an IMF blog post
The document argues that the trade balance (the difference between exports and imports) of China and the United States is primarily driven by domestic macroeconomic factors rather than industrial policies aimed at boosting exports.
Why Has China’s Trade Surplus Increased and the US Deficit Grown?
• In China, weak domestic demand—caused by the real estate downturn and low consumer confidence—has led to higher savings and lower investment. This has reduced imports and increased the trade surplus.
• In the United States, strong domestic demand (fueled by higher government spending and lower household savings) has boosted imports, worsening the trade deficit.
So, Is China’s Surplus Driven by Industrial Policies?
Not really. While China has implemented many industrial policies (such as subsidies for specific industries), these are not the main factors shaping its overall trade balance. Instead, trade imbalances are largely influenced by macroeconomic factors like savings and investment levels in both countries.
Key Takeaways
1. There Is No Global Savings Glut: Unlike in the 2000s, today global interest rates have risen, meaning there is no excess savings in emerging markets driving trade imbalances.
2. Trade Imbalances Are “Homegrown”: China’s surplus and the US deficit are mainly caused by domestic economic conditions, not industrial policies.
What Should China and the US Do?
• China: Needs to reform its economy to stimulate domestic demand, improve the real estate sector, and strengthen social safety nets to reduce excessive savings and boost consumption.
• US: Should reduce its fiscal deficit, reform its tax system, and improve public finances.
What About Industrial Policies?
Industrial policies, such as subsidies, can influence specific sectors (e.g., electric vehicles in China) but have a limited impact on the overall trade balance. However, they can create tensions with trading partners and distort competition, making it crucial to manage them in accordance with international trade rules.
Bottom Line
Trade imbalances between China and the US are primarily driven by domestic macroeconomic factors rather than industrial policies, and solutions must come from internal economic reforms in both countries.
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