The US and China have published new trade figures – the US for December 2009 and China for January 2010. These show another increase in the US trade deficit and a further reduction in China's trade surplus.
Both sets of figures are important data in themselves regarding the state of the world economy. However they also again reveal the error of one of the most influential theories of the present international economic situation – that probably most prominently promoted by Martin Wolf in the Financial Times and at book length in his Fixing Global Finance.
According to this theory the US balance of trade deficit is not principally caused by excessive consumption in the US but is forced on the US by excessive saving by Asian countries – notably China. Variants of the same thesis have been presented by Stephen Green of Standard Chartered, by David Cohen of Action Economics, by Brad Setser, by Michael Pettis of Peking University, and other authors.
The issue at stake in this is not primarily bilateral trade, which is affected by many elements, but the overall development of 'global imbalances' - i.e. the excess of China's domestic saving over domestic investment, reflected in its balance of payments surplus, and the shortfall of US domestic saving compared to its domestic investment which is represented by its balance of payments deficit.
If the theory is correct that the trade deficit is not primarily created by US excess consumption but is 'forced' on the US by the trade surplus of China then this has clear factual implications. A fall in China's trade surplus should lead to a shrinking of the US trade deficit, while a widening of the US trade deficit should be accompanied by an expansion of China's trade surplus.
The theoretical errors of such an analysis have already been discussed elsewhere on this blog. The theory however is also clearly empirically refuted by the recent trends in the trade of the US and China.
Considering first China, its trade data for January 2010 show a shrinking of China's monthly trade surplus to $14.2 billion from $18.4 billion in December 2009 and $19.0 billion in November 2009. This is shown in Figure 1.
However it would evidently be unwise to rely simply on individual months data. Therefore Figure 2 shows a three monthly moving average for China's trade balance.
The pattern of development of China's trade is clear. Prior to 2005 China did not run a significant trade surplus. A surplus then developed which peaked at the end of 2008/beginning of 2009. Since then China's trade surplus has sharply fallen.
China's monthly trade deficit, measured by a three monthly moving average, rose from $16.9 billion at the beginning of 2008 to $39.4 billion in January 2009, then began declining from February 2009 and had fallen to $17.2 billion by January 2010.
Figure 1
Figure 2
Turning to US trade data, the figures for China show that the latter's trade surplus shrank from February 2009 onwards. Therefore if the US trade deficit was being 'pushed' by China then the US deficit should have been contracting during almost all of 2009. In fact this did not occur - as can be seen in Figure 3 which charts the US monthly trade deficit. The US monthly trade deficit, having peaked in April 2008 at $62.1 billion, shrank rapidly to $26.6 billion in February 2009. It then reached its low point in May 2009 at $25.8 billion, and subsequently began to expand - reaching $40.1 billion in December 2009.
Figure 4 also shows the monthly US trade deficit calculated using a three month moving
average in order to make it strictly comparable to the figures for
China shown above.Taking a three monthly moving average the US monthly trade deficit reached a low
point of $27.1 billion in June 2009 and then began to expand again -
reaching $36.6 billion by December 2009.
However during this period when the US trade deficit was expanding China's trade
surplus was falling. Therefore the expanding US trade deficit could clearly not
have been 'pushed' by an expanding China trade surplus - as the latter
did not exist.
Figure 3
The conclusions that flow from such trade figures are clear. A theory of global imbalances which claims that the US trade deficit is 'pushed' by excessive saving by China, rather than pulled by excessive consumption in the US, is theoretically false - for reasons analysed elsewhere. But it is also refuted by the factual data. The fact that the US trade deficit has been expanding during a period when China's trade surplus has fallen shows clearly that the US deficit is not being 'pushed' by China, it is being 'pulled' by excessive consumption in the US.
Martin Wolf is one of the world's outstanding economic commentators. However on his analysis of the origins of global imbalances he is unfortunately wrong.
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