In recent times, China’s trade surplus has attracted a lot of media attention, especially when it crossed the symbolic $1 trillion threshold.
This figure, in itself, has no particular economic significance. However, it has had the merit of bringing a crucial fact back into the centre of the debate: China’s trade surplus has been growing continuously since at least 2020, and is now a phenomenon of exceptional magnitude for the world economy.

This surplus is a record in absolute terms, but above all it is a record in relation to the size of the world economy: never has a country concentrated such a large share of global surpluses on itself.

Skill or desperation?

The origin of the phenomenon is not a ‘competitive miracle’ or an alleged manufacturing superiority, but a political choice: the Chinese government is refusing to change a growth model that is now becoming less and less sustainable.

China is in fact exporting its excess savings through its huge trade surplus. It is using consumer demand in the rest of the world as an outlet to keep Chinese workers employed. Otherwise, without this huge trade surplus, the Chinese economy would plunge into a deep crisis due to insufficient domestic demand.

Definitions and measurement of the phenomenon

A country has a trade surplus when the value of exports exceeds the value of imports.
In national accounting, the broadest concept is the current account, which also includes trade in services, investment income and transfers.
The current account measures the size and direction of international borrowing. In empirical practice, however, the analysis can focus on the trade balance of goods, because it is more easily verified by cross-checking a country’s export data with its partners’ imports.

In the case of China, then, official current account statistics are manipulated to artificially shrink the size of the surplus. It declares unusually low yields on its foreign investments and unusually high tourism expenditures abroad, which compresses the size of the current account surplus.

The central point is that China is running an exceptional surplus not only in absolute terms, but above all in relation to the world economy: given the size of the Chinese economy, even surpluses ‘similar’ to those observed in the past for countries such as Germany or Japan now generate larger global effects, because they apply on a much larger scale.

Macroeconomic identities: surplus, savings and investment

The trade surplus relates directly to savings and investment through the identity: CA = S – I

where CA is the current account balance (in approximation, trade balance), S is national savings and I is domestic investment.

If S > I, the country exports net capital: i.e. it has an external surplus.

If S < I, the country imports equity: i.e. it has an external deficit.

A persistent excess of savings over domestic investment opportunities results in a growing foreign trade surplus.
That identity tells us something fundamental: the international flow of funds that finances capital accumulation and the international flow of goods and services are two sides of the same coin.

Structural causes of over-saving

A long-term foreign surplus may reflect competitive strength, but may also be a symptom of internal imbalances.
China has relatively low consumption relative to income and the level of development, hence very high household savings, supported by factors such as the weakness of the social safety net (health, unemployment, pensions) which generates precautionary savings; the institutional transition from a planned economy to a market economy with a reduction in implicit guarantees; demographic dynamics(ageing and lower family support) which imply a greater propensity to save; inequality and the real estate market from which wealth accumulation and savings originate.

On the investment side, for decades, China absorbed its high savings with very high investment; however, with a shrinking working-age population, slowing productivity growth and decreasing marginal returns on capital, it has become more difficult to invest all available savings profitably.

In this framework, a ‘natural’ response would be to shift demand from investment to consumption (by strengthening welfare and disposable income). If this does not happen, the macroeconomic alternative is a foreign surplus: the country exports goods to which a net capital outflow corresponds, i.e. it ‘exports’ savings.

From macro fundamentals to micro decisions: transmission channels.

Macroeconomic identities explain why the surplus can emerge, but not how it translates into business and consumer choices. The main channels are:

1) Exchange rate (competitiveness-prices)

A relatively weak yuan reduces the foreign currency prices of goods produced in China and makes foreign goods relatively more expensive on the Chinese market.
This stimulates Chinese exports and curbs imports.

For international comparisons, the real effective exchange rate (inflation-adjusted weighted average of bilateral exchange rates) is often used. A popular reading is that, compared to the path compatible with economic development (real appreciation trend, called the Balassa-Samuelson effect in the literature), the yuan is weaker than the trend, providing a permanent competitive advantage.

2) Capital controls and public intervention

Unlike fully floating currencies, China maintains controls on capital movements. This allows the authorities (directly or through government intermediaries) to influence the exchange rate, including through purchases of foreign currency assets, offering domestic currency, which support the demand for foreign currency and thus the weakness of the yuan.

3) Industrial policy and credit allocation

China employs industrial policy instruments that may include subsidised credit, tax support, and the targeting of investments towards sectors deemed strategic, often in exporting or import-competing sectors. These instruments amplify the ability to generate surpluses through increased exportable supply and import substitution.

Effects on partner economies: sectoral adjustment and trade shocks

The impact of a high Chinese surplus does not automatically coincide with a reduction in total employment in importing countries: in the long run, an economy may offset lower manufacturing employment with service employment. However, the effects may be significant for at least three reasons.

