China Trade Surplus Dip Is No Omen

The 38% decline in March likely was a function of a pre-tax surge in winter exports; China's first-quarter surplus still nearly doubled.

 

Sometimes Chinese economic data will surprise economists and traders by diverging slightly from consensus forecasts. Yet it is quite rare for the money pros to be off by $13 billion. That's pretty much what happened on Apr. 10, when China reported that its March trade surplus fell 38% year-on-year to $6.87 billion, while most economists were expecting a jump to $20 billion.

Coming at a time when U.S.-China trade relations have hit a nasty stretch, and U.S. Trade Representative Susan Schwab has just filed two formal complaints with the World Trade Organization alleging China is not doing enough to protect intellectual property, one might be tempted to view this as a promising development.

Not really, says Shanghai-based Standard Chartered senior economist Stephen Green. He thinks the falloff instead reflects the fact that Chinese exporters front-loaded a lot of international sales during January and February ahead of moves by Beijing to start reducing export-tax rebates on some Chinese products in March.

Not a Meaningful Number

"In February, everyone was bringing everything forward," Green said in a phone interview. He also points out that China's first-quarter trade surplus still came in at $46.5 billion, roughly double the $23.3 billion figure for the comparable time frame in 2006. While Chinese exports grew only 6.9% year-on-year in March, Green thinks monthly export growth will quickly resume its hyperspeed double-digit growth.

"In our view, this number will do nothing, zilch, nada, to address political concerns in the U.S. about China's overall trade surplus," Green explained to clients in a research note circulated soon after the trade data were released. China's first-quarter export performance was so supercharged, says Green, that the mainland's economy probably clocked 10.6% growth in gross domestic product in the January-March period.

The U.S. noted a record $232.5 billion trade deficit with China last year, and that has strengthened the hand of trade hawks in Washington who are urging the Bush Administration to take a more confrontational approach with Beijing.

U.S. Files Piracy Complaints

On Mar. 30, the U.S. imposed countervailing duties on imports of glossy paper manufactured in China (see BusinessWeek.com, 4/4/07, "Rough Road Ahead for U.S.-China Trade"). And on Apr. 9, U.S. Trade Representative Susan Schwab announced plans to file two formal complaints with the World Trade Organization alleging that China is not doing enough to protect intellectual property.

The second case concerns market barriers that the U.S. contends keep U.S. books, films, and music out of China. "Piracy and counterfeiting levels in China remain unacceptably high," Schwab said Apr. 9 in announcing the new cases, "Inadequate protection of intellectual-property rights in China costs U.S. firms and workers billions of dollars each year" (see BusinessWeek.com, 4/9/07, "China Fakes: Tough to Police" ).

China is trying to cool off its export machine with tax policies and tighter bank lending, but few expect any meaningful drop in the country's trade numbers any time soon. Chinese export industries are big employers, and this still-developing economy needs all the jobs it can generate.

More Surplus, More Jobs

China created about 11.8 million new jobs in urban areas in 2006, mainly in manufacturing, construction, and services. However, the Chinese government estimates that it must create 25 million new jobs. "Millions of migrants from the countryside, new graduates, and laid-off workers still went without work," according to a recent Asia Development Bank study on China's economic outlook.

That's one reason China is unlikely to tolerate the kind of dramatic appreciation of the yuan that some in the U.S. are calling for to cut the country's trade surplus down to size. It would be too destructive to job growth and perhaps cause political unrest. Green with Standard Chartered is forecasting a modest 4% appreciation of the Chinese yuan against the dollar this year.