An Analysis of China's Trade Balances with Other Countries and Regions
　　
　　 YU Fangdong（余芳东）
　　
　　
　　
　　Editorial note: This article utilizes a large amount of statistical data to analyze the global distribution of foreign trade in China since 1990, as well as the factors involved and the changes in trends. The research results indicate that China has gained a favourable balance against developed countries and a disadvantageous balance against developing countries; China enjoys a trade surplus with North American and European countries while suffering deficits with those in the Asia-pacific region, as well as with resource-abundant Australia, Africa and South America. With regard to trends, the structure of China's foreign trade will not undergo fundamental changes in the short term, but in the long run will be transformed in line with restructuring of the growth pattern.
　　
　　Along with the intensification of reform and opening up and a series of foreign trade development policies and measures, China has been grow­ing closer to the international econo­mies since the 1990s and their mu­tual influence over one another has become ever more profound - espe­cially following China's accession to the WTO in 2001. As a result, China's foreign trade has expanded significantly and upon an unprec­edented scale. In 2005, China's for­eign trade amounted to US$ 1,422.1 billion - 11 times that of 1990 - and ascended to third in the world from a previous ranking of 15th, behind only the U.S. and Germany. Export reached US$ 762 billion, account­ing for 7.3% (up from 1.8%) of the world total, while import reached US$ 660.1 billion, a surge to 6.1% from 1.5%. As the increase in export is much higher than that in import, foreign trade gains have been con­verted from basic balance to sus­tained surplus. The trade surplus has increased by a large margin since 1995, with the annual surplus ex­ceeding US$ 20 billion every year from 1996 to 2004 consecutively, and in 2005 it rose to US$ 101.9 billion, 2.2 times higher than in 2004.
　　
　　Exceedingly large trade surpluses have already attracted international attention, becoming a major cause of increasingly tense trade frictions be­tween China and her main business partners. Some countries accuse China of bringing about an imbal­ance in the global economy, and the RMB exchange rate has been under increasing pressure for appreciation. This will gravely damage the sustain-able development of China's foreign trade, leave our economic activity vulnerable to the impact of the glo­bal economy, and seriously challenge the macro- economic policies and re-forms of the RMB exchange rate mechanism. In order to explore fur­ther the roots of the Chinese foreign trade surplus, this article carries out an in-depth and comprehensive analysis of the national and regional distribution of Chinese foreign trade balances since 1990, so as to deduce its causes and trends.
　　
　　I. National and regional distribution of Chinese foreign trade balances
　　
　　Over the past 15 years, China's foreign trade has been developing in both breadth and domain, spreading to more areas and enjoying a greater variety of export destinations and im­port sources. Great changes have taken place in countries and regions with regard to foreign trade balances.
　　
　　(I) In terms of continental distribution, China maintains a sur­plus with North America and Europe, yet a deficit with Asia, Latin America and Africa
　　
　　 Asia is the region of greatest ex-port and import with China, ac-counting for 56.8% of China's total foreign trade in 2005. Europe was ranked second, with 18.4% of the overall amount of Chinese global business, followed by North America with 16.2%, and Latin America, Af­rica and Australia with 3.5%, 2.8% and 2.2% respectively. In total export, Asia accounted for 48.1%, North America for 22.9%, Europe for 2 1.7%, and Latin America, Af­rica and Australia for 3.1%, 2.5% and 1.7% accordingly. As for import, Asia accounted for 66.9%, Europe for 14.6%, North America for 8.5%, and Latin America, Africa and Australia for 4.1%, 3.2% and 2. 7% respectively. Continental inconsistencies in the dimensions and speed of export and import development have led to China's trade balance with different countries varying in terms of scale and direction. From 1990 to 2005, China went from an unfavourable balance to a favourable balance against North America and Europe, while the opposite occurred with Asia and Africa. China suffered a deficit against Latin America (except in the years 1997- 2002), and a continual deficit against Australia. In 2005, China's biggest surplus was with North America, reaching 118.4 billion, followed by Europe with 69.2 billion. Meanwhile China's greatest deficit was with Asia (75.1 billion), followed by Australia, Latin America and Africa, with 5.1 billion, 3.1 bil­lion and 2.4 billion respectively.
