China-U.S. trade war worsens, the trade deficit increases

(THIS ARTICLE IS COURTESY OF THE BROOKINGS INSTITUTE)

 

As the trade war worsens, the trade deficit increases

David Dollar

Editor’s Note:David Dollar unpacks the effects of a continued trade war on the economies of China and the United States. If such protectionist measures stay in place long enough, he notes, global value chains will adjust. In that case, U.S. trade deficit will shift away from China and toward the rest of Asia and Europe, but the overall U.S. trade deficit will not change in any significant way. This piece originally appeared on The Hill.

The trade war that the U.S. has unleashed on China continues to ratchet up. The next round of 25-percent tariffs on $16 billion of imports from China will go into effect Aug. 23.

China is committed to retaliate and will implement its own 25-percent tax on $16 billion of imports from the U.S. As the tit-for-tat escalation continues, it is impossible for China to match the U.S. dollar-for-dollar because it imports so much less from the U.S. than it exports.

The next round threatened by the U.S. will cover $200 billion in additional imports. The Chinese announced retaliation will hit a much smaller volume, $60 billion of imports. Still, we are moving toward complete taxation of trade in both directions.

The direct effect of these measures on the Chinese economy is small so far. China’s exports in July were up 12.2 percent over the prior year, ahead of market expectations. The International Monetary Fund’s (IMF’s) updated forecast for China’s GDP growth this year is 6.6 percent, above the target for the year.

Indirect effects are harder to measure but are arguably larger. China began the year in a tightening cycle, trying to rein in the excessive credit growth of the recent past. The regulators were determined in particular to reduce the shadow banking sector and to bring more financial activity back into the formal banking system.

Investment growth has been slowing all year, and the stock market peaked and started falling in January, well before the trade war got serious. The protectionism from the U.S. has contributed to the pessimistic mood in China. Investment growth was practically nil in July, and the Shanghai market is now down 24 percent since the January high.

The July data also show some easing of the tight money policy, though no let-up in the campaign against shadow banking. This suggests that the authorities are worried about the impact of the trade war on growth, but it is also a reminder that China has tools at its disposal.

Aside from monetary easing, the government is also pursuing some modest additional fiscal stimulus. China can afford to spend more public money on education, health and environmental clean-up and can use the fiscal adjustment to its advantage.

Another obvious tool is the exchange rate. Since April, the U.S. dollar is up 8 percent against a basket of major currencies. The Chinese yuan has more or less followed the same trend: It is down 9 percent against the dollar over this period.

This is one reason that China’s exports were buoyant in July. Too much depreciation could set off financial panic, but depreciating against the dollar in line with the other major currencies in the world makes sense in the current environment.

China’s Ministry of Commerce announced this week that Vice Minister Wang Shouwen will visit Washington, D.C. in late August for talks with Treasury Under Secretary David Malpass. It is good that the two sides are talking, but there is not likely to be a negotiated settlement anytime soon.

The Chinese side is confused about what the U.S. wants. It feels that near-agreements were reached twice before only to have the U.S. pull back. What China is ready to offer is clear:

  • It will agree to some big headline numbers for purchases of agricultural products and energy, which is more of a publicity stunt than a policy change;
  • it is already committed to opening some important markets in China, such as automobiles and financial services; and
  • it would agree to some general language about improving intellectual property rights protection and avoiding forced technology transfer.

These talks at the vice minister level should clarify positions, but an end to the trade war will likely require higher-level talks and ultimately a meeting between Presidents Trump and Xi. The next time that the two will meet, barring an exceptional summit, would be at the Group of 20 summit at the end of November in Buenos Aries.

An important obstacle to reaching a settlement is that the U.S. administration has put a big focus on trade balances, and those are very hard to change.

Because of the large fiscal stimulus, the U.S. economy is growing rapidly. Interest rates are rising, as is the value of the dollar. It is natural in this situation for the U.S. trade deficit to widen.

In the first half of the year, the overall U.S. deficit in goods was up 7 percent. The deficit with China was up 9 percent and 16 percent with Europe. Those trends will almost certainly continue in the second half of the year. Protectionism aimed at China will not have any big effect on the overall U.S. deficit.

The protectionism should eventually reduce imports from China, but it will also reduce U.S. exports and increase U.S. imports from other locations. Much of what the U.S. imports from China are intermediate products used by U.S. firms to be more competitive.

Taxing these will naturally result in some lost business for U.S. firms, both in the domestic market and in export markets. If the protection stays in place long enough, global value chains will adjust. Some labor-intensive final assembly will shift to countries like Vietnam in order to avoid the 25-percent tax.

Suppliers such as Japan, South Korea and Taiwan will retain more production at home rather than off-shoring to China. China is likely to remain the center of the Asian production hub, but will concentrate even more than it does now on intermediates and less on final goods for the U.S. markets.

All of this will shift some of the trade deficit away from U.S.-China toward larger trade deficits with the rest of Asia and Europe. But the overall U.S. trade deficit will not change in any significant way.

China Robust July foreign trade shows little impact from row with US

(THIS ARTICLE IS COURTESY OF THE SHANGHAI NEWS AGENCY ‘SHINE’)

 

Robust July foreign trade shows little impact from row with US

China’s foreign trade accelerated in July despite escalating trade tensions with the United States, with data pointing to a more balanced trade picture.

