Oxstones Investment Club™Chazen Global Insights,
In December 2010, Chazen Director Shang-Jin Wei briefed officials from the U.S. Department of Commerce on how to improve trade relations with China. Here, he explains how resolving the gender imbalance in China could help cure the U.S. trade deficit.
Chazen Global Insights: How did you come to brief the Commerce Department?
Shang-Jin Wei: The United States and Chinese governments hold annual meetings to talk about improving commercial relations and other issues of mutual interest. Over the last few years, there’s been a particular urgency on improving trade relations. When President Obama took office, he announced a very ambitious goal to double U.S. exports within five years. The U.S. government has been actively looking for ways to do that. The University of Washington’s Jackson School was invited by the Secretary of Commerce to organize a meeting on the topic. I was invited in this context.
CGI: Is doubling trade within five years even feasible?
SJW: In the past 20 years or so, the U.S. on average has not managed to come anywhere near that rate. But the one trading partner that has come close to letting the U.S. double its exports is China. U.S. exports to China have been growing close to 13% per year. That means the U.S. has nearly doubled its exports to that market every five years.
CGI: So U.S. exports to China have been successful. But haven’t U.S. imports from China grown even faster?
SJW: Yes, but it’s important to correct some common misconceptions.
China is in the news frequently because of a triple phenomenon. It has a high trade surplus, high foreign exchange reserve holdings, and its currency value is low. The most common narrative that connects those variables is this: The country manipulates its currency by aggressively buying U.S. dollars and selling Chinese currency. This reduces the value of the Chinese currency, which makes Chinese goods cheaper and encourages a trade surplus.
CGI: Isn’t that the case?
SJW: Well, it’s not the only possible narrative. An alternative is to recognize that any country’s net trade balance reflects the difference between domestic saving and domestic investment. Once you see trade balance in that vein, you could ask: could there be structural factors not related to currency manipulation that could lead to high savings and a high trade surplus? Logically the answer is yes.
CGI: It sounds like you’ve got a theory.
SJW: My research with Dr. Xiaobo Zhang suggests that there is an important factor that’s not part of the conventional explanation yet. That factor is a steady deterioration in the ratio of young men to young women in the premarital age cohort, starting in 2002.
CGI: What could that possibly have to do with the trade deficit?
SJW: (Laughs) It is an unusual explanation. First, some basic facts. Left to nature, the ratio in the marriage market [of men to women] should be close to 1:1. The Chinese marriage market was indeed close to that before 2002. Then it started to deteriorate in the direction of having more young men than young women.
CGI: Why? What happened in 2002?
SJW: The sex ratio imbalance results from a confluence of three factors. First, Chinese parents prefer to have a son. Second, B-mode ultrasound machines that allow parents to detect the gender of a fetus started to spread in China in the early 1980s. Third,a strict family planning policy was also put into place in the early 1980s. So 2002 and 2003 were the years in which the first cohort with the imbalance was entering the marriage market.
The connection with savings is this: With fewer young women, young men will face deteriorating prospects. Families with young men have to be worried. If they realize that higher family wealth will improve their son’s chances in the marriage market, raising their savings rate is one way to do it.
CGI: So parents, by raising their savings rate, make their son a more attractive catch.
SJW: Exactly. In my statistical analysis, roughly 50 % to 60% of the increase in Chinese household savings since 1990 can be attributed to the rising sex ratio imbalance.
CGI: How did you determine the 50% to 60% number?
SJW: In several ways. One example is that you can explore regional variations in China. Dr. Zhang and I find that regions with a higher sex ratio imbalance also tend to have a higher savings rate, holding constant other factors that may affect local savings rate.
The key thing take-away is that this social development — a steady deterioration of the ratio of young men to young women — leads to a dramatic increase in household savings. Without a corresponding rise in the investment rate, this has led China to run an ever larger trade surplus since 2002. In other words, the sex ratio effect may be a key driver for the rising trade surplus.
CGI: So what’s the practical implication of this?
SJW: In future U.S.–China economic dialogues, instead of narrowly focusing on currency exchange rates, it makes sense to bring in a whole array of structural factors, including a discussion about family planning policy and gender equality.
CGI: That’s an unusual recommendation to make to the Department of Commerce.
SJW: The first thing is recognition of the issue. Even if the sex ratio imbalance gets reversed soon, you’re not going to see the effect right away, since it will take a while for children born over the next few years to reach marriageable age. However, leaving it to the market to work out will be too slow. That’s a case for smart government intervention. You need to have some encouragement for parents who have a girl — maybe offer financial rewards to families that have girls.
CGI: But will that really solve the trade deficit for the United States?
SJW: The U.S. trade deficit is a multilateral phenomenon. The United States doesn’t just run a deficit against China but against 92 countries in the world, including India, Mexico, and Germany.
The trade deficit comes from the fact that U.S. savings is less than U.S. investment. It’s true that the U.S. household savings rate has gone up in recent years. It used to be close to 0%; now it’s 5–6%. But that increase has been more than offset by government dis-saving. Without fundamentally changing the U.S. fiscal deficit issue, the Department of Commerce’s efforts to boost exports will likely be offset by a rise in imports. When the U.S. government succeeds in restoring the fiscal balance and the U.S. national savings rate increases, its trade deficit will almost surely fall.
Tags: Asia, big picture, China, commerce, currency rates, demographic issues, exports, family planning policy, food for thought, government policies, savings rate, trade, trade deficits, U.S.