　　
　　(II) With regard to countries at different development levels, China maintains a surplus against developed nations but a deficit against restruc­turing countries, such as developing nations, Eastern Europe and the Com­monwealth of Independent States
　　
　　Between 1990 and 2004, China's export to developed countries in-creased and import decreased in terms of proportion of total trade, while the situation was the opposite with the developing countries. Sta­tistics from the United Nations Con­ference of Trade and Development (UNCTAD) show that China's ex-port to developed nations reached as high as 58% (up from 36%) of the country's total export, and that to de­veloping nations sunk to 51% (down from 60%). Correspondingly, China's import to developed nations dropped to 40% (from a previous level of 51%), while import to de­veloping nations nudged up to 51% (from 43%) of China's total import.
　　
　　Transformation of the foreign trade pattern has directly changed the scale and direction of trade with both developed and developing countries. Between 1990 and 2004, China converted a deficit with de­veloped countries into a surplus, and a surplus with developing countries into a deficit. Throughout this time, China maintained a deficit with re-structuring countries in Eastern Eu­rope and the Commonwealth. Re­garding develop­ing countries in various regions, China's deficit came mainly from developing coun­tries in Asia, fol­lowed by those in Latin America and Africa.
　　
　　(III) In terms of specific coun­tries and regions, the U.S., Hong Kong, the European Union (EU), Canada, South Africa and New Zealand all have a trade deficit with China, while Taiwan, South Korea, the Association of Southeast Asian Nations (ASEAN), Brazil, Australia and Russia have a surplus with China
　　
　　Chinese foreign trade is centred upon certain countries and regions, with 83% of exported goods going to the U.S., the European Union, Hong Kong, Japan, ASEAN, South Korea, Taiwan and Russia, and 73% of im­ported goods coming from Japan, South Korea, ASEAN, Taiwan, the European Union, the U.S., Austra­lia and Russia. The degree of national concentration is higher in export than in import and since 1990, the concentration in export and import has been abated somewhat. However, the U.S., EU, Hong Kong and Japan have always been our main export destinations, and Japan, South Korea, ASEAN, Taiwan and the EU have long functioned as our sources of import. In 2005, export to the U.S., EU, Hong Kong and Japan accounted for 21%, 19%, 16% and 11% respectively of the total export volume. Japan served as China's larg­est import source (15% of China's total import), while import from South Korea, ASEAN, Taiwan and the EU hovers at about 11%.
　　
　　In the 15 years since 1990, China, from a 1.4 billion deficit, has gained a surplus of US$ 114.2 billion against the U.S. - the largest of all trade surpluses of China with another country and one which is increasing in volume year upon year. We have maintained a surplus with Hong Kong, surging to US$ 112.3 billion from US$ 12.4 billion and converting a deficit of US$ 3.1 billion against the European Union into a surplus of US$ 70.1 billion. During the same period, we have remained in a disadvantageous balance with Taiwan, calculated at US$58.1 billion (from US$1.9 billion), and also in deficit with ASEAN, expanding to US$ 19.6 billion (from US$ 1.6 billion). Trade with South Korea lapsed into a 41.7 billion deficit from a 600 million surplus, and with Japan, a 1.4 billion surplus was replaced by a 16.5 billion deficit.
