Cover Story: Fixing China’s Trade Imbalance Needs a Home Remedy

Amid a prolonged real estate downturn and tepid domestic consumption, exports have re-emerged as a vital growth driver for China’s economy. The export surge, however, has sparked global retaliation from trading partners seeking to protect their industries, further exacerbating political tensions with the U.S. and Europe [para. 1][para. 3].

In the first half of 2024, net exports contributed 13.9% to China's GDP growth, an improvement from -11.4% in 2023, boosting GDP by 0.7 percentage points. This led to a record trade surplus of $99 billion in June, raising concerns about Chinese goods impacting foreign markets [para. 2]. Since late 2023, Europe and the U.S. have imposed tariffs on Chinese exports, followed by Brazil, Canada, India, Turkey, and Mexico from early 2024 [para. 3].

Growing doubts about globalization's benefits and heightened geopolitical tensions, especially between China and the U.S., have driven a rise in trade protectionism. The COVID-19 pandemic accentuated supply chain resilience issues [para. 4]. In 2024, measures affecting $2.3 trillion worth of imports, or 9.7% of the global total, were implemented by WTO member states— the highest level since 2020 [para. 5].

China, the world’s largest exporter, faces severe restrictive trade measures, including tariffs and bans in the tech sector. High-tech exports like new energy vehicles (NEVs), lithium batteries, and solar cells are prominently targeted [para. 7]. Trade imbalances significantly impact China’s external environment as it contends with weak domestic recovery and a sluggish property market, leading to a lower-than-expected GDP of 4.7% in Q2 2024 [para. 8]. Experts like Huang Yiping pointed out that China maintains a trade surplus with 170 countries, signifying a long-term problem [para. 9][para. 10].

China’s trade surplus remains high despite the pandemic's economic fallout, hitting $837.9 billion in 2022 and $518 billion by July 2024. This reflects China’s manufacturing strength but signals structural issues like heavy investment at the expense of consumption [para. 17]. To mitigate trade tensions, experts suggest Chinese firms should increase their global investments and set up overseas factories [para. 20]. Drawing parallels with Japan's 1980s trade friction with the U.S., experts suggest China should transition to exporting capital [para. 21][para. 22].

Chinese exports, especially NEVs, lithium batteries, and solar cells, have led to heightened tariffs and protectionist measures. U.S. tariffs on Chinese NEVs increased to 100% in August, while the EU implemented duties ranging from 17.4% to 38.1%, with Canada considering policies on Chinese electric vehicle imports [para. 50][para. 52]. Trade disruptions also affect developing countries, leading to measures like Brazil reinstating import tariffs on staggered schedules and Mexico applying new tariffs on multiple goods in April [para. 57][para. 59].

China’s reliance on exports amid domestic economic challenges underscores the need for domestic policy reforms to address structural and cyclical issues [para. 84]. Recommendations include easing local government incentives toward public services, fostering competition in the service industry, and reforming the financial sector for better corporate support [para. 89][para. 96]. Experts also suggest enhancing domestic consumption through fiscal and monetary policies, emphasizing support for vulnerable groups [para. 107][para. 109].

Given the increasing challenges, experts suggest China should leverage the WTO for dispute resolution and engage in proactive trade management strategies to cushion against external risks [para. 123]. Shifting towards developing nations and initiating a “Green Marshall Plan” to foster sustainable economies could also help alleviate excess capacity and promote the yuan's internationalization [para. 124][para. 127].

China should reform policies to focus on consumption, address structural disparities, and enhance the service sector to mitigate trade imbalances and support domestic growth, say experts [para. 145][para. 155].