estate and other urban development or infrastructure projects. Genuine growth refers to growth achieved through exports, producing goods for consumers, and investment in businesses that serve either of those two “genuine” end-use categories.

Xi’s problem is that China’s domestic economy is not delivering for him. Chinese gross domestic product (GDP) growth in the second quarter was just 0.4%, a huge comedown from the 6% rates China was posting before COVID. The problems go beyond the ongoing COVID shutdowns. Other problems include a struggling Chinese real estate market, with billions of dollars of real estate bonds defaulting or underwater. According to reports, Chinese homebuyers are refusing to make mortgage payments on unfinished apartments, which stand vacant in dozens of Chinese cities. China’s total debt including the public and private sectors has reached a record 273% of GDP, raising more fears (especially among China’s own rich) that the Chinese house of cards built on government credit might actually collapse. Alibaba, China’s online equivalent of Amazon, reported its first-ever revenue decline in the second quarter. Meanwhile, Pinduoduo, China’s equivalent of Dollar General (online retail for the poor) saw strong revenue growth of 36%, indicating that China’s low-paid are struggling. To make up for the depressed home market, the Chinese government drives exports up, which it can do by extending and rolling over loans to exporters, allowing them to boost export sales, whether or not those sales are profitable.

Matching Pair: China Trade Surplus Over $100B a month, US Deficit Over $100B a month

The U.S. trade balance is roughly the mirror image of China’s. When China expands its surplus with the world, the U.S. deficit tends to get deeper. This year, the U.S. has posted monthly trade deficits in excess of $80 billion each month. In March, for the first time ever, we posted a monthly trade deficit over $100 billion, at $107.6 billion. Meanwhile, despite COVID shutdowns early this year, China recovered sufficiently to post in July its own largest-ever monthly trade surplus, at $101.3 billion.

Another way to look at the economic impact of trade balances is to look at the current account balance as a share of GDP. A persistent surplus indicates overproduction by a nation. By overproducing manufactured goods, China takes more than its share of employment and output in the global manufacturing sector. This forces underproduction on other nations, including the loss of jobs and industries in the deficit countries. The jobs are especially important because manufacturing has traditionally offered good-paying jobs, with good benefits and good prospects, for those without four-year college degrees.

According to World Bank figures, China’s surplus peaked at 9.9% of China’s GDP in 2007. Last year it was only 2%. But this measure, based on the current account surplus, includes many factors, such as tourism and short-term capital flows, that are not relevant to the issue of overproduction. On the basis of our $886 billion projection for this year’s China trade surplus, China’s overproduction would be around 5% of its GDP. The U.S., heading for a $1.3 trillion goods trade deficit this year, is conversely suffering from roughly 5% underproduction.

Conventional economists who claim trade deficits don’t matter are not interested in the composition of jobs, U.S. capacity in critical industries, income inequality or the long-term future of the U.S. economy. If you ignore all those things, it may be true that trade deficits “don’t matter.” If you ignore all those things, then it makes sense to hollow out our economy and foist trillions of dollars of debt on our children, all for a pile of cheap t-shirts and electronics. But if you are concerned about those issues, which are all vital to our future, then trade deficits absolutely matter. They are one of the key drivers of household income stagnation, worker disaffection, and slow economic growth in the 21^st century.

The IMF acknowledged that global imbalances increased in 2021 and are likely to increase further this year, commentingthat growing global imbalances increase “risk of disruptive currency and capital flow movements,” which can trigger recessions, especially in smaller nations. But in a typically anodyne report, IMF economists blame the imbalances on the Covid pandemic, high commodity prices and recession, and call for more free trade and more free markets. They ignore the actions of nations like China that are consciously exploiting the international system to overproduce and shift unemployment onto deficit nations. Chinese economists have been quite explicit in their analysis of their government’s actions, pointing out that Chinese export growth accounts for about one third of China’s paltry economic growth this year and exports account for about one quarter of China’s huge labor force.

China Share of U.S. Imports Shrinking

In the first half of this year, according to U.S. Census data, U.S. goods imports from China totaled $271.7 billion, an all-time high, and 8.9% above the previous high, in 2018. If that trend continues to year-end, this year the U.S. will import a record $586 billion of goods from China. Remember that this data does not include de minimis imports so it is an underestimate.

But despite all of the above, there is some good news in this year’s trade figures.

The Section 301 tariffs, levied on around half of our imports from China, have not stopped the recent rise in imports from China. However a careful look at the trade data shows that the tariffs have succeeded in reducing the share of U.S. imports taken by China. This suggests our dependence on China is shrinking.

Table 1 shows the share of U.S. imports coming from major regions and nations in 2017 and this year. We have estimated total 2022 imports by doubling the total for the first half of the year. We compare to 2017 because that was the last full year before the Trump administration began imposing Section 301 tariffs.

China has lost five points of share in the U.S. import market, falling from just under 22% in 2017 to just under 17% this year. This is surely due to the Section 301 tariffs. The biggest gainer from China’s loss is the ASEAN nations (10 southeast Asian nations including Vietnam, Thailand and Malaysia). ASEAN gained three points of share in the U.S. market, surpassing 10% for the first time. The dollar value of ASEAN imports rose a stunning 99% over these five years.

The EU, Mexico, and the Central American CAFTA free trade nations also gained share, but well under one percentage point each. However, each saw their imports to the U.S. grow by over 40%.

Table 1

Source: U.S. Census, CPA estimates

Conclusion
The escalating trade surplus of China and trade deficit of the U.S. increases the need for action to address a deep imbalance that threatens the U.S. economy, global financial stability, and voters’ willingness to accept the global trading system. Amid the concern over energy, recession, and inflation, governments in the U.S. and worldwide are paying insufficient attention to this problem, which is centered on the bilateral U.S.-China relationship.

There are many possible remedies to begin getting these huge imbalances under control, including action to make the U.S.dollar more competitive, to reduce U.S. imports by tariff or other more direct controls, or to employ industrial strategies that explicitly re-shore U.S. production in targeted industries.