　　
　　
　　
　　II. Causes for the transformation of China's national and regional foreign trade balances
　　
　　(I) It is mainly the differences in resource endowment which cause our trade deficit with the majority of developing countries and a few de­veloped countries
　　
　　China, a country poor in resources, needs to import in large quantities as her resources are not enough to satisfy fully the demands of her rapid economic sustainable development. In 1990-2005, the import of primary commodities ballooned from 18% to 22% of the total import volume. In 2005 the import of crude oil swelled to ten times that of 1992; refined oil im­port increased by 3.3 times, iron ore import by ten times and that of steel by 2.6 times. Developing countries in Asia, Latin America and Africa, in addition to Australia, Russia and Brazil, are our main resource providers. In 2005, resources in the form of energy, mineral products, steel, copper, nickel and aluminium, as well as agricultural products im­ported from Australia, Russia and Brazil, accounted for 74%, 87% and 92% respectively of the total import volume. Import from these countries respectively equalled 1.5 times, 1.2 times and twice the cor­responding volume of China's export. China ordered an increas­ing amount of commodities in the form of energy, minerals and agri­cultural products from developing countries in Latin America, Asia and Africa. Comparatively speaking, some developing countries, restricted by low in-come and weak consumption and with a product structure similar to that of China, have limited de­mand for our commodities - there-fore China's export to these coun­tries was on a relatively small scale, resulting in China's deficit against them.
　　
　　(II) Production in China shares a strong mutual supplementary na­ture with that in the U.S. and in the European Union (EU), and in particular, China's obvious competi­tive advantages in the export of manufactured goods and their ample supply are the main reason for the constant growth of China's trade surplus against the U.S. and the EU
　　
　　(i) The consumption demands in the U.S. and the EU, stimulated by robust economic growth, are growing, with the U.S. market in particular experiencing vigorous consumption demand. On the con­sumption scale, American spend­ing upon consumption accounts for 71% of the U.S. GDP while EU citizens consume 57% of GDP; in terms of production structure, ser­vice production totals 75% of GDP in the U.S., while in the European Union this figure is 71%. Some manufacturing industries are trans­ferred aboard due to industrial re-structuring - labour-intensive in­dustries in particular - and supply shortages mean they have to im­port in large volume so as to sat­isfy their consumption demands. Since 1976, the U.S. has continu­ally suffered deteriorating deficits in two-way trade with nearly ev­ery country in the world, soaring to US$ 782.1 billion in 2005 (from US$ 9.5 billion). The disadvanta­geous balance with the European Union reached as high as US$ 106. 1 billion in 2005 from US$ 57.2 bil­lion in 1999, with a surging deficit against Asian and Latin American countries.
　　
　　(ii) China enjoys a strong com­petitive advantage in labour- inten­sive production and is complemen­tary with America and the European Union, occupying an increasingly large share of their markets. Chinese low- end industrial manufactured goods with clear competitive advan­tages upon the international market and a strong capability for produc­tion supply enter the U.S. and the European Union in large quantities. Statistics from the U.S. Census Bu­reau and the Eurostats show that be­tween 1990 and 2005, import from China expanded 15 times, jumping from 3% to 14.6% of America's to­tal import; total import from China in 2005 was twice as large as in 1999, accounting for 13.4% (up from 7%) of the European Union's total import. America and the European Union remained China's no.1 and no.2 importers. China was ranked the second largest exporter to the U.S., behind only Canada, and also the second largest exporter to the Eu­ropean Union after the U.S. In 2005, the U.S. imported office equipment from China, including automatic sta­tistical processing equipment, telephones, telegram dispatchers and typewriters, along with TV-receivers, video monitors and TV-projectors, amounting to 1/3 of the amount of these products in the American market. Labour- intensive manufac­tured goods such as furniture, toys, games and suitcases accounted for more than 70% of these products in the U.S. market. Exported products such as textiles, shoes, hats, decorations, furniture, toys, leather, electrical appliances, electronics, and audio-video equipment and its acces­sories constituted 45.4% of China's export volume to the European Union.
