China's growing trade surplus
When a country exports more to other nations than it imports, that country is said to have a trade surplus. If it imports more from the world than it exports, it is deemed to have a trade deficit. During the past 20 years, China has continuously run trade surpluses with the rest of the world. It has been able to do this by positioning itself as the world’s manufacturing center for everything from consumer goods to industrial components. It has used its trade surplus to accumulate vast amounts of wealth, and when necessary, as leverage with other countries when in trade discussions.
Newly reported data shows that China is continuing its trade surplus trend in 2022. During the first five months of the year, China’s trade surplus ballooned to $292 billion. This is occurring in spite of the Trump Administration’s tariffs on Chinese imports to the U.S. that the Biden Administration for the most part has kept in place. The U.S.-China trade war resulted in a January 2020 agreement in which China would purchase an additional $200 billion of U.S.-made products and services by the end of 2021. China did not meet this requirement. More than two years after the agreement took place, U.S. exports to China are up $16 billion, while Chinese exports to the U.S. are up $73 billion.
How is it possible that China continues to increase its exports to the world, and in turn its trade surplus? China has a long-held practice of subsidizing its state-owned companies. Subsidies allow these firms the ability to out-price foreign firms domestically and abroad. Subsidies can come in the form of capital injections. They can also be in the form of the Chinese government preserving portions of the domestic market for these companies against competition. Sometimes they can be the cheap financing the Chinese government can provide directly to Chinese companies.
The Center for Strategic and International Studies estimates that China is spending 1.7 percent of its GDP on subsidies to Chinese companies, primarily those that export. At face value, this might not seem very much, however, this is a staggering amount. In 2021, China’s GDP was $17.46 trillion dollars, of which 1.7 percent is almost $300 billion. To put this in perspective, China recently announced that it would hike its total military budget a whopping 7.1 percent, up to $230 billion from $209 billion the previous year. This is approximately $70 billion less than it spends on company subsidies.
China also continues to use tactics to deter foreign competitors from accessing its huge population. In the past, it has used red-tape in every form possible to discourage foreign competitors. One method that I have heard many complaints about is forced joint ventures between Chinese and foreign competitors. In other words, if a foreign company wants access to the Chinese market, it may be forced to join forces with a local Chinese company. This allows the Chinese company to steal intellectual property or trade secrets. Many foreign firms eventually find out that their Chinese joint venture partner has become a serious competitor.
Per the 2020 U.S.-China trade agreement, the U.S. has the ability to drastically escalate tariffs on Chinese imports if China fails to hold up its end of the bargain, which it clearly has not done. However, at present this could be a very complicated matter. While many policymakers want to take a strong stand against China because of its failed promises, and because of its public support of Russia while it aggressively attacks Ukraine, this is easier said than done.
Inflation is already squeezing the ability of U.S. households to make ends meet. Chinese products line U.S. store shelves in almost every industry. Increasing tariffs on Chinese imports would mean that Americans would pay even more for these goods. In the long run, raising tariffs could allow U.S. firms the ability to gain market share, which would help increase U.S. manufacturing and employment. However, in the short term, higher prices on Chinese imports, many of which are no longer manufactured in the U.S. or to a lesser extent, will exacerbate inflation at a time that the Biden Administration is trying to decrease it.
It is clear that the U.S. needs to formulate an effective strategy to deal with China’s weaponization of its exports and trade surplus as a way to bully the world. Finding us in a position where we have every right to further increase tariffs on Chinese goods, but we can’t, is a sure sign that a strategy is needed in order to not be in this position in the future.