This post was originally published on this site.
How the surplus is achieved, and why it’s a problem
Chart 1 Source: Brad Setser
China, which by some measures has the world’s largest economy, is also running the biggest trade surplus in world history. Its surplus is unprecedented in dollar terms; more important, it’s unprecedented as a share of the world economy, as illustrated by Chart 1 above, reproduced from last week’s primer.
And China’s big surplus is a big problem.
Last week I explained that the root cause of this massive trade surplus is the refusal of the Chinese government to change an economic strategy that has become unsustainable.
In the past, China achieved stunning economic growth in part through a combination of very high savings and very high investment. Its savings remain very high, but investment in China is running into diminishing returns in the face of slowing technological progress and a shrinking working-age population. Yet the Chinese government keeps failing to take effective steps to reduce savings and increase consumer demand. Instead, China is in effect exporting its excess savings via its massive trade surplus. It’s using consumer demand in the rest of the world as a safety valve to keep Chinese workers employed. Otherwise, without the massive trade surplus, the Chinese economy would fall into a deep slump given its insufficient consumer demand.
In today’s post I’ll start by talking about how this policy works — that is, how China engineers its giant trade surplus. Then I’ll talk about why China’s surplus is a big problem for the rest of the world. Next week I’ll talk about how policy should respond.
Beyond the paywall, I’ll address the following:
1. How China generates its giant surpluses
2. The disruptive effects of China’s surpluses on other nations
3. Chinese surpluses as a national security issue
4. Chinese surpluses as a threat to economic growth