The Metamorphosis of China’s Trade Policy

  • Daniel Aronoff


Part I of this book analyzes the forces that generated the US housing boom of the 2000s. The most important causal element, it shall be argued, was China’s trade surplus with the United States. Therefore, I begin with a brief account of China’s emergence at the turn of the twenty-first century as the greatest trading nation on earth and the propagator of a large trade imbalance with the United States.


Financial Crisis World Trade Organization Pearl River Delta Chinese Communist Party Domestic Investment 
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  1. 2.
    Jonathan D. Spence, The Search for Modern China (W.W. Norton & Company, 1999), p. 122.Google Scholar
  2. 3.
    J. L. Cranmer-Byng (ed.), An Embassy to China: Lord Macartney’s Journal, 1793–1794 (London, 1962), p. 340.Google Scholar
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    Zhao Ziyang, Prisoner of the State, the Secret Journal of Zhao Ziyang (Simon and Schuster, 2009), p. 97.Google Scholar
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    Ibid., p. 137.Google Scholar
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    Ibid., p. 102.Google Scholar
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    Ibid., p. 107.Google Scholar
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    Ibid., p. 149.Google Scholar
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    Yasheng Huang, Capitalism with Chinese Characteristics: Entrepreneurship and the State (Cambridge University Press, 2008).CrossRefGoogle Scholar
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    For an analysis of China’s economic policies in the 1990s, see Yiping Huang and Kunyu Tao, Causes of and Remedies for the People’s Republic of China’s External Imbalances: The Role of Factor Market Distortions (Asian Development Bank Institute WP No. 279 April 2011); and Dennis Tao Yang, “Aggregate Savings and External Imbalances in China,” Journal of Economic Perspectives, Vol. 26, Number 4 (2012): 125–146.CrossRefGoogle Scholar
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    See Rudolph Bems, Robert C. Johnson, and Kei-Mu Yi, “Vertical Linkages and the Collapse of Global Trade,” American Economic Review Papers & Proceedings, Vol. 101 (2011): 308–312.CrossRefGoogle Scholar
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    The cost of transport and the ability to coordinate activities across vast distances have also been factors in shaping supply chains. The growth of international trade is, in part, a consequence of the dramatic reduction in transport and communications costs over the past several decades. For an empirical analysis of the complex role of transport costs in international trade in recent decades, see David Hummels, “Transportation Costs and International Trade in the Second Era of Globalization,” Journal of Economic Perspectives, Vol. 21, No. 3 (2007): 131–154.CrossRefGoogle Scholar
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    This is an application of F. A. Hayek’s theory that production processes involve a tradeoff between time and cost—the longer the period of production, the lower the unit cost. For this reason lower interest rates induce longer production chains. See F. A. Hayek, Prices and Production (New York: August M. Kelly, 1931). The concept was originally developed by Eugen Bohm-Bewerk. For a modern exposition, see John Hicks, Capital and Time (Oxford, UK: Clarendon Press, 1987).Google Scholar
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    Adam Smith, The Wealth of Nations, Modern Library Edition (Random House Inc., 1994 [1776]), p. 694. The passage quoted in the text occurs in the context of qualifications to the definition as stated. Smith’s concept of mercantilism involved running surpluses in the trade of final goods. In order to achieve that end, mercantilists will often restrict exportation of capital goods (or intellectual property) that might aid foreigners in developing competing final goods. Likewise, the mercantilists will promote the importation of capital goods that improve the competitiveness of its exports of final goods. The ultimate goal, however, is the same as stated in the text—to run “an advantageous balance of trade.”Google Scholar
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    US Department of the Treasury, Report on Foreign Portfolio Holdings if US Securities, which is updated periodically. Also note that many economists believe these figures are understated by as much as 18 percent, since they do not include holdings of China’s main Sovereign Wealth Fund, China Investment Corporation, and those held by state banks. See Brad Setser and Arpena Paudney, China’s $1.7Trillion Bet: China’s External Portfolio and Dollar Reserves (Council on Foreign Relations, 2009).Google Scholar

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© Daniel Aronoff 2016

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  • Daniel Aronoff

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