　　
　　(iii) Due to the disparity in demand, China's import from America and the European Union does not ensure a simultaneous growth in line with export, leading to a growing surplus for China. On the one hand, America and the EU manifest a strong appetite for con­sumer goods, maintaining robust im­port from China. On the other hand, inhibited by her internal production structure, low consumption level and purchasing power, plus the strict con­trols imposed by the U.S. and the EU over the export of high- tech prod­ucts to China, China maintains a small- scale and slow growth of im­port from the U.S. and the EU. Be­tween 1990 and 2005, export to the U.S. and the EU increased by 30.5 times and 20.4 times respectively, yet import has increased by far less (6.4% and 6.5%), resulting in a growing surplus for China.
　　
　　 According to official statistics from the U.S. and the EU, America's deficit against China soared from US$ 10.4 billion in 1990 to US$ 201.5 bil­lion in 2005, while the EU's deficit against China increased from U.S.$ 32.8 billion in 1999 to US$ 106.3 bil­lion in 2005. China was thus the larg­est trade deficit partner for both the U.S. and the EU.
　　
　　(III) International industrial transfer and adjustment, in addition to direct foreign investment pouring into the country, act as a crucial driv­ing force in the rise of China's ex-port - particularly in the processing trade - and also as a cause of the grow­ing surpluses against the U.S. and the EU and the increasing deficits against Taiwan, South Korea, Japan and ASEAN
　　
　　2006.12.31, 1:57
　　
　　Since 1990, developed countries in Europe and America have gradu­ally transferred their traditional manufacturing abroad and caused multinationals to mushroom in China, with an eye to cheap labour, favourable infrastructure and increas­ingly open systems of foreign trade and investment, so as to turn China into a manufacturing factory oriented towards the global market. In 2005, actually utilized direct foreign invest­ment totalled US$ 60.3 billion, equal to 17.3 times that in 1990. Foreign funded enterprises are both the cre­ators and the beneficiaries of the enormous surplus. The direct conse­quences of expanding foreign direct investment are as follows:
　　
　　(i) It has provided a substantial boost to Chinese export as 70% of foreign direct investment is centred upon manufacturing, in­cluding 12.8% in the electronics and telecommunications fields. These in-vestments are aimed at export, form­ing the principal component of our export. Export by foreign funded cor­porations accounted for 12.6% of the total export volume in 1990, soaring to 58.4% in 2005, with a trend of con­tinuous growth year by year. They con­verted the deficit of the 1990- 1997 period into a surplus by 1998- 2005, achieving a surplus of US$ 56.7 billion in 2005 which accounted for 55.6% of China's total surplus.
　　
　　(ii) It has broadened China's processing trade. With an eye upon China's cheap labour and produc­tion costs, and not just China's do­mestic market, many multination­als set up production and process­ing bases oriented towards the glo­bal market, thereby bringing about a massive improvement in China's processing trade. Between 1990 and 2005, China's processing trade ex­panded by 15.4 times in terms of export, increasing from 41% to 54.7% of the total export, and import in-creased by 13.6 times, jumping from 35% to 41.5% in its proportion of the total import. Accordingly, gen­eral trade has shrunk in terms of export from 57% to 41%, and im­port has declined from 49% to 42%. Processing trade gained a surplus of US$ 142.5 billion, up from US$ 6.7 billion, which was 20.3 times larger than before, while general trade brought in a surplus of US$ 35.4 billion, an increase of only 2.8 times from the previous US$ 9.3 billion.
　　
　　(iii) Some countries and areas in the Asia- Pacific region have moved their labour- intensive industries to China and multinationals have made overseas purchases, which not only raise our surplus against the U.S. and the EU but also aggravate the deficit against some Asian countries. In 2005, direct investment from the Hong Kong Special Administrative Region accounted for 3 2.8% of all overseas investments; 11% came from Japan, 8.6% from South Korea, and 4.2% from Taiwan. Automobile and electronics corporations from the Asia-Pacific region in particular have invested in China, making her a plat-form for export to European and American markets.