Growth in imports and exports, denominated in US dollars, rebounded in July, with imports rocketing by 27.3 percent — nearly double the growth pace in June — and exports rising 12.2 percent from a year earlier, data released yesterday by the General Administration of Customs showed.

July’s trade data was under the spotlight as it was the first reading since fresh US tariffs on a wide range of Chinese goods went into effect. The US slapped an extra 25 percent tariff on US$34 billion worth of Chinese imports beginning July 6, to which China responded with an equivalent retaliatory measure.

China’s surplus with the US shrank slightly to US$28.09 billion in July from a record high of US$28.97 billion in June.

“China-US trade tariffs seem to have had more impact on China’s exports than its imports from the US,” said Betty Wang, senior China economist at the Australia and New Zealand Banking Group.

China’s exports to the US rose 11.2 percent year on year in July, compared with an increase of 12.5 percent in June, while China’s imports from the US grew by a faster 11.1 percent in July, up from June’s 9.6 percent.

At the same time, China’s imports from the Association of Southeast Asian Nations, the European Union and Australia jumped 30.2 percent, 20 percent and 33.7 percent, respectively, “which may suggest that China is trying to seek other import sources in the midst of the trade war,” according to the ANZ Group.

“Currency devaluation, which may have helped exports to some extent, has been largely market-driven in our view and is not a preferred policy tool by Chinese policy-makers as part of retaliatory measures,” Wang said.

Wang added that the much higher-than-expected import growth was mainly driven by surging commodity, mechanical and electrical products.

The better-than-expected growth might be partly because China tends to strengthen economic and trade ties with other major economies amid trade tensions with the US, Huatai Securities said in a research note.

Yesterday’s data also revealed a more balanced trade picture, thanks to the surge in imports.

China’s global trade surplus narrowed by 40 percent from a year earlier to US$28 billion last month. The trade gap with the 28-nation EU contracted by 8 percent to US$11.2 billion.

China has been seeking a more balanced trade pattern, with a series of pro-import policies introduced.

Last month, the State Council released guidelines on expanding imports, promising tariff cuts, clean-ups of unreasonable price markups, and better intellectual property rights protection.

The policy incentives have had positive impacts on imports, Huatai Securities noted. It added that a decision of intensifying efforts to improve infrastructure, made at a meeting of the Political Bureau of the Communist Party of China Central Committee in late July, will further drive imports of industrial raw materials such as iron ore.

Looking forward, China tends to maintain strong imports, while exports are also likely to hold steady despite uncertainties rising from trade tensions with the US, said Bai Ming with the Ministry of Commerce research department.

“The tariffs have so far had a limited impact on overall trade,” China Merchants Securities said. While short-term effects might be mild, the impact of US tariffs on China’s trade may be gradually revealed as time passes and more tariffs on Chinese goods threatened by the US take effect, it noted.

CHINA ACCUSES US OF TRIGGERING MAJOR TRADE WAR IN HISTORY

(THIS ARTICLE IS COURTESY OF 247 NEWS)

 

China Says Trade War With The U.S. Is Not An Option

(THIS ARTICLE IS COURTESY OF THE SHANGHAI DAILY NEWS)

A potential trade war should not be used as an “option” to spoil Chinese-American relations as the two countries are able to resolve bilateral trade disputes through dialogue, Commerce Minister Gao Hucheng said yesterday.

China and the United States, the world’s largest traders, should work together to promote trade and investment, said Gao, speaking at a briefing in Beijing.

A good relationship between the two countries not only benefits both sides but helps global economic growth and recovery amid a still weak momentum, Gao said.

US President Donald Trump pledged during his election campaign to raise import duties on Chinese goods to 40 percent but he has yet to take formal action. He also said he would declare China an “exchange rate manipulator.”

However, in a phone conversation earlier this month to Chinese President Xi Jinping, Trump said that the United States was ready to work with China to take bilateral ties to new historic heights.

Gao said yesterday China would not comment too much on what the US president said during his election campaign, but would focus on the new American government’s attitude toward trade with China.

“As a consensus reached between leaders of the two countries, cooperation was the only right choice for China and the US,” Gao said.

Whatever changes in the US policy toward China, the trade relations between the two nations will eventually return to “the track of mutual benefits and win-win,” he said.

China is now America’s largest trading partner and its third largest export destination after Canada and Mexico, according to a report from the US-China Business Council.

China’s direct investment in America hit a record high of US$45 billion in 2016, a threefold increase on 2015.

Robust bilateral trade and investment have supported some 2.6 million jobs in the US, according to the report.

“A trade war should not become an option,” Gao said. “If the two sides fight, both will be hurt.”

The US last year replaced China as the world’s largest trader as China’s foreign trade declined.

Gao yesterday said China would not seek a “blind expansion in exports‚“ as it could undermine the country’s resources and environment.

China would instead gain new grounds through improved standards, techniques, brands and services.

Addressing China’s tightening inspection on outbound investment since late last year, Gao said measures were being taken to control irrational and blind outbound investment, where companies made huge investment into high risk areas and fields unrelated to their core businesses.

The commerce minister said the government would guide companies to make more prudent and rational outbound investment while improving rules to facilitate outbound investment and protect the rights of investors.