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ECONOMIC GROWTH OF TWO COUNTRIES with trade surplus: China and Germany
Dr Farzad Mirmahboub (Iran)
Trade balance plays a very important role in international relations; it also constitutes an essential element that can characterize the economic growth of different countries. There are countries with mercantilist policies: their economies record year after year positive trade balances; other countries, on the contrary, have repeated deficits. Germany and China operate on the mercantilist manner: these two economies have indeed very high trade surpluses. Despite this similarity, the GDP growth rates of these two countries are very different: between 0% and 3% for Germany and between 7% and 14% for China. As a result, the external balance does not explain everything: its relation with the growth rate of the economy is not univocal.
Germany and China are very different from each other; Germany is a developed country that was industrialized since the 19th century, while China, as an emerging country, knows a recent industrial expansion that makes observers dizzy.
If their growth rates can be, at this point, different from each other, it must probably be related to the conditions of national income components. In the 1990s, each of these countries had an external balance close to zero; since 2000-2001 there is an irresistible growth in their respective external balances. For China, this is due to its entry into the WTO, for Germany, this is due both to its wage repression policy and to the establishment of the euro. But Germany's external balance with China is negative.
Keyword: Trade balance plays, Germany, China, growth rates, external balance.
Comparison of GDP components
We consulted the World Bank database from 1970 for GDP and its components: private consumption, public consumption, investment, exports, imports and external balance. The presented statistics and percentages are calculated using the World Bank database in constant prices.
The part of private consumption in Germany has been stable over time: 55.3% of GDP in1970, 59% of GDP during the 1990s. This level of private consumption is much higher than that of China: 43.76% of GDP in 1978 and a peak of 51% in 1989. The second characteristic element of the private consumption of China is its very strong and rapid fall since 1999 (the year of the principle agreement given by the United States to China's entry into the WTO): from 47.63% in that year to only 26.86% in 2011.
Public consumption has been stable over time in Germany: around 19% of GDP. In China, we observe a steady decline: from 19.25% of GDP in 1978 to only 13.69% in 2011.
Investment in China is much higher than in Germany. For China it goes from 30.3% in 1978 to 46.7% in 2011, while for Germany the statistics are more modest: 22.2% in 1978 and 20% in 2011. Almost half of China's GDP is spent on investment: this means that, in all areas, the Chinese industry is setting up "overcapacity" of production; a very good basis for the development of "dumping" practices.
The comparison of foreign trade data is very informative. For Germany, we observe a take-off of both exports and imports from 1994: from 21.67% of GDP to 53.48% in 2011 for exports, and from 21.85% to 47.29% in 2011 for imports. The trade balance, which was close to zero until 2000, took off from this date, rising from 0.31% to 6.19% in 2011. Surpluses are acquired in large part thanks to the euro, through trade with partner countries which are in deficit with Germany.
Chinese exports, 23.8% of GDP in 1978, show, as a percentage of GDP, a decline in the 1980s leading to a period, 1989-1993, during which they are close to 14% of GDP. The devaluations carried out during this period lead to a steady rise from 1993 to 2001. In 2001, exports arrive at 23.7% of GDP. In that year, the entry of the country to the World Trade Organization (WTO) leads to a real explosion of exports which arrive at 44.7% of Chinese GDP in 2011. Imports, around 15% of GDP in the 1980s, slow down in 1990-91 - they are around 11% of GDP - then steadily increase to reach 32% in 2011.
The Chinese trade balance fluctuates at a high level (from 6% to 11% of GDP) over the period 1978-1984, then collapses and stays close to zero between 1985 and 1993. The successive devaluations carried out between 1989 and 1994 work out and allow China to find a positive external balance in 1997 (1.65% of GDP), then a very rapid growth of it from 2001, reaching 12.72% of GDP in 2011.
Over the period 2001-2011, considering the total consumption, the investment and the external balance, two small tables allow to visualize the difference between Germany and China.
Table 1: Total consumption, investment and external balance of China in 2001 and 2011
Year Consumption Investment External balance
2001 61.85% 36.21% 1.93%
2011 40.55% 46.73% 12.72%
Source: World Bank database (calculated in constant prices, reference year: 2000)
Table 2: Total consumption, investment and external balance of Germany in 2001 and 2011
Year Consumption Investment External balance
2001 77.10% 20.90% 2.00%
2011 73.81% 19.99% 6.19%
Source: World Bank database (calculated in constant prices, reference year: 2000)
By a quick review of these data, we can conclude:
- The part of consumption is much larger in China than in Germany (the profit of enterprises is also higher);
- This part declines when the external balance increases;
- For Germany, the relative stability of investment shows that the growth of the external balance has been made to the detriment of consumption, particularly wages.
- For China, the simultaneous "explosion" of investments and the external balance, concomitantly with the entry of China into the WTO, was obtained thanks to a very big repression of consumption; wages were heavily compressed.
Economic growth and external trade
Brunet and Guichard (2011) give an expression of the growth rate of an economy as the expression of two ratios; on the basis of accounting equality between GDP and the sum of domestic expenditure (DINT) and the external balance (SEXT):
GDPn-GDPn-1 _ DINT n-GDPn-1 + SEXTn
GDP- GDP- GDP-
The first of these ratios expresses the difference (positive or negative) between the domestic expenditure of the current period and the "income" of the previous period, expressed as a percentage of the latter; there are countries that spend more than their income and those that spend less.
