The Totality of Trade

Story Highlights:

• China reported a Q1 2011 trade deficit totaling $1.02 billion—but the fall in exports likely had much to do with Lunar New Year festivities.
• Despite an overall trade deficit, both Chinese imports and exports rose year over year in Q1.
• When looking at economic health, what matters isn’t just exports or imports, but total trade overall.

China, long the world’s export leader and recently anointed second-largest economy, reported a $1.02 billion trade deficit in Q1 2011. That’s right, a quarterly tradedeficit—its first in seven years.

But unlike in the US, where trade deficits are usually met with handwringing, China’s deficit hasn’t been called evidence of “declining competitiveness.” In fact, economists are little surprised by China’s trade deficit, pointing to the fact the country typically exports less in the first three months of the year (many factories close down in observance of Chinese New Year, and celebrations typically last up to two weeks, thereby limiting production and exports). In February alone, for example, the trade deficit totaled $7.3 billion—Lunar New Year festivities usually occur in February—but in March, China reported a surplus of $140 million.

But leaving aside the reasons why, the reality is exports outweighing imports (or vice versa) doesn’t necessarily tell you much about economic health on its own—and it doesn’t matter if we’re talking about the US or China. Example: If imports fell off a cliff, that could drive a trade surplus but also would likely be symptomatic of other problems. What’s far more important typically is total trade: Exports plus imports—and increased activity on both sides is desirable.

In China, despite its Q1 trade deficit, exports rose 26.5% y/y and imports rose 32.6% y/y—both grew! This isn’t a case where the world suddenly wanted less Chinese goods, but rather, one where trade overall expanded. If China were to experience a recession anytime soon, we’re quite sure it wouldn’t be because their imports surged more than their exports. The whole focus on deficits versus surpluses is, perhaps, a manifestation of the world view where exports are good and imports less so. But in our view, increasing overall trade, no matter the side of the ledger, is symptomatic of increasing internal demand in China from an increasing middle class (which is good) and ongoing Chinese and global growth (also good). To wit, the World Bank estimates Chinese Q1 GDP will be 8.7%.

Ironically, many in the US blame our supposedly bad trade deficit on China flooding the world with it’s relatively cheaper goods. (Oh, the horror!) Who do we blame now (if we wanted to, which we don’t)? Is China, with their own trade deficit, still to blame? That might complicate the picture for those who may think of global trade like sports or warfare—one side wins, and the other loses. But if viewed correctly, the US’s trade deficit is no worse or better than China’s. Whether China returns to a trade surplus or continues to carry a deficit doesn’t have to be a sign of unavoidable doom—just like our trade deficit hasn’t doomed the US (nor has the UK’s doomed them, for that matter). The US won’t gain competitiveness by enacting mercantilist controls aimed at reducing imports to narrow our trade deficit—and neither will China. (As we’ve said before, protectionism typically hurts more than helps.) Both sides are typically net winners in global trade, or the trade wouldn’t have occurred in the first place.

So no matter who’s got a trade deficit, be it the US, China, the eurozone, or Antarctica, a better assessment of the overall health of the economy is the totality of trade, not just imports or exports themselves.