China's Massive Trade Surplus Threatens Western Economies

China's massive trade surplus poses a threat to Western economies, leading to rising trade tensions and potential protectionist measures that could hinder China's strategic industries and global expansion.

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Aqsa Younas Rana
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China's Massive Trade Surplus Threatens Western Economies

China's Massive Trade Surplus Threatens Western Economies

China's trade surplus has exceeded $800 billion in each of the past two years, posing a significant threat to economies across the West. According to economist Roger Bootle, Beijing's state support for strategic industries like batteries, high-end electronics, and electric vehicles risks wiping out companies in the United States and elsewhere.

China's trade surplus is equivalent to about 1% of the GDP of the world excluding China, which is twice as large as it was just before the financial crisis in 2007. The country's massive state support for key industries and its reluctance to boost domestic consumption have contributed to this imbalance. While China's exports have helped keep inflation down in the West, the trade surplus threatens to depress aggregate demand and cost Western workers their jobs and incomes.

Why this matters: The issue of global imbalances is just as relevant today as it was during the financial crisis, and the preparedness of both the US and Europe to accept China's huge trade surpluses is waning. This could lead to increased tariffs on Chinese exports, further escalating trade tensions between China and the West.

US Treasury Secretary Janet Yellen recently traveled to Beijing to discuss the issue, but tensions between the two countries remain high. The Biden administration has taken measures against China, such as probing its shipbuilding sector and pushing for TikTok to divest from its Chinese parent company. China has responded with relatively muted measures but is concerned about the prospect of TikTok being acquired by an American entity.

China's most promising industries, including electric vehicles, wind and solar projects, medical devices, and chips, are facing growing threats of trade restrictions from Western governments. This comes at a time when Chinese stocks were starting to recover from a multi-year slump, as investors were optimistic about China's efforts to build new growth engines and achieve self-sufficiency in key supply chains. However, the geopolitical tensions and the prospect of tit-for-tat responses from Beijing could hinder China's global expansion and drastically alter the investment landscape.

"The targeted sectors are of strategic importance to President Xi Jinping's agenda for green transition and high-tech development," experts warn. "Any future protectionist moves by the EU against China will further impede trade and capital flows, adding to the already heavy downward pressure on China's stock market, making investing in Chinese stocks a challenging endeavor."

Key Takeaways

  • China's trade surplus exceeds $800B, posing threat to Western economies.
  • China's state support for strategic industries risks wiping out Western companies.
  • Trade imbalance threatens to depress demand and cost Western jobs/incomes.
  • US-China tensions escalate, with measures against China's promising industries.
  • Geopolitical tensions could hinder China's global expansion and stock market.