Employment. If you only make the goods that your economy wants you don't employ nearly as many people. In an environmnt of poverty and inequality then your economy doesn't demand a whole lot because people just don't have the money or the credit to buy stuff. That's why Korea, Germany, China are all export oriented powers. If you instead maintain a negative trade balance by importing the goods that your economy wants, you are essentially exporting your currency and your job placements, which is the US strategy. Being at the center of every supply chain in the world also makes you indispensible and resilient in terms of inflation.

If you played Victoria 3 a lot you must have run into a late game profit crisis and unemployment issues from pop growth and women's liberation. Simply put, you own people's consumption doesn't rise nearly as quickly as you need it to. One short term solution is to try and export goods to developed markets, and to import cheap commodities as much as possible.

China still has to import stuff like oil, chips etc which they need foreign exchange for. Also, having a ton of forex allows them to protect Yuan against external shocks (look what happened to so many other developing countries when fed raised interest rates) and keep it within the desired band.

The export oriented economy is what helped bring in foreign capital and technology and recently China has been shifting focus to domestic consumption as well.

You can use those pieces of paper to buy capital.

China didn't have capital, specifically Deng invited foreign capital to increase the rate of industrialization and they are still in that process, like the amount of poor people in China has improved a ton but there's still people living in rural china without access to warm water or electricity.

In addition, being the manufacturing base of the world means it's much harder to take action against china, western countries do like their treats and third world countries rich in resources will over time align with china because they have close relationship.

Don't know if china still pursues that strategy but they had a somewhat fixed exchange rate between the Renminbi and USD, basically exchange rate can be in an 'acceptable band'.

Countries obvously trade to acquire goods and services, but they also do so to gain currency, both to use for further trade and as part of reserve assets (in the central bank) which can used to intervene in currency markets to influence exchange rates. Countries, especially in highly developed, modern, technologically complex economies need to import huge amounts of raw materials and machinery which they can't produce themselves or at least not as cheaply as importing.

If you have a trade surplus in your current account (all trades of goods and services, income flows (e.g. wages to labor, rent, interest and profits to capital) and transfer payments), then that means that the total monetary value of your exports (and inward flows - injections - of income and transfers) excedes the total monetary value of imports (and outward income and transfer flows).

But the current account is just one part of the full account of all financial transactions, the Balance of Payments (BOP), i.e. the account of all flows of capital (monetary/financial or otherwise) between countries. There are also the capital account (flows of non-finacial assets, like when a family migrates and takes physical belonging with them or a firm or rich household moves furniture or machinery abroad) and the financial account (flows of financial assets). The financial account is more important than the capital account, being far larger in monetary terms and made all flows of financial assets (e.g. FDI, portfolio investment in equity and bonds etc., and so on). In theory, a balance of payments has to be balanced, so that, leaving aside the inevitable human errors in accounting, if there is a surplus in one part of the BOP, then there much be a surplus in the rest. The balance in the balance of payments (made up of (1) current account, (2) capital account and (3) financial account) is not what people are talking about when they speak of balancing trade deficits/surpluses, because, in theory, the BOP is always balanced.

To realise why consider this: in order for country-states to be willing to engage in long-term trade, there needs to be an expectation of some kind of parity in terms of what you are exchanging. If you have a surplus with a country, the total value of what you are giving them through trade, income and transfers is greater than the total value of what they are giving you. There must be a deficit therefore in the financial account, which means that the total value of the flows of financial assets into your economy from theirs is greater than that flow from your economy to their's.

Balancing your trade, meaning your current account, is a different issue. However, it is true that Neoclassical economists and Neoliberal ideologues often imply that, under liberalized free trade, current accounts should automatically balance, for the following reason:

• Suppose country A (who uses currency A), have a deficit with country B (who uses currency B). B thus by definition has a surplus with A.

• As this imbalance emerges, the demand for the currency B rises relative to before and to the demand for currency A, because their demand is derived from that for the goods and services sold nominally in those currencies, and when you buy goods from, say, the US, you pay in their currency, the dollar. Correspondly the demand for currency A would fall relative to B. So we would expect currency B to appreciate against currency A (so A's depreciates). But then B's exports to A would become more expensive and it's imports from A cheaper, and A's exports cheaper and it's imports from B more expensive. So the total exports from B to A would fall, it's imports from A would increase, i.e. A would export more B and import less than before. In quantity terms, this is an 'improvement' which would move the imbalance closer towards balance, so long as their is an imbalance, due to that imbalance's effect on the exchange rates. In brief, current account deficits are supposed to have a self-correcting tendency.

