"China's Current Account Surplus Not Due to Export Subsidies or Policy, Says CATO Institute"

Yonhap News Agency

There is an analysis suggesting that China's excessive current account surplus is not solely due to government-led industrial policies or export subsidies and other trade policies. Rather, it is attributed to structural macroeconomic factors such as demographics, financial repression, and a deteriorating real estate market, which cannot be resolved merely through tariffs.

The CATO Institute, a U.S. libertarian think tank, published an article on April 22 (local time) titled "The Macro Roots of China’s Trade Surplus That Tariffs Won’t Reach," presenting this perspective.

This article is based on the recent National Bureau of Economic Research (NBER) paper by Chang Ma and Shang-Jin Wei, titled "The Chinese Current Account Imbalances: Puzzles, Patterns, and Possible Causes."

The authors of the paper note, "To address China's current account surplus, the focus should not be solely on trade or industrial policies, but rather, serious attention must be given to structural determinants." They emphasize, "Short-term macroeconomic stimulus to respond to the sluggish housing market and deflation may help increase consumption and reduce the trade surplus in the short run. However, policy reforms that address structural factors leading to excessive household and corporate savings are needed as part of a sustainable long-term solution."

The CATO Institute stated, "The U.S. tariff policy only changed the direction of bilateral trade imbalances, but did not reduce the overall deficit," concluding, "Policymakers must move away from reflexively treating tariffs as a cure-all and instead confront the underlying structural issues directly."

The following is a summary of the main points.

The recent NBER working paper by Chang Ma and Shang-Jin Wei, "The Chinese Current Account Imbalances: Puzzles, Patterns, and Possible Causes," analyzes the causes of China's current account surplus and challenges several widely held beliefs in the process. The prevailing perspective is that China’s persistent surplus is mainly the result of industrial policy and export subsidies. However, the authors dispute this narrative. While industrial policy can affect the performance of individual industries, it has little macro-level impact on the overall current account. Instead, the authors point to structural macroeconomic factors, such as demographics, financial repression, and a deteriorating real estate market, as the real causes. These factors have kept savings persistently higher than investment, thereby prolonging China’s external surpluses.

First, the authors argue that the impact of China’s industrial and trade policies on the current account is limited. Using historical evidence, they show that while trade policy can influence specific industries, it leaves little trace on the country’s overall current account. This is because imports and exports across the economy tend to move together. This insight aligns with the national income accounting identity, which establishes that a country’s current account balance is ultimately determined by the gap between national savings and investment, not by trade or industrial policy alone. This is consistent with what CATO Institute researchers have long emphasized while analyzing the U.S. persistent trade deficit.

So, what drives China’s persistently large surpluses? The authors identify three structural factors: a unique demographic structure, a highly distorted financial system, and a collapsing real estate market.

First, due to the effects of the one-child policy, China has a pronounced gender imbalance. According to the authors, this leads to four main outcomes. First, the excess of males and shortage of females has made the marriage market extremely competitive. As a result, men and parents of young sons are strongly incentivized to increase savings to appear more economically attractive to potential spouses. Second, the generational effect of a large population entering working age can raise the savings rate. Third, simply having fewer children encourages parents to save a larger portion of their income. The authors cite research indicating that this factor alone raised the savings rate by 7 percentage points from 1970 to 2009. Fourth and finally, since parents cannot rely on having multiple children to support them in old age, they have a stronger incentive to accumulate more retirement savings themselves. The authors estimate that this single factor accounts for about half of the increase in China’s savings rate during the same period.

China’s savings rate, and consequently its current account, is also heavily influenced by a malfunctioning financial system. The authors argue that China’s banking system is excessively favorable to state-owned enterprises, crowding out high-growth private firms from access to capital. As a result, China exhibits one of the world’s highest corporate savings rates. Both corporations and households must accumulate more internal savings or attract foreign investment, which in turn further increases China’s current account surplus.

Finally, China’s fragile housing market has eroded household assets and weakened aggregate demand, leading to a deflationary economy. This has also reduced import demand and has become another mechanical factor raising the current account surplus.

The authors also discuss policy implications. They argue that to address China’s current account surplus, policymakers need to take structural determinants seriously, rather than focusing only on trade or industrial policies. Short-term macroeconomic stimulus responding to a sluggish housing market and deflation may help boost consumption and reduce the trade surplus temporarily. However, policy reforms that address the structural factors causing excessive household and corporate savings are needed as part of a sustainable long-term solution.

Reflecting on the comments submitted by Scott Lincicome and Chad Smithson of the CATO Institute to the U.S. Trade Representative’s Section 301 investigation, this NBER paper delivers an important message: the trade balance does not explain everything. The administration often tries to evaluate foreign economies using macro-level indicators such as trade surpluses or excess production capacity. However, as this paper demonstrates, such indicators are shaped by domestic structural factors like demographics, financial repression, and weak household demand, which cannot be resolved through tariffs.

As the CATO Institute researchers have long documented, the U.S. trade deficit is also the result of macroeconomic factors—specifically, the gap between national savings and investment—rather than unfair foreign trade practices. This paper also ties in with a recent publication by Maurice Obstfeld at the Peterson Institute for International Economics, which analyzes the various factors affecting the U.S. current account, including the persistent U.S. fiscal deficit.

In the past, U.S. tariff policy only changed the direction of bilateral trade imbalances but failed to reduce the overall deficit. Policymakers who are serious about addressing trade imbalances should move away from reflexively treating tariffs as a cure-all and instead grapple directly with the underlying structural issues.

This content was produced with the assistance of AI translation services.