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LU Feng: Two countries, two lessons


The economic growth trajectories of China and the United States have displayed mirror-image relations over the past two years following the outbreak of the COVID-19 pandemic. During this time, the two countries have seen different external demand, economic growth, total demand and inflation, because they have adopted different prevention and control measures, as well as different macroeconomic policies, in response to the pandemic.

China and the US have seen different recovery of production and consumption. After the sharp economic contraction caused by the pandemic, production and consumption in the two countries recovered rapidly, but the similarity ends when it comes to resumption of supply and demand.

China has registered much quicker industrial production recovery than the US.China's Index of Industrial Production rose to 118.8 by the end of 2021 from the baseline of 100 in January 2019 before the pandemic, bringing the average growth for the past three years to nearly 6 percent. The index of industrial production in the US stood at only 98.8 by the end of 2021, still below the pre-pandemic baseline. However, the US has seen faster recovery of retail consumption than China. The US retail index increased to 125.6 by the end of 2021, putting the three-year average growth at 7.9 percent. The index was 114.3 in China with an average annual growth of 4.6 percent in the same period, much lower than that of the US.

While China has had a trade surplus over the past two years, the US has had a trade deficit. The two countries have turned to foreign trade to address the mismatch between supply and demand. The growing US trade deficit can be attributed to its efforts to improve its aggregate supply. Its trade deficit rose from $596.3 billion in 2019 to $651.2 billion in 2020, up $54.9 billion. In 2021, it further rose to $915.9 billion. The US trade deficit grew by $319.6 billion over the past two years, putting the average annual increase at $159.8 billion, which equals to 0.73 percent of the average US GDP in 2020-2021. The negative contribution of deficit growth to total demand is several times higher than the pre-pandemic level.

China has seen weak domestic demand and kept expanding net exports as external demand has risen in recent years. Its foreign demand contributed more than 22 percent to the incremental growth of GDP in 2020-21, showing great difference with the 10 years before 2019. Over the past two years, the imbalance in bilateral trade between China and the US has expanded significantly. China had a total surplus of $714.2 billion with the US in 2020-21-$357.1 billion annually on average, up about 21 percent from the average level of $282.48 billion in 2015-19.

Inflation in line with total demand shows different performances. In 2020, consumer prices in China and the US both rose and then fell. Differently, China's consumer prices rose from a high base at the end of 2019.As pork prices rose sharply by nearly 50 percent, China's annual consumer price index growth stood at 2.5 percent, much higher than the 1.2 percent growth in the US. The monthly consumer price index in China rebounded from zero at the beginning of 2021, while the annual CPI growth of 0.9 percent was largely lower than that in 2020 and below the average level of 2 percent in the five years before 2019. Meanwhile, in the US, the annual CPI growth in 2021 reached 4.7 percent and continued to soar in January and February this year. Specifically, the figure rebounded at the beginning of 2021 as it did in April and May of 2020, and exceeded 5 percent in mid-2021 as inflation escalated. It then reached 7 percent at the end of 2021, leading to inflation unseen in the US for decades. In February this year, the US CPI further rose to 7.9 percent.

In recent years, China and the US have both borne the brunt of the pandemic. Therefore, economic performances of the two countries are similar to some extent, as macroeconomic indicators have experienced V-shaped fluctuations and authorities have introduced intervention measures. However, the different national conditions, macro policies and pandemic prevention and control measures of China and the US have made the economic performances of the two countries differ. The latest inflation in the US is attributable to not only the pandemic but also its massive stimulus policies.

The link between the domestic mismatch between production and consumption and the change of the external imbalance in China and the US amid the pandemic actually show the positive impacts of economic globalization as well as economic supplementation and the potential of mutually beneficial cooperation between China and the US.

A trade imbalance usually leads to complaints from the deficit side. However, given the accelerating imbalance of domestic supply and demand in the pandemic, it is reasonable to adjust the gap between domestic supply and demand by expanding the trade imbalance.

If the US had failed to expand imports and reduce its trade deficits last year, its CPI might see double-digit growth by the end of this year, bringing more difficulties. Without growing external demand over the past two years, China's economic growth, too, would have been under greater downward pressure.

Much room remains for further exchanges and mutual learning between China and the US on macro policies. During the pandemic, the US launched counter cyclical macro policies to the maximum, and still issued massive fiscal stimulus plans despite its rapid economic recovery and continued to implement zero interest rate and additional quantitative easing policies in early 2021 despite severe inflation. The lack of forward-looking cross-cyclical policies and unsustainable overstimulation have led to high inflation.

China's policy designing has taken both counter cyclical and cross-cyclical adjustment into consideration. More exploration should be made on balancing the adjustments and addressing the impacts of future economic expectations on effects of cross-cyclical adjustment. The two countries can improve exchanges and learn from their economic policy experience during the pandemic to improve the effectiveness of their policies.


From: China Daily, 2022-04-06