The China Trade Imbalance

The U.S. President is correct in saying that China has very different trade rules compared to the west.



Trump stating that the Chinese have been manipulating the global markets for the past 25 years through a cheap currency policy is correct. Through the devaluation of their currency they have conquered the world’s export market and become the second largest economy in the world. Furthermore, they accumulated the largest reserve of foreign currencies which they put into global credit markets to fuel cheap credit. This led to a global credit bubble and bust. We buy their cheap goods. They take our pounds, dollars, euros and buy treasuries which supply us more credit to buy more of their cheaper goods. The cycle continues.


From the early 80s to mid-90s, the yuan declined drastically (82% decline against the US Dollar). They tanked their currency which allowed them to gain an economic advantage. Chinese Yuan was around 8.29 against the dollar for the next decade. This huge devaluation during the 80s and 90s enabled the Chinese economy to explode in size. It allowed them to take over the world’s export market whilst taking jobs and foreign currency out of the world. Through 2005 their economy moved from $350billion to $3.5trillion making it, at the time, the third largest economy in the world. U.S in 2005 realised this and threatened tariffs against Chinese goods unless they were to avoid their currency policies. China agreed to stop undervaluing their currency against the dollar and from 2005 to 2013 their currency strengthened by 4.5% a year. In comparison to their double digit growth, the currency increase was minimal. It has helped enable China to become the second largest economy in the world.


Currencies are usually the balancing mechanism to prevent global imbalances from occurring. If traded in an open economy, China’s currency value should be strengthening due to the aggressive growth in the Chinese economy. This would make exports less attractive and prevent wealth accumulation in China. However, the government decides the value of the yuan and they have kept the yuan cheap as part of the plan. This has been the case for the past 20 years.


He raises a valid point that past attempts to deal with this imbalance has not worked. Most countries and foreign businesses in China will agree but are too concerned to complain due to the fear of being cut out from the Chinese market. We are starting to see changes as there is growing competition from Chinese counterparts as many large companies are asking politicians to share their concerns to Beijing. China’s import tariffs are approximately double those of the US and UK but have also put in place a number of non-tariff trade barriers that exclude countries or industries. A great example is when South Korea allowed the US to host a missile defence system in their country. China saw this as a threat and thus the purchasing of Korean cars and cosmetics collapsed. Furthermore, Chinese tour groups to South Korea were stopped and a number of Korean supermarkets were closed. When the imprisoned Liu Xiaobo won a Nobel Peace Prize in 2010 at Oslo, China shut off imports of Norwegian salmon for years. There are many examples of the Chinese government directly issuing orders to companies. Facebook, Instagram, Twitter, Google, YouTube are all blocked in China. The leaders state that they are possible threats to national security but this has conveniently allowed the growth of Alibaba and Tencent.


There are various restrictions on investments that heavily favour Chinese companies. Out of the 17 largest Chinese takeovers of European companies from 2000 to 2017, only a quarter could have happened had it been the other way around due to Chinese laws and policies. A Berlin-based think-tank states that “Chinese investors enjoy one of the most open investment regimes in Europe with almost unfettered access to all industries. China on the other hand continues to strategically limit access for foreign companies in many sectors. This has been particularly concerning in recent years as previously Chinese companies barely invested outside of its country. In 2008, Chinese annual direct investment in the 28 EU countries was around €700m but in 2017 it hit €30bn (four times the amount of EU investment in China).


This has been repeated across the world with foreign companies concerned with China forcing their companies to transfer their technology to Chinese competitors in exchange for access to China’s market. Although Chinese officials claim that this isn't official policy, in reality, it is a regular occurrence and arguably implicit in the government's “Made in China 2025” industrial plan.


I have always been under the impression that Robotisation and Automation are the reason for decline in manufacturing jobs year on year. I believed that the added advancements in technology would be the direct correlator to disappearing manufacturing jobs in the UK & USA. However, I now believe that Chinese labour and cheap Chinese currency are the core reasons for companies transferring operations into China. A lot of people have been vocal on the growing trend of protectionism throughout the world, however, I think China’s economic policies are far more protectionist than the world acknowledges.

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