I would be very grateful if you could relate it to this example,
Sept. 12 – The growth rate of China’s export slowed in August, but the trade surplus remains high despite the government’s efforts to trim the ballooning figure.
The trade surplus was US$24.97 billion last month, the second highest in history after US$26.91 billion in June, the General Administration of Customs said on its website yesterday.
Exports totaled US$111.36 billion, up 22.7 percent from a year earlier, down from 34.2 percent year-on-year in July, according to the Customs figures. Imports reached US$86.38 billion, up 20.1 percent from a year earlier.
"Slower export growth in August is mainly due to a high base a year ago," said Qiu Gaoqing, an economist with Bank of Communications in Shanghai. Exports increased 32.8 percent in the same period last year.
www.chinanews.cn
Trade surplus occuring now and then for some months or a few yaers is not bad because a few months’ trade surplus may be offset due to few months’ trade deficit in a year or a couple of years’ surplus is followed by a few yaers deficit and vice versa. Over all the central tendency should be towards zero trade deficit. The problem arises if there is a continuos, consistend situation of only trade deficits (or only trade surplus), months after months and year after year.
Consistent trade surplus has two problems. In a free market situation in the exchange market, this would mean continuous pressure of the country’s currency to appreciate which hurts future export realisation (means one has to sell good abroad at progressively lower prices) and which makes imports cheaper and thereby hurts domestic production. In a free market through the mechanism of exchange rate movements, trade surpluses should over time get corrected. But for various reasons many countries do not have free trade. So the corrective adjustments do not take place to bring back a balance between exports and imports. This problem all the more hurts the Chinese economy and its people because China does not allow any foreign exchange transaction at any exchange rate other than the officially pegged/ fixed rate and this rate remains virtually stagnant even if trade surpluses grow continuously. Trade surplus means that the country earns more foreign exchange than it needs and therefore build up forex reserves. This means the country has to invest the reserves abroad . Chinese do this by investing large amounts in US treasury bills which earns very little.. In the ultimate sense, this means the Chinese do not consume all that they produce and therefore produce for the American consumers. To attract the American consumers they have to sell the cheapest by paying the Chinese workers low. On top of that they give loans to America (buying treasury bills means giving loans). In other words, a poor country like China saves by not consuming all that it produces and this savings are used by a rich country like America. So, it is net loss to the Chinese economy and the Chinese people. Meanwhile, the continuous inflow of foreign exchange to Chinese exporters (net of what the Chinese importers use) are converted into Yuan. The extra supply of Yian continuously builds up local demand and therefore inflation. Initially for a poor country to get into high exports is emotionally very satisfying and increasing forex reserves looks good. But real economic terms this is great problem. Earning foreign exchange by expoting is beneficial only when such earning are fully used to import goods of better quality or lower price or import good the country needs but is not capable of producing or buying new technology from foreigners. Unfortunately the people of China are mostly poor and they need very little of American goods in their simple life style; and the better off Chinese.cannot buy anything they want from abroad. So China is unable to import in a large way. This is the general phenomenon with most poor developing countries.
In the long run however China has to get over this problem and the solution will to free the exchange rate from govt. dictates, allow freer imports and allow Chinese to consume better quality imported goods, import high technology, allow Chinese to travel within the country more and more by air so that aircrafts in large numbers can be bought from US and Europe.
In brief, continuous trade surpluses are a symptom of low foeign exchange absorption capacity (lower inflow of better technology, better quality products and products that improve standard of living of the common people) and large dependence on foreign demand for emplyment security of domstic labor. The adverse cosequences are black market in foreign exchange (in a country where the exchange rate id detrmined by Govt. on an ad hoc basis), consumption deprivation for the local people and higher inflation.
Being a communist party dictatorship, China will not so easily make its people free to decide what they will consume, export, import and save. That would mean liberal democracy which is inconsistent with Communist commend and ule economy.
{ 2 comments… read them below or add one }
because money and resources go toward the manufacturing process gathering the materials overheads wages power costs taxes. only to have the goods sit on the shelf is bad if nobody wants them "cough, mattel goods made in china"
References :
Trade surplus occuring now and then for some months or a few yaers is not bad because a few months’ trade surplus may be offset due to few months’ trade deficit in a year or a couple of years’ surplus is followed by a few yaers deficit and vice versa. Over all the central tendency should be towards zero trade deficit. The problem arises if there is a continuos, consistend situation of only trade deficits (or only trade surplus), months after months and year after year.
Consistent trade surplus has two problems. In a free market situation in the exchange market, this would mean continuous pressure of the country’s currency to appreciate which hurts future export realisation (means one has to sell good abroad at progressively lower prices) and which makes imports cheaper and thereby hurts domestic production. In a free market through the mechanism of exchange rate movements, trade surpluses should over time get corrected. But for various reasons many countries do not have free trade. So the corrective adjustments do not take place to bring back a balance between exports and imports. This problem all the more hurts the Chinese economy and its people because China does not allow any foreign exchange transaction at any exchange rate other than the officially pegged/ fixed rate and this rate remains virtually stagnant even if trade surpluses grow continuously. Trade surplus means that the country earns more foreign exchange than it needs and therefore build up forex reserves. This means the country has to invest the reserves abroad . Chinese do this by investing large amounts in US treasury bills which earns very little.. In the ultimate sense, this means the Chinese do not consume all that they produce and therefore produce for the American consumers. To attract the American consumers they have to sell the cheapest by paying the Chinese workers low. On top of that they give loans to America (buying treasury bills means giving loans). In other words, a poor country like China saves by not consuming all that it produces and this savings are used by a rich country like America. So, it is net loss to the Chinese economy and the Chinese people. Meanwhile, the continuous inflow of foreign exchange to Chinese exporters (net of what the Chinese importers use) are converted into Yuan. The extra supply of Yian continuously builds up local demand and therefore inflation. Initially for a poor country to get into high exports is emotionally very satisfying and increasing forex reserves looks good. But real economic terms this is great problem. Earning foreign exchange by expoting is beneficial only when such earning are fully used to import goods of better quality or lower price or import good the country needs but is not capable of producing or buying new technology from foreigners. Unfortunately the people of China are mostly poor and they need very little of American goods in their simple life style; and the better off Chinese.cannot buy anything they want from abroad. So China is unable to import in a large way. This is the general phenomenon with most poor developing countries.
In the long run however China has to get over this problem and the solution will to free the exchange rate from govt. dictates, allow freer imports and allow Chinese to consume better quality imported goods, import high technology, allow Chinese to travel within the country more and more by air so that aircrafts in large numbers can be bought from US and Europe.
In brief, continuous trade surpluses are a symptom of low foeign exchange absorption capacity (lower inflow of better technology, better quality products and products that improve standard of living of the common people) and large dependence on foreign demand for emplyment security of domstic labor. The adverse cosequences are black market in foreign exchange (in a country where the exchange rate id detrmined by Govt. on an ad hoc basis), consumption deprivation for the local people and higher inflation.
Being a communist party dictatorship, China will not so easily make its people free to decide what they will consume, export, import and save. That would mean liberal democracy which is inconsistent with Communist commend and ule economy.
References :
Personal knowledge of economics and economic history and politics of communism. Most economists may however diasgree with me, saying that my analysis is simplistic and will never offer a cogent alternative explanation of the Chinese economic behavior.