China No Help In Recession

Derek Scissors / January 25, 2010

China announced last Friday that its economy grew 8.7% last year. Among other things, this will prompt a chorus of claims that China is leading the world out of recession.

Wrong.

The typical way of thinking about this is to take China’s and every other country’s GDP growth, add it all up, and see which economy contributed most to the world’s pile. But that is not the way GDP works.

Consider the case of a country that successfully dictates trade terms such that it extracts a great deal of wealth from its partners. Its GDP would grow very quickly while that of its partners would shrink or grow much more slowly. It would then seem that the predator is leading global growth higher, when it is enriching itself at the rest of the world’s expense.

Behind this possibility is that GDP includes trade. A trade surplus adds to GDP and a trade deficit takes away. China runs the largest trade surplus, which means the rest of the world runs a large trade deficit with the PRC.

Seen that way, China is not adding anything to global growth. Using trade, it is adding the most to its own GDP and taking away the most from the rest of the globe’s. (more…)