The second ratio is the external balance expressed as a percentage of the income of the previous period; here again there are countries with surplus and countries with deficit. This allows to classify countries according to whether their growth is based on exports or, conversely, on domestic demand. In the first case ("mercantilist" countries), the external balance is positive and, generally, the first ratio is negative: net exporting countries restrict their domestic expenditure. In the second case, the first ratio is positive (the domestic expenditure which "pulls growth" is stimulated by the development of credit) and, as a result, the second ratio is negative: the country spends more than it produces, so it needs to import. This way of growth leads to the development of indebtedness of all the economic agents of a country to the outside world and can then lead to transfers of ownership.
Germany and China, since the beginning of the present century, have had a rapid growth of their external balance at the same time that their ratio of domestic expenditure has become negative.
For Germany, we can observe a generally negative external balance ratio in the 1970s and generally positive in the 1980s. During the 1990s, the external balance is generally close to zero, the rate of economic growth is then low (except for the years 1990 and 1991) in relation with the evolution of the productivity. It is indeed from 2001 that Germany inaugurates its new period of high growth based on exports to the euro area countries; these exports are possible thanks to the establishment of the euro.
Germany develops a wage deflation policy while other countries implement wage increases. The result was that Germany has gradually become more and more competitive compared to its partners. The existence of the common currency has made it impossible to restore equilibrium by modifying the exchange rate.
On the other side is the situation of China which is largely derived from an undervalued currency by the combination of exchange controls and daily interventions of the central bank of China in the foreign exchange market. China acts in such a way that the Yuan can continue to be undervalued.
Almost always the ratio of domestic expenditure has been positive (except for the years 1980, 1981, 1982 and for the period 2006-2011); not only positive but also high. On the one hand, there were years with inflation phenomena (for example 19851988), on the other hand, productivity growth has been very high, so technological "catch-up" is achieved through economic openness, notably through "joint ventures". In this way Chinese growth could almost always be very high by the addition of two ratios, both positive: the first expressing very fast productivity gains, the second expressing competitiveness facing the outside.
From the entry of China to the WTO, things are changed; the floodgates that contained the potential flow of Chinese manufactured goods are lifted and these products are spreading around the world. Then the trade balance, which was already
significant in 2001 (1.93% of GDP), increases very quickly to reach the record of 15.14% of GDP in 2008. In that date, because of the crisis, the demand of the Western countries weakens and the China's trade balance falls in 2009 to 8,17%, but it goes up then again to reach 12,72% in 2011. Since 2001, China has a typically mercantilist growth: gigantic external surpluses and slowdown in domestic demand (the first ratio is negative). This mercantilist growth is based on very low wages and protectionism; a multiform protectionism (exchange dumping, disguised subsidies on exports, industrial dumping thanks to overcapacity of production).
Which approach for other countries?
Such analyses can be carried out for other countries; also we can study the case of some other countries taking account of their similarities to China and Germany as well as their relations with them. Union European members, especially those with external deficit, need to verify their trade policies and maybe some domestic conditions in order to be more competitive facing countries like Germany and China. A review of the euro conditions and mechanisms seems useful. Russia and other CIS countries such as Kazakhstan regarding their relations with China need to verify some trade policies to effectively facing mercantilist policies.
The case of Russia could particularly be interesting; the economy of this country during the first years after the Soviet Union was somehow similar to current situation of China; with the major (but descending) part of investment and the low level of private consumption in its GDP. But the current situation of Russia is somehow similar to some developed countries in the European Union with a relatively high level of private consumption. Also the investment part in its GDP is higher than the part of government expenditures. Russia's trade balance was positive in the 1990s and during the first years of the 2000s, but the economy has known some trade deficits after 2007 like some other developed countries faced with the crisis.
References
Brunet, Antoine, and Jean-Paul Guichard. 2011. La visée hégémonique de la Chine ; l'impérialisme économique. Editions Harmattan, Paris
Eurostat (European Commission), Database. 2017.
http://ec.europa.eu/eurostat/data/database
Gréau, Jean-Luc. 2012. Chine ; la fin de la grande croissance. L'Expansion (Réflexions Tribunes), december 1st, 2012, Groupe Express-Roularta
International Monetary Fund, Data. 2017. http://www.imf.org/en/Data
International Trade Center, Trade Statistics. 2017. http://www.intracen.org/itc/market-info-tools/trade-statistics/
The World Bank, DataBank. 2017.
http://databank.worldbank. org/data/home. aspx
Жан-Поль Гишар
КИТАЙСКАЯ «ПАРТИЯ-ГОСУДАРСТВО» И МУАЬТИНАЦИОНААЬНЫЕ ФИРМЫ
В книге Жан-Поля Гишара, профессора Факультета права и политических наук Университета Ницца - София Антиполис, директора Центра по Сотрудничеству с Восточными странами (СРЕ) анализируются дисбалансы'в международной торговле и в обрабатывающей промышленности, приводящие к бурному экономическому развитию Китая и более или менее глубокой деиндустриализации большинства стран. Эти процессы влекут за собой рост социальных проблем не только в странах с развитой экономикой, но и по всему миру. Рост безработицы и неполная занятность, а также крайне неблагоприятные перспективы в сфере занятости порождают в широких слоях населения чувство страха и тревоги за будущее, которое представляется непредсказуемым и угрожающим. Следствием становится рост антиглобализма, все большее недоверие широких масс к оторвавшимся от них глобализировавшимся элитам, многие другие процессы, угрожающие стабильности современного общества. Разработка и проведение крупнейшими странами согласованной политики, направленной на противодействие китайской экономической экспансии, стала фактически условием их дальнейшего существования.
Traduction en russe du livre de Jean-Paul Guichard LEtat-parti chinois et les multinationales - Lfinquiétante alliance LHarmattan, 2014. - 233p.
