Shocking June Numbers: China Continues to Reap the Benefits of Trade Surpluses — But Why?

Just as we thought domestic and other global manufacturing supply options might gain favor from a sourcing perspective due to a gradually rising Chinese price, China produced a surprising 44% increase in its year-over-year exports in June. According to the FT's coverage of the story, "China defied widespread fears about a new slowdown in the global economy to record another surge in exports last month compared to the same period last year ... the $20 billion result adding to the surplus of $19.5 billion in May, which could indicate that China's external surplus might balloon again in the second half of the year."

These results should add further fuel to the free trade fire for those in the US and the rest of the world who believe China's continued currency manipulation is responsible for an artificially low China export price. But it's not just the currency that continues to make the China price more attractive for certain products. China also encourages or discourages certain export behaviors through VAT rebate and export tariff programs. From a VAT rebate perspective, China provides a tax rebate back to suppliers after they can prove goods have been exported. They also discourage the export of certain materials (e.g., rare earth metals) deemed strategic to the country and business by increasing the export price through specific tariffs.

Examining one category, the FT notes that "exports of steel -- one of the most politically sensitive sectors -- increased another 14 per cent in June over the month before to 5.6 million tones." Over on Spend Matters' sister site, MetalMiner, we have covered the steel pricing and China export question at length, pointing out the excess capacity available in the US market and the benefits China gains from keeping the RMB low at the expense of domestic producers.

Here at Spend Matters, we're not experts in this area ourselves, but to us, the steel debate represents yet another argument suggesting that China will continue to come under increased scrutiny for the government's monetary, economic and export policies. Moreover, the steel example is also further proof that if you're doing business in the region and not evaluating other supply options, perhaps you should be. After all, the China export price will have to rise when Chinese Communist party officials decide their current policies are untenable in the face of global opposition.

Jason Busch

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