This article appeared originally in Gulf News: link to original article
Trade surplus — good or bad? I don’t believe there is a straightforward answer to that question. But before trying to reach a close-enough answer to that, let’s explore the trade surplus topic.
To simplify matters, trade surplus is when a country exports to a country more than it imports from it. And a trade deficit is the exact opposite of that. A country is said to be in a trade surplus if the net of its surpluses and deficits is positive. This article will explore the cases of the Top 5 trade surpluses in 2016, how they got there, and what’s next for them.
Germany tops the list, and it’s the most interesting example of all. First, because it has a larger trade surplus than that of China, which by default is assumed to top the list. Now one may argue that perhaps the domestic market is not big enough, and that can possibly result in a country not importing much, and exporting in excess of that.
The same could be said if GDP per capita is taken into account. In Germany’s case, its population is north of 80 million, and it’s GDP per capita is among the highest 20 worldwide at $41,936.1 (World Bank). In other words, Germany’s case is unique and exceptional, especially that it’s not a resource-rich country.
China is ranked second, South Korea third, Netherlands fourth, and Singapore fifth. Out of the four, three are not resource rich, and the recipe seems to differ across the board. Here is why.
One way to reduce imports and increase exports is the traditional result of manipulating a country’s currency by keeping it artificially, or by market forces, lower than its peers. Germany does not enjoy the luxury as part of the euro area — even though quantitative easing could have been instrumental in depreciating the euro and further increasing exports from highly competitive countries in the euro area (tourism is not being considered here).
Germany’s companies are key here. China, on the other hand side, has historically managed its yuan by deploying the monetary tools at its disposal to depreciate its value. Moreover, China’s trade edge is driven by its low production cost, which is the result of lower labour costs and economies of scale.
It should be noted here that China would very possibly lose its trading edge as it backs off debt-fuelled and export-model growth towards a consumption-based one. With a population of more than 1.3 billion, the only obstacle to a major reduction in its trade surplus is a higher GDP per capita, or purchasing power.
South Korea is another fascinating case. Even though having its one and only land border closed, with North Korea, it has managed to elevate its status into a major global trading hub. And if you examine its Top 5 exports versus its Top 5 imports, you would notice that its four products are among the top exports and top imports.
The exception is its exports of passenger and cargo ships, an industry that South Korea has cultivated for decades. Netherland’s population is a fifth that of Germany, with a GDP per capita of $45,294.8, which could partly explain its current trading position. As for Singapore, its 5 million population enjoys the 10th highest GDP per capita at $52,960.7. Singapore is a renowned trading hub, pegging its currency to a basket of currencies that is undisclosed, but is linked to its trading ties.
What I find quite intriguing is that China and the Netherlands are among Germany’s top trading partners, and despite that, they have the highest first, second, and fourth trade surpluses. And that leads to one thought: specialisation.
The last question that I want to leave you with: how come the US, with third largest population and eighth highest GDP per capita; owns the highest trade deficit? (Note: the second placed nation’s deficit is one-tenth that of the US.)