Li Jian

 

China's trade surplus amounted to US$39.61 billion in January and February, more than double the figure of the same period last year.

 

The strong surplus growth momentum is a result of China's continued foreign trade expansion since the second half of last year, when its exports picked up while its imports remained stable.

 

Statistics show that China's exports of highly competitive industrial products, such as textiles, shoes, furniture and steel, have been strong. Exports to its major trade partners outpaced last year.

 

Given the growth momentum, it would not be surprising if China's trade surplus exceeds US$250 billion this year.

 

Apart from the factor of hot money, or inflow of speculative capital under the current account, there are new reasons for China's soaring trade surplus.

 

Since its accession into the World Trade Organization, China has steadily improved its competitiveness in trade. Since 2002, its annual trade growth has averaged 28 percent while its export growth averaged 29 percent, both about 10 percentage points higher than the average rate of the past 30 years.

 

The expanding investment in recent years, on the other hand, has jazzed up China's production, serving as a powerful engine for its exports.

 

China has been dampening investment recently. At the same time, the country is manufacturing more of its own high-tech, mechanical and electrical equipment used in the production of exports.

 

This has, naturally, led to a slowdown in some equipment imports.

 

Despite this, although China has taken a series of measures to control its export growth momentum and encourage imports of high value-added and resource-consuming products, its exports have kept growing faster than imports.

 

In the long run, China needs to change its growth pattern and stimulate domestic demand to balance its trade. It needs to help its exporters update their strategies to export more high-value-added products instead of the current low-end products.

 

In the short-term, policymakers must figure out solutions to the export-import gap.

 

China has adjusted its trade policy, lowering export tax rebates and imposing taxes on export of resource-consuming products.

 

Meanwhile, it has raised its requirements on foreign investors which are a major force in the manufacture of exports regarding environmental protection and social responsibility.

 

This has put pressure on exporters, who need time to adapt to the new situation.

 

As a populous developing economy, however, China still needs to develop labor-intensive industries, which are behind the current strong export economy. And as the domestic demand will not increase in the short term, it is necessary for China not to dampen exports immediately. Otherwise, its economy and employment will suffer, especially in the economically underdeveloped middle and western regions.

 

Given the projected slowdown of US economic growth and China's further adjustment in its export policy, the country's export growth may slacken. But China can, nevertheless, be expected to retain a growth rate of more than 20 percent for the middle and long term.

 

China's import growth has remained slow compared with its exports, but that does not mean it will not pick up in the coming years.

 

China has entered a stage of accelerated industrialization. The heavy and chemical industries are showing strong growth, which increases demand for advanced manufacturing equipment, raw materials and energy. Since the domestic supply cannot satisfy demand, China can expect to see its imports of those products increase continually in the long run.

 

With the number of China's high-income earners increasing rapidly, the domestic demand for luxury goods has been on the rise. Domestic supply will not be able to satisfy the demand. Imports of such products are expected to increase gradually.

 

Moreover, China's agriculture is limited by the country's meager per capita farmland and water resources. As a result, its agricultural production, which depends on land and water, is at a disadvantage compared with imported products.

 

Imports of agricultural products, therefore, will increase in the long run.

 

China used to encourage exports because it lacked foreign exchange capital and needed to protect its fledgling domestic industries and create more jobs.

 

Now that it has become a major manufacturing and trade power, China no longer needs such a lopsided trade strategy.

 

The most important principle it should uphold is the creation of a more market-based, fair and neutral trade environment.

 

Policymakers need to have a balanced view toward the relationship between export and import, casting off the traditional mentality that discourages imports.

 

The State also needs to devise favorable tax policies for the import of necessary resources such as iron ore and advanced equipment and products that are crucial for China's domestic industrial development.

 

Apart from lowering the tariffs on these imports, China should consider cutting the value-added tax and other taxes and fees on these products.

 

China also needs to gradually lower tariffs on high-end consumer goods and luxury goods to help the balance of trade.

 

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation, attached to the Ministry of Commerce

 

(China Daily April 6, 2007)