Understand economics from scratch

Chapter 27 What Does Currency Devaluation and Appreciation Mean——International Trade Economics You Must Understand (2)
China's international balance of payments has undergone several major changes over the past several hundred years. From the opening of direct trade between China and Europe in the Ming Dynasty to the eve of the Opium War, China's overall foreign trade balance was a huge trade surplus.After the Opium War, Western powers sold opium to China on a large scale, and China's current account balance turned from a trade surplus that had lasted for hundreds of years to a trade deficit.During this period, until 1949, China's trade surplus was only very small, while trade deficit was a regular phenomenon. In 1985 and 1986, when China's economy and trade were in surplus, the economic balance of payments was in surplus for more than 5 years. After our country suffered from Western trade sanctions, a deficit appeared.During this period of time, we finally reversed the continuous pattern of my country's regular trade deficit before the Opium War, and returned to the pattern of surplus from the Ming Dynasty to the Opium War.

Since the reform and opening up, China's open economy has developed by leaps and bounds. During this period, one of the most prominent features of China's economic development is that the growth of foreign trade is faster than the growth of the national economy, and the degree of dependence on foreign trade continues to rise to the highest level in the world. The export-oriented strategy has created China's largest foreign exchange reserves in the world, and international organizations believe that China's foreign trade myth is the greatest success story in the era of globalization.

The so-called trade surplus (favorable balance of trade) means that in a specific year, the total export trade volume of a country is greater than the total import trade volume, also known as "surplus".This means that the country's foreign trade was in a favorable position that year.

A trade deficit means that the total value of a country's import trade is greater than the total value of exports within a certain period of time (such as one year, half a year, one season, one month), commonly known as "excess import", or trade deficit.This shows that a country's foreign exchange reserves are reduced, the international competitiveness of the country's products is weak, and the country is in a disadvantageous position in foreign trade that year.

In other words, in a certain unit of time (usually calculated on an annual basis), the two parties in the trade buy and sell various goods, import and export each other, if the export amount of Party A is greater than the export amount of Party B, or Party A If the amount of imports is less than that of Party B, the difference is called a trade surplus for Party A; otherwise, it is called a trade deficit for Party B.Generally speaking, in terms of the interests of both sides of the trade, the party that gets a trade surplus is the one that takes advantage, while the one that gets a trade deficit is the one that suffers.It can be said that trade is actually for making money, and the party with a trade surplus has made a net profit; while the party with a trade deficit has paid a net money.

The size of the trade surplus largely reflects the status of a country's foreign trade activities in a particular year.Under normal circumstances, it is not appropriate for a country to have a large foreign trade surplus for a long time, because this will easily cause friction with the relevant trading partner countries.For example, one of the main reasons for fluctuations in the bilateral relations between the United States and Japan is that Japan has been in a huge surplus for a long time.At the same time, a large foreign exchange surplus usually leads to an increase in the amount of domestic currency in a country's market, which is likely to cause inflationary pressure, which is not conducive to the sustainable and healthy development of the national economy.Similarly, the government authorities of a country should try to avoid long-term trade deficits, because a large deficit will lead to the outflow of domestic resources and increase external debts, which will also affect the normal operation of the national economy.

A larger trade surplus is not necessarily good. An excessively high trade surplus is a dangerous thing, which means that the growth of the domestic economy is more dependent on external demand than at any time in the past few years, and the external dependence is too high.The huge trade surplus has also led to the expansion of foreign exchange reserves, which has brought greater pressure on the appreciation of the renminbi, and also given the international trade protectionists an excuse that the huge surplus reflects the undervaluation of the renminbi.This increases the pressure of RMB appreciation and financial risks, and increases the cost and difficulty of the reform of the RMB exchange rate mechanism.A relatively simple countermeasure is to stimulate domestic consumption.

Trade subsidies: subsidies for import and export trade

NewPage (New Page Company), a name that few people know even in the United States, has entered the vision of countless Chinese people on the day of "April Fool's Day" in the West.

The $20 billion paper company in Ohio, USA, isn't kidding.Because of a statement made by the U.S. Department of Commerce, its earlier complaint is likely to become a fulcrum for leveraging the trade relationship between the two major countries, China and the United States.

At 2007 a.m. on March 3, 30, U.S. Secretary of Commerce Gutierrez announced that he would change the trade policy that had been maintained for 11 years, and use countervailing tax trade penalties on China, which has always been regarded as a "non-market economy" by the United States. .

According to this preliminary decision of the US Department of Commerce, the coated paper products of several Chinese paper companies will be subject to countervailing duties.Among them, Shandong Chenming Paper Group was levied a tariff of 10.9%, Jiangsu Jindong Group was levied 20.35%, and many other companies were levied 18.16%.

In 1984, the U.S. Department of Commerce made a decision not to use countervailing duty penalties for "non-market economy countries" identified by the United States. In 1986, the U.S. Federal Court confirmed this policy in the "Georgetown Steel Case", ruling that the Department of Commerce has the right to decide whether to use countervailing duties.

