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| Good Reasons for China's Trade Surplus |
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By Mei Xinyu According to statistics from the Ministry of Commerce, China's trade surplus in March amounted to US$11.19 billion, up 98.5 percent on the previous month. It is the second highest month-on-month record in history. China's trade surplus increased tremendously last year. And the country's development blueprint for the 11th Five-Year Plan (2006-10) period explicitly states that "imports should be actively expanded." Against this backdrop, the large monthly increase in trade surplus has aroused widespread attention. In effect, however, we should not overestimate the impact of the trade surplus change over a single month or even a quarter. We should at least examine the matter over the course of a year because such a study must be justified by longer-term observation. It should be noted that the rapid growth in trade surplus in the first quarter has solid back-up in the basic economic conditions. Almost all of China's major trade partners are enjoying prosperous economic growth. It is predicted that US economic growth could reach 4.5 percent in the first quarter. At the interest rate decision-making meeting of the US Federal Open Market Committee of the Federal Reserve Board on March 28, it was announced that growth slowdown in the US gross domestic product (GDP) during the fourth quarter of last year was only temporary and was a result of influence from special factors. The committee said that growth for the first quarter of this year was faring quite strongly and that momentum had become more mild and sustainable. In Europe, the European Union (EU) manufacturing index in March reached the highest level since September 2000. The finance ministers of EU members have generally held that economic growth this year would reach 1.9 percent. Japan, whose economy has been battered in the past decade, achieved a GDP growth of 5.6 percent in the fourth quarter of last year. Its capital expenditure increased by 9.5 percent that quarter while other indices this year, such as the consumer price index, bank loan growth and corporate and public confidence in the economy, have been on the rise. The country is enjoying the longest period of economic expansion, such that the interest rate decision-making meeting on March 9 decided to put an end to relaxed monetary policies. The strong economic growth of China's trade partners will inevitably lead to a growth in their imports. We should not worry about the resulting growth in our trade surplus or even carry it too far as to bear a sense of guilt. They have purchased Chinese products not as a result of coercion or improper competitive behavior. Another important factor behind the rapid increase in China's trade surplus growth is the "Spring Festival effect." Around the traditional Spring Festival period, due to holidays and changes in employment, China's exports generally decrease while imports expand as a result of festival consumption. This leads to a narrowed trade surplus or a widened deficit. According to China's lunar calendar, the Spring Festival period this year, which ended in the middle of February, was much earlier than last year's, which was prolonged until early March. The "Spring Festival effect" had entirely disappeared by March this year. Given the unchangeable fact of a fairly big trade surplus growth in March and the first quarter, China should handle its foreign trade philosophy carefully. A huge trade surplus, undoubtedly, would not be sustainable in the long term. It is absolutely right to seek a balance of international payments. However, the fact that we should try to achieve such a medium- and long-term target should not be interpreted as having to view it as a short-term task and achieve it in the short run. We should note that we have multiple policy targets. The efforts to narrow the trade surplus, to an extent, conflict with economic growth, employment and upgrading the industrial structure. Net exports played a significant role in driving China's economic growth last year. In the medium and long term, we need to replace foreign demand with domestic demand to push our economic growth. However, it is hard to realize it in the short term, because a large-scale increase in investment would further deteriorate the country's already serious excessive production. And consumption growth hinges on an improved income distribution structure and social security network, both of which cannot be achieved within a short period. Therefore, if we rush to take drastic measures to forcibly narrow the trade surplus, we will risk derailing the economy. The United States and Europe are the major trade partners of China and also the main source of China's trade surplus. The surplus is mainly attributable to the internal economic situation of those countries. The macro economies of the United States and Europe are faring soundly, which determines that their imports and trade scale would not decrease significantly. If China blindly sticks to a policy of forcing down its trade surplus, it may lose the two markets that it could have won through fair competition. Analysis of the growth of the processing trade and general trade indicates that China's foreign trade is displaying positive growth trends. General trade is resurging and the value added by domestic processing trade is increasing. In the long term, those positive growth trends would contribute to China's position in the international division of labor and the steady and sustainable growth of the Chinese economy. We should not seek a trade surplus, of course. But in achieving a trade balance, we should not jeopardize our long-term development goals. For that reason, at least this year, we should not simply force down exports to decrease the trade surplus in order to balance foreign trade. The author is an associate research fellow with the Chinese Academy of International Trade and Economic Co-operation. (China Daily April 26, 2006)
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