China’s trade surplus misleads its Western critics

LONDON, Feb 11 (Reuters Breakingviews) - When it comes to China’s $1.2 trillion record trade surplus, leaders of rich countries are peddling an outdated truth. “The Chinese are killing their own customers, particularly by no longer importing much from us,” French President Emmanuel Macron complained in December. In reality, any revival in consumption in the world’s second largest economy might bypass foreign high-tech products which the People’s Republic no longer needs. Instead of macroeconomic tools, the West’s best option is to copy China’s mix of “buy local” and export-oriented policies.

European Union leaders are meeting in Belgium on Thursday to discuss, opens new tab this divisive issue. France has adopted the United States’ strategy of pressing Beijing to narrow the gap between the country’s imports and exports, while also promoting “Made in Europe” policies modelled on American and Chinese industrial strategies. Central to this is the Industrial Accelerator Act the EU will propose later this month, aimed at steering procurement and tax incentives toward strategic domestic industries. But Germany, Italy and the Netherlands are reluctant, stressing the need to restore competitiveness over protectionism.

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Line chart showing an overlap between the revealed comparative advantage of China and G7 countries

France has a point: through the Made in China 2025 plan unveiled a decade ago by President Xi Jinping’s administration, China has used procurement, subsidies, state-directed lending and strategic M&A to become a manufacturing powerhouse in sophisticated sectors. In industrial robotics, Foshan‑based Midea (000333.SZ), opens new tab took over Germany’s Kuka in 2016, acquiring one of an oligopoly long controlled by Japanese and European firms, as other lower‑cost Chinese robot makers rose to dominate the domestic market. Similar patterns appear in biotech, artificial intelligence and autos.

The West is struggling to compete. Morgan Stanley analysts argued last week, for example, that surging Chinese car exports imply long-term operating earnings for European auto makers 29% below what the market already expects. But the focus on China’s headline surplus is an unhelpful distraction.

Classifying merchandise trade using the Product Complexity Index from Harvard University’s Growth Lab, opens new tab, which gives each product a score based on the know-how required to make it, confirms that the surge in the country’s net exports since the Covid-19 pandemic comes from high‑tech goods, which recorded a surplus of 5.2% of GDP in 2024. It also shows that China has shifted from being a seller of low-complexity goods — such as live animals, food and precious metals — in the early 2000s to a major buyer: in 2024 its deficit in this category reached $420 billion, or 2.2% of GDP.

Line chart showing that China has a surplus in high and medium complexity goods but a deficit on low complexity ones

The upshot: even if Xi’s current plan to boost consumption succeeds, it’s unlikely to mean much extra demand for European cars and machinery because China is competent at making this stuff. Nor would a stronger yuan sufficiently dull demand for China’s innovative products.

Instead, Beijing could narrow its surplus by importing more commodities. Indeed, that is what happened when the U.S. demanded action on global imbalances after the 2008 financial crisis. Beijing then delivered a 28% inflation-adjusted appreciation of its currency between 2011 and 2015, and lifted imports of mineral fuels, ores and wood, reducing the trade surplus from 4.2% of GDP in 2009 to 2.1% in 2014.

A further relocation of factories producing items like toys and apparel from China to lower-wage economies like Vietnam, Cambodia, Bangladesh and India could help too. In this mid-tier manufacturing China has kept a stable surplus of around 2% of GDP. But that would still do little for chemical giants such as Dow (DOW.N), opens new tab and BASF (BASFn.DE), opens new tab, which are shutting plants due in part to Chinese capacity depressing prices.

Admittedly, China has relied heavily on the trade surplus to prop up its economy following Xi’s bursting of a property bubble five years ago, which has led to weak household spending. Yet this subdued consumption hasn’t harmed the U.S. and European economies much: unlike in the 2010s, both now have supportive fiscal policy and low unemployment. What hurts them are China’s supply-side policies, not its demand-side weakness.

To be sure, the cheap yuan has played a role in both. But it’s only about 17% undervalued, per International Monetary Fund estimates, opens new tab. Weijian Shan of Asia-focused private equity firm PAG, who believes, opens new tab Beijing could live with a 50% exchange-rate appreciation over five years, recently estimated Chinese manufacturing to be twice as productive as the U.S.'s in terms of physical output. High-tech exports are especially insensitive to currency prices.

Bar chart depicting China’s output per worker relative to the U.S.'s across five industries

Ultimately, China’s surplus is confounding Western thinking. For decades, economists warned that East Asia’s state-directed investment and overcapacity would eventually hit a Soviet‑style wall, opens new tab and choke off innovation. Yet, while wasteful spending has abounded, it has also generated clear technological advantages for what is now the world’s second largest economy.

Replicating these advantages is the best way to fight back. Economist Luca Fornaro and his co-authors in a paper published last month, opens new tab argue for public research and subsidising private innovation. A version of this is the Netherlands’ “Project Beethoven,”, opens new tab which is attempting to support chip leader ASML (ASML.AS), opens new tab and a semiconductor ecosystem by funding universities, housing, transport links and energy infrastructure.

Still, “buy local” rules, which France has already deployed through its electric vehicle “eco bonus,” can also help, for example by giving carmakers the visibility they need to avoid the type of electrification pullback Stellantis (STLAM.MI), opens new tab just announced. Its CEO, together with Volkswagen (VOWG.DE), opens new tab chief Oliver Blume, argued last week, opens new tab for expanding such schemes.

But it’s telling that the EU’s new industrial policy is still struggling to get the backing of exporter countries. They rightly fear that definitions of what counts as “Made in Europe” will be made too strict, blocking imported Chinese industrial parts that ultimately make German products more competitive abroad.

However, China’s playbook is about marrying aid to key sectors with promotion of overseas sales. For EU leaders, this should mean eschewing the U.S. approach of blanket tariffs and coerced onshoring in favour of tailoring rules that bring each industry closer to the technological frontier. Once futile obsession with trade balances is cast aside, it’s easier to reconcile France’s desire to support national champions with Germany’s wish to restore export competitiveness.

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Editing by Una Galani; Production by Streisand Neto

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Jon Sindreu

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Jon Sindreu is the London-based global economics editor for Breakingviews. He was previously a reporter and a columnist for the Wall Street Journal, where he covered macroeconomics, financial markets and aviation for 11 years. He holds a master’s degree in financial journalism from City St George’s, University of London. He also holds degrees in computer science and journalism from Universitat Autònoma de Barcelona, in his natal Catalonia.

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