An Empirical Study Of China’s Trade Imbalance

Since the1990s the global current account imbalances has become a hot issue that economists compete to research. At that time, the U.S. current account showed a deficit overall, which was the main embodiment of global current account imbalances. China’s current account has shown a large surplus in recent years, and is gradually becoming the main manifestation of the global current account imbalances. The scale of China’s goods trade occupies the main share in current account, so the analysis of China’s current account balance mainly focuses on the analysis of the trade balance. Starting from$34billion in2001, China’s trade surplus begins to grow steadily, soaring from$59billion in2004to$360.7billion’s peak in2008. The trade surplus keeps increasing largely. On the one hand, it stimulates the rapid economic growth to solve the employment problem. On the other hand, it brings tremendous negative impact on China’s macro economic operation:it restricts central bank’s controllability to monetary supply and weakens the effectiveness of monetary policy, which increases the difficulty of the government’s macro-control; it leads to frequent trade frictions between China and developed countries in Europe and the United States; it is not conducive for China to optimize export structure and adjust industrial structure. China’s too high trade surplus and it’s derive exchange rate problem is important and urgent issue, which needs to deeply study and resolve.There are many theories of trade imbalances. But these classical theories mainly suit for foreign situation. Empirical research in China is relatively scarce, and there has no systematic empirical research literature on trade imbalances theory. What’ more, domestic literatures that study the influencing factors of China’s trade balance, tends to focus on exchange rate, FDI, financial deficits and other factors. There is little from viewpoint of productivity, which is the intrinsic economic determinant of China. By the way, literatures that discuss the trade balance are mainly concentrated on two questions:which factors affect the trade balance; how to measure problem of trade imbalances. But less literature deeply discusses how a factor influences the trade balance mechanism. Therefore, they can not propose targeted solutions.This paper uses the writing idea of "from the surface to the point". First of all, on the basis of summing up the theory of trade imbalances, it makes empirical research to see whether these theories are applicable for our country. Then it narrows study range, and talk about the influence of labor productivity to our trade balance and three transmission mechanisms on the basis of inter-temporal equilibrium analysis method of current account. Finally, it focuses on real exchange rate effect, which is one of three transmission mechanisms of labor productivity to trade balance.This article talks about China’s trade imbalance from blew contents:Chapter1:Introduction. It firstly explains the background of the proposed topics. Then it contrasts the status of international trade imbalance and China’s trade imbalances, and introduces the importance of trade imbalance problem to China and the world. At last, it put forward the problem discussed in this paper, and summarizes the innovation of this study.Chapter2:Literature review. It sorts out the existing literatures to summarize various factors that influence China’s trade balance, especially the factors of labor productivity. And it classifies literatures that describe how labor productivity affect real exchange rate and that describe how real exchange rate affect the trade balance.Chapter3:Comb and demonstrate the basic theory of trade balance decision. The theory includes Prices-Specie-Flow Mechanism, Elasticity, Multiplier, Absorption, Money, Structure, and Income Analysis Theory and so on. This paper makes theoretical model in use of China’s macro-economic data. And it analyses the applicability of these classic trade balance theory in China, through methods of data comparison, static time series co-integration model and dynamic rolling regression model. Firstly, this paper estimates the price elasticity of exports and imports. It finds that Marshall-Lerner Condition in Elastic Theory is suitable in China, and the change of RMB exchange rate has a significant impact on China’s trade balance. Secondly it estimates static open economic trade multiplier, dynamic marginal propensity to consume, dynamic marginal propensity to import, dynamic foreign trade multiplier and dynamic effect to trade balance from export, investment and consumption. Then it verifies Harberger Condition. Thirdly, it finds trade balance in Absorption Theory is consistent with actual trade balance. Absorption theory can explain the trade balance change from2000to2006, when China’s nominal exchange rate is stable. Fourthly, China’s trade balance can be explained by Monetary Theory in general. Then it estimates money demand function, find money gap, and studies the relationship between the money gap of Monetary Theory and the trade balance. Fifthly, it finds China’s industrial structure changes, especially the balance of manufactured goods, have significant contribution on China’s trade surplus. Then it analyses the change of trade balance between primary products and manufactured goods, and the change among resource-intensive products, labor-intensive products and capital/technology-intensive products. Sixthly, it estimates the dynamic effect of our national income to goods imports. At last, this paper introduces the inter-temporal equilibrium analysis methods of current account, including the development of inter-temporal equilibrium analysis method and inter-temporal equilibrium model of labor productivity.Chapter4:Empirical Study on the transmission mechanism of labor productivity to trade balance. First of all, this paper analyses the transmission mechanism of labor productivity to trade balance theoretically, including international capital flow effect, labor effect and real exchange rate effect. It set and examines the basic econometric model of China’s trade balance, by bringing foreign labor productivity in inter-temporal