U.S.-China financial imbalance tied to weak domestic economies: IMF report
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Eniola Odetunde/Axios
Huge financial imbalances between the U.S. and China can be chalked up to weaknesses in each nation's domestic economy — as opposed to being primarily driven by unfair Chinese trade practices, according to a new piece from International Monetary Fund economists.
Why it matters: The conclusion throws some cold water on the Biden administration's stance that China's practice of heavily subsidizing targeted industries is a central economic concern.
- Biden officials have argued that the U.S. must make aggressive use of tariffs to prevent a "China shock 2.0," a repeat of the experience in the early 2000s when the rise of Chinese manufacturing undermined many U.S. and European industries.
- The big imbalances are driven less by decisions around trade and industrial policy, the IMF's chief economist and colleagues found, and more by macroeconomic imbalances. Specifically, China saves too much and the U.S. saves too little.
What they're saying: "There are increasing worries that China's external surpluses result from industrial policy measures designed to stimulate exports and support economic growth amid weak domestic demand," wrote IMF chief economist Pierre-Olivier Gourinchas and three colleagues.
- "This trade and industrial policy view of external balances is incomplete at best and should be replaced with a macro view. External balances are ultimately determined by macroeconomic fundamentals, while the link to trade and industrial policy is more tenuous," they wrote.
State of play: China's trade surplus has risen significantly since the pandemic, the authors found, but that is primarily because of weak domestic demand due to its plunging real estate market and prolonged lockdowns. That has led Chinese consumers to build savings and investment rates to fall.
- The U.S. has been a mirror image, with soaring domestic demand, large budget deficits and a plunging household savings rate.
- Those domestic shifts explain China's large current account surpluses and the U.S.'s large current account deficits, the authors found, without resorting to narratives that center on Chinese subsidies for electric vehicles, solar cells, semiconductors and other products.
Yes, but: The Biden administration has portrayed its steps to combat Chinese industrial policy — such as a 100% tariff on the country's electric vehicles — as being forward-looking actions, not aimed at addressing today's macroeconomic savings and spending imbalances.
- The administration wants to prevent Chinese companies from selling goods below cost, which it says prevents U.S. companies from gaining a toehold in future growth industries and sectors with national security implications.
- "The actions of China's government have had dramatic implications for the location of global manufacturing activity. And they have harmed workers and firms in the U.S. and around the world," Treasury Secretary Janet Yellen said in April.