• But this argument assumes a couple things: note that even that while the total value of B's exports fell if we only take into account their fall in quantity/volume, there was a positive effect on this total value due to appreciation of B's currency making exports more expensive; so they're exporting less, but getting more for each export. They are also importing more (negative effect on the CA), but at a lower price (positive effect). They're importing more, but paying less for each import. So the quantity effects on the CA balance is negative (i.e. decreases their surplus) for B, but the currency-monetary effect is positive (increases the surplus). The question is which of these outweights the other.

• This is where neoclassical economics uses the idea of price elasticities, which tells you the proportion between a change in a price and the consequent change in the quantity demanded on the market. They use the Marshall-Lerner condition, which basically says that the trade of exports and imports is elastic overall (meaning that price changes cause proportionally bigger quantity changes). So if this condition applied, then B's surplus causes appreciations in B's currency, and the quantity changesn (which have a negative effect on their surplus)) are proportionally bigger than the price changes (which have a positive effect on their surplus), so it would decrease the surplus, bringing it closer to balance.

• The argument here is symetrical for the deficit side of the equation.

• It also assumes that the currencies can just appreciate/depreciate smoothly, i.e. it ignores exchange rate mechanisms, such as fixed or hybrid-fixed currencies countrols. It also ignores capital controls, e.g. on hot money flows between currencies, and the fact that countries A and B will often trade in currencies other than their own, including for things they produce, most importanly in the U$ dollar.

So there have to be no exchange rate system controls, and the Marshall-Lerner condition would have to always be true. But these two conditions are not, in general, true, so the argument doesn't often hold, and the usefulness is severaly limited, as it evident by simply looking at trade in the real world, even if it can describe a certain market tendency among others.

All this also of course ignores the essential, concrete reality of imperialism and colonialism, the role of the U$ dollar as the world's reserve currency, as well as other real world factors which throw a wrench in this simplified, metaphorically frictionless model of how and why countries engage in trade with each other. But China is no longer a country under the imperial boot, although it does continuously intervene to keep the RMB sufficiently low for trade.

Why not just make all the goods that your country wants (especially if you’re an enormous country that can scale economies and has access to strategic materials like China) and then you’d have more stuff?

Because you need raw materials to continue your current scale of manufacturing. Resource exploitation competes with land and labor needed for manufacturing capacity. What's more, resource exploitation has low marginal yield and high external costs, while manufacturing is comparatively higher yielding and cleaner.

So you source materials abroad and import them for cheap, then transform them into high yield exports which you sell at a profit. This nets you a surplus that can be invested at home in higher quality domestic capital as well as beneficial social services like education and health care.

And how do currency exchange markets fit in?

Generally speaking, you want other people trading in your currency in order to increase its demand abroad. This biases trade in your favor, because you can produce currency very cheaply relative to what its traded at. So you print $100 note and buy a lump of iron. Then you transform the iron into nails that sell for $1000, but you demand payment in Domestic Money. This forces foreigners to sell you more of their iron in order to get Domestic Money to pay for your nails.

Why don't foreigners simply produce their own nails? Because you have highly advanced and efficient forms of capital that produce nails incredibly cheaply. This makes them digging for iron a cheaper way of buying nails - short term - than building their own crude smithies.

Because prices of currencies change the value of export/import and consequently you’d eventually have a country that exports and imports the same value of goods.

Don't think of countries as operating with Exports and Imports. Think of them as producing Raw Materials against Finished Goods. The pricing simply becomes the ratio of raw to finished goods that is being exchanged. So, how many pounds of iron get you how many pounds of nails?

Maybe I fundamentally misunderstand the purpose of trade.

I mean, its complicated. At a superficial level, the purpose of trade is to simply acquire at a lower price abroad what would be a high price locally. So, an iron miner can dig for iron more easily than they can turn iron into nails. And a nail smith can forge nails more easily than they can dig for iron.

But there's also a foreign policy angle to trade, wherein certain jobs are more desirable than others. Iron mining has a host of social costs internalized by the industry that smelting and forging doesn't. So you're better off making nails than digging for iron. Gearing your economy towards exports means establishing competitive capital such that you can employ more of your people in the higher quality jobs. And by having exclusive domain over capital, you can start dictating terms to the folks in the lower-end professions. You set up a virtuous (for you, vicious for your trade partners) cycle in which you keep more and more of the surplus value of trade in each exchange of iron for nails.

This plays into the great geopolitical game of commerce, in which industrial nations have a financial incentive to keep unindustrialized nations in the dark on technology, in order to keep them churning out cheap raw materials.

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