Chapter 4. Foreign Trade Dependence and Trade
4.1 Debate Caused by Foreign Trade Imbalance
FTD refers to the ratio of a country’s total foreign trade volume (exports plus imports) to the GDP. It is commonly used to measure the importance of foreign trade to the national economy.
FTD = (Imports + Exports)/GDP
When discussing international trade, people usually replace the numerator with the current account (the difference between exports and imports). If the current account is greater than zero, it is referred to as foreign trade surplus; if it is less than zero, it is referred to as foreign trade deficit. The evaluation of the trade balance with the proportion of the current account in the GDP is sometimes called the degree of trade imbalance.
Degree of Trade Imbalance = (Exports−Imports)/GDP The method of using this indicator to evaluate the degree of for- eign trade distortion is called trade weighted. A very high proportion of surplus in a country indicates that the exchange rate of that coun- try is undervalued. The ratio of the current account to the GDP is not more than plus or minus 5% by adjusting the exchange rate.
The introduction of distortions into a country’s foreign trade gen- erally has two meanings: first, the FTD is too high; second, the trade surplus (or deficit) or the degree of trade imbalance is too high.
In recent years, whether China’s foreign trade is seriously distorted or not has aroused waves of controversy at home and abroad.
Domestically, many research reports and government documents agree that China’s FTD is too high. Some people claim that “China’s
Foreign Trade Dependence and Trade Weighted Method 105
FTD is nearly five times as high as the average value of that of foreign trade powers of 17%. FTD is regarded as an important reference indi- cator in judging the degree of a country’s economic security. China’s current FTD is 80%, which is also the highest in the global trade history. In other words, China may be stricken with typhoid fever due to the poor exports once the world economy has a cold.”1
Several individuals at the National Bureau of Statistics assert that “The FTD of the Chinese economy has exceeded 60%, so the international market price can cause the change of the domestic price quickly through conduction.”2
Some scholars believe that “China’s FTD is over 60% or even 70%
in some years. What does it mean? The too high FTD will lead to a series of problems. Once the international economy changes, it will impact China’s economic development.”3
These discussions seemingly reflect a consensus among people that the FTD of China is too high. Thus, some people propose that China’s economic growth model lacks sustainability and needs major adjustments to shift the focus of economic growth from FTD to domestic demand expansion.
China’s trade surplus is often considered abroad as accounting for a large proportion. The Chinese government is accused of intention- ally manipulating the exchange rate and seizing employment oppor- tunities through a large amount of exports. For example, Prof. Paul Krugman of Princeton University published an article in the New York Times in March 2010 that argues that China’s policy of main- taining the value of RMB low has become a poison to global economic recovery, and thus China should assume responsibility for the RMB exchange rate. As he was a Nobel Prize winner for Economics in 2008, his words were very influential. Krugman admitted that he did not calculate China’s exchange rate but referred to a research by the Peterson Institute for International Economics (PIIE), which reported that the RMB exchange rate was down by 20%–40%.
1See www.people.com.cn, December 8, 2005, http://finance.people.com.cn/GB/1045/
3925435.html.
2http://news.xinhuanet.com/fortune/2008-08/05/content 8956786.htm.
3See http://finance.sina.com.cn/g/20101029/10518867679.shtml.
106 From Trade Surplus to the Dispute over the Exchange Rate
On March 24, 2010, Fred Bergsten, head of the PIEE in the U.S., suggested labeling China as an exchange rate manipulator. In the tes- timony he delivered at the U.S. congress, Bergsten said that China’s current account surplus was more than $400 billion in 2007, account- ing for 11% of its GDP. After the outbreak of the global financial cri- sis and despite the drastic shrinkage in the external market, China maintained a trade surplus of $275 billion in 2009, accounting for 5% of its GDP. In Bergsten’s opinion, the proportion of the current account in the GDP in countries should generally be controlled within plus or minus 5% based on the principle of trade weighted. China has greatly exceeded this range, and thus the RMB should appreciate by more than 24% to decrease its exports, increase its imports, and reduce the current account surplus within 5%.4
In a preparatory meeting attended by the finance minister and the central bank governor held prior to the G20 meeting in November 2010, U.S. Treasury secretary Tim Geithner proposed setting the upper limit of the proportion of a country’s current account surplus (or deficit) to its GDP to 4%.
According to Hegel, “All that is real is rational, and all that is rational is real.”5 Two aspects can be considered in judging whether China’s foreign trade situation is reasonable. First, are the degrees of trade dependence and trade imbalance sustained and stable in a long period of time? Does any abnormal change occur? Second, does China’s FTD significantly differ from that of other countries in the world? If the statistics conflicts with economic theory, then either the economic theory or the statistics is wrong.
According to government statistics, during the early economic reform, China’s FTD was only 3.2% in 1980 but peaked at 57.4%
in 2005. Despite the dual pressures inside and outside the country, its FTD continued to remain at around 50% in 2010. In theory, a too high FTD is unreasonable and so is a too high degree of trade
4Aside from referring to the papers of the PIEE, Morris (2006) calculated the exchange rate distortion between the RMB and the dollar using trade weighted and concluded that the RMB was underestimated by 20%–35%. He also applied the data obtained using the Atlas method.
5Shaoming Gao (2010).Hegel Philosophy of Right, Beijing, China: Business Press.
Foreign Trade Dependence and Trade Weighted Method 107
imbalance. In fact, no economy can maintain the trade surplus (or deficit) for a long period of time. If the degrees of trade dependence and trade imbalance in China are both very high, these two indica- tors must drop gradually and return to the world average level under the dual internal and external pressures. Surprisingly, the degrees of trade dependence and trade imbalance of China have remained unchanged despite the continuous appreciation of the RMB. Since 2005, the RMB exchange rate has appreciated by over 30% against the $. Since June 2010, deducting the inflation factor, the RMB exchange rate has appreciated by over 10% against the $, but the official FTD remains very high. Clearly, the reality highly conflicts with theory, indicating the possibility of error in the statistics.