1) Distributional and spatial effects

Import shocks tend to be concentrated by sectors and geographic areas. A very famous paper by David Autor, David Dorn and Gordon Hanson published in 2013 diagnosed what the authors called the ‘China shock’, caused by the rapid growth of Chinese exports to the US before the global financial crisis.

They estimated that the surge in Chinese exports had eliminated about 1.5 million US manufacturing jobs. With this ‘China shock’ study, they showed that manufacturing employment losses, while manageable at the aggregate level, can be very severe locally, with a persistent fall in incomes, long-term unemployment, mobility and retraining costs, and socio-economic deterioration of specialised communities.

2) Political destabilisation

The concentrated effects fuel distributional conflicts and political pressure for defensive measures (tariffs, quotas, subsidies), making ‘pure’ textbook adjustment (only compensation and welfare) often politically difficult.

3) Prices and rates: short-term benefits, long-term structural costs

Cheap imports can reduce inflation and the purchase of foreign securities can contribute to lower rates. But these benefits can coexist with structural costs: loss of production capacity in specific sectors, strategic dependencies, vulnerabilities.

National security and strategic dependencies

In the presence of a structural surplus and aggressive industrial policies, international specialisation may emerge in which the rest of the world becomes dependent on a single country for critical inputs (e.g. essential materials for electronics, defence, energy transition).
When production and especially refining/processing become concentrated, the dominant country can gain market power and geopolitical leverage (export restrictions, constraints).

Besides security, there is the issue of growth: some high-tech industries generate knowledge externalities, innovative ecosystems (suppliers, specialised human capital, venture capital, research), dynamic returns (learning-by-doing).
If a country loses such ecosystems, recovery can be difficult and slow.

Moreover, stable dominance can turn into market power: low prices in the conquest phase, then ability to extract rents once competition is reduced. Looking forward, the concern is not only commercial, but concerns the technological and production trajectory of partner countries.

Economic policy options in the face of China’s structural surpluses

Policies to respond to China’s large trade surpluses can be organised into four broad categories, which are not mutually exclusive and have advantages, limitations and risks.

1) Internal adjustment in China (ideal option)

From the point of view of the world economy, the most efficient solution would be an internal rebalancing of the Chinese economy, based on strengthening the social safety net (health, unemployment, pensions); increasing the disposable income of households; reducing precautionary savings; reallocating demand from investment to consumption.

This adjustment would reduce excess savings, thus lower the trade surplus and increase the welfare of Chinese consumers themselves. This is why it is often referred to as a first best solution by international institutions and much of the literature.

Main limitation: this is an internal Chinese political choice. If the Chinese government refuses to implement it, other countries have no direct means to impose it.

2) International coordination and multilateral pressure

A second level of response is to attempt to regulate imbalances through multilateral institutions, such as: monitoring of external accounts; consultations on persistent macroeconomic imbalances; rules on subsidies and trade practices.

In theory, multilateral coordination reduces the risk of retaliation and trade wars.

Its limitations are the difficulty of enforcement; incentives for statistical manipulation; slow decision-making processes; and increasing geopolitical fragmentation.

Consequently, this strategy has shown limited results in containing large surpluses.

3) Targeted defensive instruments in importing countries (second best option)

When internal adjustment and coordination fail, importing countries may resort to defensive instruments, which include: targeted tariffs or quotas on specific sectors; anti-dumping and anti-subsidy measures; local content requirements; and controls on foreign investment in strategic sectors.

From a theoretical point of view, these measures are second best: they introduce distortions, but can be justified if they are aimed at containing rapid and concentrated shocks; preventing irreversible destruction of productive capacity; reducing critical dependencies.

The main risks are protectionist escalation, capture by interest groups, improper extension of the concept of ‘national security’.

3) Selective industrial policy and long-term growth

A final area of intervention concerns future-oriented industrial policy, with the aim of preserving or developing production capacities in sectors that generate strong technological externalities, are crucial for security and strategic autonomy, and have long-term growth potential.

The problem here is not only defensive, but dynamic: preventing external surpluses from allowing a single country to monopolise entire ‘technological ecologies’, making any recovery very costly.

The central difficulty, in short, is to identify the right sectors while avoiding permanent subsidies to mature or ineffective industries.

To sum up, analytically speaking, China’s trade surplus, like that of any other country, is the result of an internal macroeconomic imbalance: an excess of domestic savings over domestic investment.

Correcting the imbalance implies an economic policy response on several fronts. Faced with a surplus, China would have to expand domestic demand with monetary and fiscal policy to rebalance its external accounts. At the same time, it would have to accept a revaluation of the yuan.

Favoured by the appreciation, resources would shift from exportable manufactured goods to non-exportable services.
But this would only happen permanently on the condition that the demand for manufactured goods in excess of the diminished supply does not raise the relative prices of the same manufactured goods, re-establishing the previous situation.

As per the textbook, the end result must still be a reduction in savings relative to domestic investment.