First-Quarter Trade Deficit Highlights China’s Delicate Balancing Act

A variety of reasons have culminated to create a$1.02 billion trade deficit for China for the first quarter of 2011. The last time a first quarter trade deficit was recorded was 2004. Issues such as seasonal factors,  spikes in oil prices, greater technological imports, yuan appreciation and increasingly expensive global commodities have all contributed to this occurrence. From Forbes:

China’s General Administration of Customs recorded a trade deficit for the first quarter of 2011 for the first time since the same quarter in 2004. At about $1.02 billion, the quarterly deficit was notable. The month of March saw a small surplus of $139 million, following a large $7.3 billion deficit in February.

Though the first-quarter deficit does not necessarily signal an alarming state of affairs, it does highlight China’s delicate balancing act in its attempt to transition its economic model — hinting at real dangers.

China’s trade deficit does not therefore suggest an immediate crisis for China’s export sector. Such a crisis could occur if there were deep and lasting drops in exports and rising input costs. STRATFOR financial sources in China say that deficits would have to continue for several months in a row before they would be expected to have a remarkably transformative impact on the overall system. (In 2004, deficits occurred each month from January through April.) But there is no doubt that upward cost pressures are making Chinese companies uncomfortable. This points to the real risks of the economic restructuring, since export growth is widely perceived to have reached its speed limit.

The rise in global commodities has aggravated the challenges of this policy, since Beijing can expect to import more goods at higher costs, even as it fails to generate new household consumption-driven demand effectively (notwithstanding the surge in automobile imports when comparing the first-quarter 2011 deficit to that of 2004). The Japanese earthquake will simultaneously have a negative effect on China’s exports, since Japan makes up about 8 percent of Chinese exports and 6 percent of its export growth. Hence, even as China prioritizes containing inflation as a domestic political goal, new threats to growth have emerged that will affect the government’s policy responses and reactions.

Most analysts expect that China’s exports will continue to grow, though probably not surpassing record heights reached in previous years. From the Washington Post:

The International Monetary Fund said Monday that it expects China’s current account — a broader measure of its economic relations with the rest of the world — to widen over the next two years to an amount equal to more than 6 percent of the country’s economy. That is short of the levels seen at the height of the boom but beyond what some consider sustainable. The United States also has pressed the country to move more quickly on social and other policies that could boost local spending, causing an increase in Chinese imports. And China has faced U.S. pressure to allow its currency to rise more freely on world markets.

But as a global recovery has taken hold, officials in the United States and at organizations such as the IMF have argued that it would be unhealthy for the world economy if China’s overall trade surplus grew back to and beyond the records set at the peak of the boom in 2008.

From that perspective, even a small deficit might be evidence that China’s dependence on exports might be shifting as rising wages and commodity prices and a slowly appreciating currency hike up prices and imports.

The shortfall will give China ammunition in discussions in Washington this week about global economic issues that often revolve around its emerging role in the world economy. Although the country will run a substantial trade surplus for the year, it is expected by many to narrow from around $180 billion last year to perhaps $150 billion or less in 2011.


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