A look at why China has such a big surplus, and what are the options for trimming it

Brad Setser is probably the smartest guy out there who is focused on global trade, which is a very hot topic right now. This is his moment.

I think this is a topic that all FX traders need to get their heads around at the moment, because without any action, the US trade deficit is going to continue to rise and Trump is going to continue to fume.

As I've been saying for awhile: It's not necessarily the size of the US trade deficit that matters, it's how the US government will react to it.

But China has options too and would much rather steer its economy towards a better trading relationship with the US, without suffering. There are ways to do that and Setser looks at four of them:

  1. China imports more commodities and encourages more tourism spending abroad, keeping overall trade up even as Chinese imports of manufacture goods fall.
  2. China imports fewer manufactures, but also exports fewer manufactures thanks to a rise in China's exchange rate
  3. China imports fewer manufactures and exports fewer manufactures, as the world throws up trade barriers at the border in response to China's formal and informal barriers to imports
  4. The development of Chinese national champions doesn't mean that China's market in those sectors is reserved for Chinese firms and Chinese production-the Chinese market doesn't end up being the winner-take-all, so a China that has caught up technologically ends up both importing and exporting in a range of sectors.

Check out the post here.