China still in cross-hairs over trade

China’s current account surplus is no longer unusually large. But its surplus in traded goods is substantial, particularly relative to the size of the global economy, and the bilateral imbalance with the US remains huge. That will be enough to keep it in the cross-hairs as the new US administration focuses on reducing the US trade deficit. A cursory glance shows that the huge external imbalance China developed during the 2000s has largely subsided. The current account surplus peaked near 10% of GDP in 2007. It has been below 3% of GDP for the past six years. Three percent is the ceiling commonly used to define a balanced external position. In the recent past, the US Treasury has used this threshold as one of the factors determining whether a trading partner is a “currency manipulator”. Looked at from other angles though, China’s external position is less well balanced. For example, while the current account surplus is under 3% of GDP, the goods surplus is much larger, around 5% of GDP. The difference is explained by a hefty increase in the services deficit in recent years, driven almost entirely by a surge in outbound tourism.