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What Rebalancing?

TOKYO – The American economist Herbert Stein once said that if something cannot continue forever, it will not. In the case of imbalances between China and the West, however, the cut-off point still looks to be a long time in the future.

Five years ago, many people warned that excess spending in the West and undervalued exchange rates in Asia were producing unsustainable imbalances. From 2005 to 2008, China’s bilateral surplus with the United States increased by 41%, and its trade surplus with Europe more than doubled. After falling in 2009, China’s surplus with the US and Europe increased by 32% and 16%, respectively, in 2010. Someone who fell asleep in August 2008 and woke up in 2010 would probably never guess that there had been any interruption whatsoever in China’s burgeoning imbalances with the West.

These surpluses are generated primarily within East Asian production networks. Multinational corporations in Japan, South Korea, and elsewhere ship sophisticated parts and components to China for assembly and re-export to developed countries. The China Customs Agency classifies this type of trade as “processing” trade. In 2010, China ran deficits of more than $100 billion in processing trade with East Asia and surpluses of $100 billion with Europe and $150 billion each with the US and Hong Kong. Its global surplus in processing trade in 2010 totaled $322 billion.

While rebalancing is not taking place in processing trade, it is occurring in “ordinary “trade (China’s other major customs regime). Ordinary exports are produced using Chinese factors of production, and ordinary imports are intended for China’s internal market. China’s balance in ordinary trade shifted from a surplus of $38 billion in 2005 to a deficit of $48 billion in 2010.