Times, though, have changed, Gutierrez said.When the Commerce Department made its decision in 1984, companies in what was then a communist country would not adjust their business practices because of government subsidies, he said.However, "China in 2007 is not the economic situation of the Soviet Union and the Eastern Bloc in the mid-20s. Chinese companies will respond to subsidies, and we can reasonably measure these responses."Gutierrez said.

In fact, some relevant American companies and individuals have been planning and promoting the use of countervailing duties against China. However, these actions are mainly carried out through the channels of Congress.According to the American constitutional government, to change a principle established in judicial precedents, it needs to be overturned through legislative means.Therefore, some members of Congress are trying to promote legislation to force the executive branch to use countervailing duties against China.

So what exactly are subsidies and countervailing?
The subsidies given by the state to import and export trade are trade subsidies.Trade subsidies can be direct or indirect.A direct trade subsidy is simply a negative tax, with the opposite consequences of a tax.Indirect trade subsidies generally take the form of loosening credit, cheap energy use or free use of infrastructure.The subsidy amount can maintain a certain proportional relationship with the trade volume, which is called a specific subsidy; it can also maintain a certain fixed proportional relationship with the trade value, which is called an ad valorem subsidy.For example, export subsidy in trade subsidies, also known as export subsidy, is a cash subsidy or financial subsidy given to exporters by a government to reduce the price of export commodities and strengthen its competitiveness in foreign markets when exporting certain commodities. preferential treatment.There are two ways: direct and indirect: direct subsidy is the cash subsidy paid directly to the exporter when a certain commodity is exported.Indirect subsidy is the financial preference given by the government to certain export commodities.

Countervailing refers to the behavior and process of a country's anti-dumping investigation agency implementing and enforcing countervailing laws and regulations.Among them, subsidies refer to the financial or financial preferential measures provided by a government or any public institution to domestic producers or export operators, including cash subsidies or other policy preferential treatment, so that their products can be compared with those not enjoyed in the international market. Subsidized like products are in a favorable competitive position.The World Trade Organization Countervailing Agreement divides subsidies into three basic types: prohibited subsidies, actionable subsidies and non-actionable subsidies.For the first two types of subsidies, countries can appeal to the World Trade Organization and adopt anti-subsidy measures authorized by the dispute mechanism of the World Trade Organization; importing members collect countervailing duties through investigations in accordance with domestic anti-subsidy laws.

Commodity Dumping: Capturing the Market with Low Prices

在1855年以前的10年间，英国对华工业品贸易始终在200万英镑左右徘徊。拥有3.6亿人口的中国，1853年人均消费英国棉纺织品的价值只有0.75便士；而仅有14600人口的洪都拉斯却人均消费英国棉纺织品934.5便士，是中国的1246倍。直到第二次鸦片战争后的1865年，在对外合法贸易中，中国才第一次出现逆差。

In market competition, in order to make one's products sell well, apart from the quality factor, the most important thing is the price of the product, especially in a country like China where the natural economy was dominant at that time.That is to say, it is necessary to make its products "cheap" so that Chinese people who advocate frugality can buy their products.

The United Kingdom took the lead in completing the industrial revolution and replaced manual labor with large-scale industrial production of machines. The labor efficiency of handicraftsmen in China is many times higher than that of Chinese handicraftsmen, and its commodity prices can be reduced to a fraction of that in China.British goods can easily become "cheap" when the same goods from both countries are put together.

British "cheap" goods were cheaper than Chinese handicraft products under natural economic conditions, and their competitiveness was naturally stronger. Therefore, after British cotton textiles flooded into the Chinese market, Chinese handicraftsmen went bankrupt one after another.In this way, the farmers who produced raw materials for them had to resell the raw materials to foreigners, which also resulted in the plundering of Chinese raw materials.

Commodity dumping (dumping) means that under the condition of controlling the domestic market, large enterprises sell dumped commodities in foreign markets at prices lower than the domestic market, or even lower than the production cost of commodities, and attack competitors to occupy the market.

The agreement implementing Article VI of the GATT 1994 states that if, in the normal course of trade, a product is exported from one country to another at a price lower than that of the same product consumed in its own country comparable price, that is, entering the commercial channels of another country at a lower value than its normal value, the product will be considered dumped.

Dumping usually has several of the following characteristics:

First, dumping is an artificially low-price sales measure.According to different markets, the exporter sells the same commodity at a price lower than the market price of the commodity in the exporting country.

Second, the motives and purposes of dumping are various, some are to sell surplus products, some are to compete for foreign markets and expand exports, but as long as it causes substantial damage or substantial threat to the establishment and development of a certain industry in the importing country or Substantial obstruction, it will incur the punishment of anti-dumping measures.

Third, dumping is an act of unfair competition.Under the government's export incentive policy, producers often sell their products at low prices in order to obtain government export subsidies; at the same time, producers sell their products in foreign markets at dumping prices, thereby gaining a competitive advantage in another country's market and further Eliminate competitors, and then increase prices to obtain monopoly high profits.

(End of this chapter)