Trade Balances In China And The US Are Largely Driven By Domestic Macro Forces – Analysis

Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, Krishna Srinivasan and Rodrigo Valdés

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Worries that China’s external surpluses result from industrial policies reflect an incomplete view

China’s widening trade surplus and the growing US trade deficit since the pandemic have renewed concerns about global imbalances and fueled an intense debate on their causes and consequences. There are increasing worries that China’s external surpluses result from industrial policy measures designed to stimulate exports and support economic growth amid weak domestic demand. Some worry that the resulting overcapacity could lead to a “China shock 2.0”—a surge of exports that would displace workers and hurt industrial activity elsewhere.

This trade and industrial policy view of external balances is incomplete at best and should be replaced with a macro view. External balances are ultimately determined by macroeconomic fundamentals, while the link to trade and industrial policy is more tenuous. To understand the pattern of global external imbalances, we need to understand the macroeconomic drivers of desired saving relative to desired investment, not only in China, but also in the rest of the world including, importantly, the United States. While other countries contribute to global imbalances, the United States and China together account about one-third of the global current account balance.