　　
　　On the one hand, China has be-come a base for some Asian countries and regions exporting to the U.S. and the EU, and these Asian countries and regions have actually shifted part of their surplus against the U.S. and the EU to China. On the other hand, import from Asia has grown by a large margin. In addition, favourable geo­graphical conditions have made Asia- Pacific countries and regions the main overseas suppliers of parts and materials for the processing fac­tories of multinational companies based in China. In 2005, the electri­cal machinery, audio-video and transportation equipment and parts imported from South Korea ac-counted for 3 5.7% of her total ex-port to China , and imports of these products from Malaysia constituted 55% of Malaysia's total, 46.6% of Thailand's total, 45.6% of the Phil­ippines' total, and 45.3% of Taiwan's total.
　　
　　Meanwhile, the Asia- Pacific re­gion resembles China with respect to production structure; moreover, the strict trade protection upon import of agricultural products and textiles from China also restricts China's export to this region to a certain degree. The combination of these two factors results in China's increas­ing deficit against Taiwan, South Korea, A SEAN and Japan.
　　
　　（IV）A growing demand for im­ported high- tech products is one reason for the deficit with Japan
　　
　　Sustained and robust economic growth and industrial restructuring require large- scale import of high-tech products such as machinery and equipment to satisfy national invest­ment needs. Japan, as one of the world's technological powers, has been the largest exporter and supplier of technology to China. In 2005, export of capital- intensive and tech­nology- intensive products such as electrical equipment, steel, machinery, plastic, chemical prod­ucts and precision instruments to China accounted for over 70% of China's total import from Japan.
　　
　　At the same time, Japan suf­fered from low economic growth and long- term weak consumption and investment demand, and has applied protective measures against Chinese goods, such as agricultural products and textiles. Although China's export to Japan continues to increase, export growth remains smaller than import growth. In 1990- 2005, China's export to Japan increased by 8.3 times, and import by 12.2 times, turning a surplus into a deficit with Japan.
　　
　　(IV) More substitution of imports also results in a more favourable bal­ance for China
　　
　　This is indicated by the follow­ing two points. Firstly, with the estab­lishment of a better technological in­novation mechanism, China's tech­nological level and product quality have both improved, and China is ca­pable of producing more products. Foreign funded corporations are be-ginning to make more local orders in addition to their overseas purchases, and China's import therefore de-creases accordingly. Since 1990, im­port by these corporations has been smaller than export, turning the dis­advantageous balance into a much more favourable one. Secondly, price hikes on the international market, and policy measures related to native resource development as well as en­ergy- saving and reduction of waste, have curbed the import of resource products to a certain degree.
　　
　　
　　
　　III. Analysis of the changes in national and regional distribution of China's foreign trade balances
　　
　　
　　
　　 The above analysis indicates that the current growth in the trade surplus was brought about by the combined functions of several eco­nomic factors, both national and international. Namely, it is a result of mutually beneficial exchange be­tween China and other countries whereby each supplies resources to help the others meet their needs, and is also a result of global industrial transformation and adjustment un­der conditions of globalization, which has led to a win-win situation and an inevitable trend of economic cooperation and competition among countries throughout the world. It is normal for a favourable or disadvan­tageous balance surplus and deficit to emerge in a country under an increas­ingly open global economic situation within a certain period. A trade im­balance reflects a process in which countries all seek maximum benefits in cooperation and competition in circumstances of peaceful development. In a period of eco­nomic globalization, the trade surplus is no longer a symbol of the global sales and competitiveness of a single product from a certain country, as many countries and multinational companies all benefit from this situation.
　　
　　Currently, foreign trade and ex-port remain the driving force of China's economic development. Ex-port is still promoted strongly but im­port is held back by many factors. Therefore, the distribution of trade balances in countries and regions will continue in the short term. The sur­pluses against the U.S. and the EU and the deficits against Japan, Australia, South Korea and ASEAN in the Asia Pacific Region, develop­ing countries in Africa and Latin America, and Russia, will not un­dergo any fundamental changes or downturns, and could even continue to expand.
