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Trade integration,restructuring and global imbalances --A tale of two countries

Author

Listed:
  • Teng, Faxin
  • Meier, Claudia
  • Kamenev, Dmitry
  • Klein, Martin

Abstract

China is widely seen as one of the sources of global macroeconomic imbalances. Its persistent current account surplus and capital exports to the United States are even cited as one of the causes of the global financial crisis. The most common explanation traces China's current account surplus to a mismatch between saving and investment due to inefficiently low domestic demand. We challenge this explanation. Our argument rests on an analogy that we construct between two countries generally thought to be very different: Russia and China. Russia, a raw materials exporting country, has been running current account surpluses similar to China's in relation to GDP. As for most raw materials exporting countries this is considered normal, reflecting efficient reinvestment of wealth from natural resources in financial assets. We show that a similar efficiency argument can be constructed for China, although the nature of wealth that is reinvested in financial assets is different in the two countries. Our analysis implies that China's current account surpluses can be expected to disappear over the long horizon – although the time when this will happen may still be very far away. Moreover, an appreciation of the Chinese currency may not have the desired effect of mitigating the country's current account surplus as a weakening in competitiveness is counterbalanced by a strengthening of investment motives.

Suggested Citation

  • Teng, Faxin & Meier, Claudia & Kamenev, Dmitry & Klein, Martin, 2011. "Trade integration,restructuring and global imbalances --A tale of two countries," MPRA Paper 31946, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31946
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    References listed on IDEAS

    as
    1. Iordanis Petsas, 2010. "Sustained Comparative Advantage and Semi-Endogenous Growth," Review of Development Economics, Wiley Blackwell, vol. 14(1), pages 34-47, February.
    2. Michele Boldrin & David K Levine, 2008. "Quality Ladders, Competition and Endogenous Growth," 2008 Meeting Papers 277, Society for Economic Dynamics.
    3. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 471-494.
    4. N/A, 2011. "Balance of Payments," Foreign Trade Review, , vol. 45(4), pages 73-104, January.
    5. Bowden Roger J. & Huang Hui, 2009. "Infrastructure, Commodity Spectra, and Trade Transitions in Economic Development," Global Economy Journal, De Gruyter, vol. 9(2), pages 1-33, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    trade structures; trade imbalances; current account imbalances; outside assets;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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