equilibrium analysis model of current account. And it adds other macroeconomic variables and builds comprehensive model of China’s trade balance. Then it examines the transmission mechanism of labor productivity to trade balance, combining with the coefficient of labor productivity and the mediating variables FDI, and the coefficients of relative labor costs and real exchange rate. It use panel data model to study labor productivity’s influence to the mediating variables FDI, relative labor costs and real exchange rate, and to discuss the open of conduction channels. What’s more, this paper talks about labor productivity’s mechanisms to trade balance:lengthways, it researches how the effect of labor productivity to trade balance changes before and after PGDP reaches threshold level; crosswise,it contrasts different provinces’ impacts of labor productivity to trade balance, and talks about labor productivity’s different transmission mechanisms to trade balance in eastern, central and western regions. Base on the regression equation of real exchange rate, we can predict every year’s changing range of real exchange rate, with the change of labor productivity in the next period of time. Then, it uses data to answer some foreign attacks on China’s exchange rate regime. At last, it gives some policy recommendations to reduce China’s trade surplus from the three transmission channels.Chapter5:Empirical study on real exchange rate transmission mechanism of labor productivity to trade balance. Firstly it shows the development from Purchasing Power Parity Theory to Balassa-Samuelson Effect. Then it discusses the influence of labor productivity to real exchange rate, on the base of Balassa-Samuelson effect model. Then it compares different econometric models in use of China and United State’s time series data. Through empirical methods like co-integration analysis, error correction model, VAR impulse response and variance decomposition, it exams whether the effect exists in China, which gives theory support on the transmission mechanism of real exchange rate. It also makes further examination on Balassa-Samuelson effect in use of provincial panel data. What’more, the result of trade balance’s exchange rate model shows that the channel of real exchange rate effect is open.Chapter6:Main empirical findings and prospects of future research. It summarizes and discusses all empirical results in this paper, and proposes the limitations of this research and outlook of future research.The innovations of this article are as follows:1. Theory and Model Level.The paper sums up the influencing factors and the relevant literature of China’s trade balance, and summarizes current account the analysis methods and models of inter-temporal equilibrium. None of the literatures I searched has systematically studied the applicability of the basic trade balance determination theory in China. The empirical research of some trade balance theories is not sufficient. The paper makes some pioneering exploration on the basis of previous research. It discusses whether these classic theories of trade balance can explain our trade balance change and which theory significantly affects trade balance in different stages in China, in use of many, methods like data comparison, static time series co-integration model and dynamic rolling regression model. Hope to give some enlightenment to understand China’s trade imbalance and some effective recommendations to resolve trade imbalances. None of the literature I searched has theoretically elaborated and empirically analyzed the transmission mechanism of productivity to trade balance, and none has added real exchange rate into the framework of productivity’s transmission mechanism to trade balance. The paper summarizes and clearly proposed the transmission pathway of productivity to trade balance on theoretical level, and discusses our trade balance problem on base of the framework of current account inter-temporal equilibrium analysis. On one hand, it studies productivity’s transmission effect from every channel. On the other hand, it examines various factors of the trade surplus, which has contained more factors than most of the lectures I found. Then it talks about the cause and mechanism of China’s trade surplus in the senses of longitudinal and transverse. What’s more, it builds labor productivity model of real exchange rate on the base of Balassa-Samuelson effect, and compared estimated effect of different models.2. Data Processing Level.In the existing empirical research, the empirical methods of time series co-integration are mostly used and the trade models are built from the point of view of the total or all the country. The panel data model of inter-provincial regions in China for empirical analysis is used, for a more detailed inspection about the effect from the productivity and other economic variables to the trade balance at the micro level and taking advantage of a large sample data to obtain more accurate multivariate model results, This article spends considerable time and effort to collect and process the data and constructs per capita economic variables. In order to distinguish the different price levels in the different provinces, the real exchange rate of RMB against the U.S. dollar and the real effective exchange rate index of RMB of different provinces are replaced from the real exchange rate of all the country, whereby the labor productivities of different provinces of China, the United States and the world are constructed.3. Empirical Method LevelIn the discussion of the trade balance theory, we use rolling regression models, time series models. In the discussion of the transmission mechanisms of labor productivity, we use the more cutting-edge empirical methods of panel cointegration, panel error correction and panel threshold model. Estimate the models with the instrumental variable method using Two-step GMM estimation method. Firstly discusse the endogenous problem of some explanatory variablesmay in the trade balance model. In the discussion of the transmission mechanism of the real exchange rate, we use cointegration analysis, error correction model, impulse response, variance decomposition and other methods.