　　
　　Firstly, the demand for consumer goods in America and the EU will not shrink, there will be no large growth in their domestic supply, and the trend of economic globalization will not be reversed. With huge labour redundancies in rural areas, China boasts a competitive edge in the ex-port of labour intensive products. The pressure of unemployment, an impor­tant issue to be tackled in the course of economic and social development, can be relieved through development of the labour- intensive industry and through maintaining and enlarging its share in the global market. Thus the U.S. and the EU will continue to be China's largest export destinations, and may continue to be countries of big trade deficits with China.
　　
　　Secondly, encouraged by the favourable investment climate, for­eign direct investments keep pouring into China. China's position as a glo­bal manufacturing base or processing factory will enable the continued growth of her export.
　　
　　Thirdly, at present we are main­taining a rapid and high- quality eco­nomic growth, manifested by ex­panding investments and a rising de­mand for energy and raw materials. Thus, the deficits against Australia, Russia, Brazil and other developing countries in Africa, Latin America and the Asia-Pacific region will remain.
　　
　　Fourthly, industrial transforma­tion and demands for high- technol­ogy will stimulate import from Japan. With the U.S. and the EU continu­ing to exercise strict control over export of these products to China, it is inevitable that China will have a relatively large deficit with Japan.
　　
　　Fifthly, along with the 11th Five-year Plan and the emergence of policies to save energy and re-duce waste - driven especially by the rapid growth of high- technol­ogy and soaring prices of primary commodities in the international market - import substitutes will become more important. This will also restrain the scale and growth of China's export.
　　
　　However, in the long run, the surpluses against the U.S. and the EU will decrease so as gradually to realize a basic balance in two-way trade, along with China's transforma­tion of the foreign trade growth pat-tern and rising import. This will also result in changes in the distribution of national and regional trade balances.
　　
　　Factors which stimulate import in the long term include:
　　
　　Firstly, China's domestic con­sumer market, with its huge poten­tial and scope for import, will in-crease its demand for global products. The consumption level of Chinese citizens presently remains low at only 41% of the GDP - much lower than in the U.S. and the EU. As greater priority is attached to rural development, the rural market will be explored further, which will raise rural living standards and necessitate greater import from the U.S. and the EU, particularly in high-end and luxury products;
　　
　　Secondly, it is likely, through dialogue and consultation, that the U.S. and the EU will loosen control over their high- tech export to China, thus enabling China to increase her import of their high-technology products and bring down her trade surplus with them;
　　
　　Thirdly, the import of resources will display a solid growth in line with expanding economic power.
　　
　　Among the factors which restrict export in the long-term are the following:
　　
　　Firstly, the transformation of the growth pattern in foreign trade, in­cluding upgrading of the processing industry, and stricter supervision over foreign direct investment, will slow down export to an appropriate degree;
　　
　　Secondly, with the implementa­tion of 'going global' as the country's foreign trade strategy, there will be an increase in overseas investment and establishment of cooperative re­gions overseas, as well as the transfer of some industries to other parts of the world, resulting in a decrease in export;
　　
　　Thirdly, in the long term, as the wage level and the labour costs gradually go up, the competitiveness of labour- intensive products will diminish, as will foreign direct invest­ment aimed at setting up manufac­turing and processing bases. In particular, China assigns impor­tance to a scientific approach to-wards development, establishes fur­ther environmental protection, so­cial security and land use standards, and places limits upon high- pollution and high- consump­tion industries. Therefore, the cost of foreign investment will increase, fewer foreign labour- intensive in­dustries will move to China, and export from processing trade will account for a smaller percentage - all of which is conducive to nar­rowing the surpluses against the U.S. and the EU;
　　
　　Fourthly, policy readjustments targeting the global economic imbalance, particularly the continu­ous depreciation of the U.S. dollar, are also factors which will dampen China's export in the long term. CE