China's surging auto exports is not a "marvel to behold"

By constraining domestic demand, China has no choice but to increase its exports or unproductive investments

Today Noah Smith published the first of a short series of posts revisiting China’s economy:

Where China is beating the world

Noah writes:

Still, China’s rapid rise to dominance in auto exports — which, unless the legacy automakers and rich countries can get their acts together very quickly, will turn into dominance of car exports, period — is a marvel to behold.

China’s surge in auto exports is unfortunately not a marvel to behold. Noah, like most economists, does not seem to understand one of the most basic economic identities:

Production = Consumption + Trade surplus + Investment

In other words, whatever China produces must be consumed, exported, or invested. There is no other choice. This is an accounting identity, and like all mathematical identities, it is true by definition.

Well, as shown by Michael Pettis and other financial economists who follow China closely, China’s consumption compared to its production is very low. In other words, Chinese don’t consume a lot of what they produce. By definition, this means China has to export a lot or invest a lot.

The country has already built too much useless infrastructure. Noah writes:

So in the case of say, building too many apartments, or failed Belt and Road projects, or wasteful corporate subsidies, the lack of efficiency can really bite.

However, Noah doesn’t reach the logical conclusion: this means China has to export a large portion of its production. It’s not a choice. It’s a constraint.

Another way the above identity would still hold is if China were to reduce both production and exports by the same amount. But China’s government wants to grow the country’s GDP: a higher production means more jobs and more influence and power. (Which is something the European degrowth movement should keep in mind.)

Now I don’t want to pick on Noah (I have already done so previously), but this kind of misunderstanding of such a basic accounting identity is common among economists and needs to be addressed. If you want to learn more, I encourage you to read Michael Pettis, who is active on Twitter, has written several books, and writes a blog.