China’s surplus trade reached almost one trillion dollars by 2024. This was largely due to record exports, which totaled $3.6 trillion.
This surplus of 992.2 billion dollars in US Dollars has raised concerns over a possible new global trade war, particularly as Donald Trump is preparing to return to the White House and promises steep tariffs against Chinese products.
This surplus reveals the deep vulnerability of China’s economy and its heavy dependence on exports as a way to offset weak domestic demand.
Why is China’s surplus so large?
China’s exports have grown 6.7% year-to date in terms of value and 11.6% volume, reflecting an increase in shipments made to important markets such as the U.S.
Source: Bloomberg
In 2024 alone, exports to the US reached $525 billion, an increase of 4.9% from the year before, and a 15.6% spike in December.
The growth of this industry was partially attributed to “front loading,” where companies raced to finish shipments ahead of Trump’s expected tariffs.
Imports, however, told a very different story. Imports in China grew only by 1.1% by 2024 due to a slowdown in domestic consumption, and falling commodities prices.
Export gains can mask domestic structural problems.
Why is China’s trade deficit so large?
This surplus highlights China’s heavy dependence on exports as a means of powering its economy.
Domestic demand is weak, despite incentives from the government, such as trade-ins for home appliances and electronic devices, cars.
These measures may have sparked some activity but they are not enough to counter the bigger issues such as low spending by consumers and stagnant growth in income.
The imbalance is also due to China’s emphasis on high-tech products such as solar panels and semiconductors, electric cars, and other advanced technologies.
Due to heavy subsidy burdens, these sectors still struggle with an overcapacity.
Since more than two decades, excess production has been driving down the prices of factory goods. This led to allegations that cheap products are being dumped on global markets.
China’s low domestic demand
China’s economic vulnerability is its low domestic consumption.
In December 2024 the Consumer Price Index (CPI), which is adjusted for inflation, rose only by 0.1%, while GDP deflator remained at zero.
Economists worry that China may fall into a trap of deflation similar to Japan’s lost decade.
Middle class is saving and spending more as a result of pandemics and the decline in the real estate market.
The efforts to increase consumption such as the expansion of social security and providing subsidies have yet to yield meaningful results.
This lack of domestic demand has ripple effects far beyond China’s borders, especially for an economy as large as China.
Trade tensions around the world are heating up
China’s export boom hasn’t gone unnoticed. US exports to China increased by 6.9% between 2024 and 2030, reaching $361 billion. This has re-ignited calls for more aggressive trade policies.
Trump pledged to increase tariffs on Chinese products up to 60%. This could reduce China’s GDP by between 0.5 to 2.5 percentage points, according to economists.
The US isn’t alone in taking action. In response to concerns about market dumping, the European Union has already placed tariffs on Chinese imports of electric vehicles.
Brazil and Mexico introduced measures to protect domestic industry, Mexico targeting Chinese electronics and textiles.
These reactions suggest that there is a global backlash growing against China’s strategy of export-driven growth.
What is Beijing doing?
China’s policymakers have begun shifting their focus away from investment and towards consumption.
Pan Gongsheng (the governor of China’s central bank) stressed in December the importance of raising incomes, improving social security and expanding consumer subsidies to decrease the economy’s reliance on exports.
Beijing is also trying to stabilise its financial system. Beijing has tried to stabilize its financial system by refinancing the local government’s debt, and by supporting the property market.
To prevent the potential for a bond bubble, The People’s Bank of China also took unusual measures, such as halting its bond purchasing.
Private investment is still subdued because of credit restrictions and low levels of confidence. Fiscal deficits, however, are increasing.
Analysts warn that it may be some time before such measures produce results.
Can a new war of trade hurt China even more?
China has better trade preparedness today than during Trump’s initial term.
Exports to ASEAN will grow by 12 percent in 2024. This is nearly twice the rate of overall growth.
This strategy is not without its limits. The diversion of goods from the US to other countries such as Vietnam to avoid tariffs is being scrutinized and may face crackdowns.
Unevenness would be exacerbated by a prolonged trade war. As domestic demand struggles to absorb the excess production, overcapacity could increase in manufacturing.
Tariffs retaliated by other trading partners may also limit China’s capacity to access alternative markets.
Beijing’s major policy meeting, which will take place in March, is likely to introduce more measures aimed at getting people to spend. The real challenge for China is to figure out a way of growing without being so dependent on exports.
This massive trade surplus may look impressive, but is really an indication that the economy has yet to achieve balance.
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