On the one hand commentary argues tariffs on China won’t achieve Trump’s aims of reducing the US/China trade deficit because the US trade deficit is determined by the balance between saving and investment. Not China.
"The US is running a large fiscal stimulus at a time when the US economy is already at full employment. The US trade deficit will almost certainly widen.”
But at the same time, every month China’s export numbers are released analysts express surprise they aren’t weakening.
One of these ideas needs to be sacrificed. I think it’s the idea Chinese exports will weaken.
The latest data has China’s exports growing 20.1 per cent year-on-year. The common response is exports are holding up because of front-loading ahead of the increase in US tariffs from 10 per cent to 25 per cent on 1 January. But the US tariffs are only on $USD250 billion of (annual) Chinese exports. When put in context against China’s total exports of $USD2.5 trillion, all of a sudden the tariffs just don’t seem that substantial.
Consider also the broader landscape: the US is running a large fiscal stimulus at a time when the US economy is already at full employment. The US trade deficit will almost certainly widen. Some modest tariffs on only $USD300 billion, or around one month’s worth, of US imports is unlikely to materially affect that. Given that, it will be hard for China, as the world’s largest exporter, to suffer a sharp deterioration in its trading position.
What the tariffs definitely do, however, is to reorganise trade. Let’s take steel. The US Department of Commerce estimates the welfare loss from the imposition of steel tariffs is 0.5 per cent of market revenue. This is obviously not very large. (Us economists talk about a ‘welfare loss’ because tariffs artificially drive the domestic price of a product above the global market-clearing price, forcing consumers to pay more for that product.)
Foreign producers, however, are estimated to lose one third of their sales, as well as suffering lower margins on the sales that remain. As a consequence, supply chains need to adjust as US steel producers direct their exports to the domestic market and foreign producers who no longer export to the US, potentially target the markets the US has vacated.
I think the Chinese export data post January 1 is going to remain solid. Export growth could well weaken from the latest print of 20 per cent year-on-year; which does look strong relative to a global economy growing at below 4 per cent in real terms. But a sharp and sustained fall is unlikely.
Also, let’s not forget this is the first full export cycle for which China has been running a genuinely flexible exchange rate regime. The CNY has depreciated 12 per cent this year against the $US, which is a powerful tonic for weaker exports.
While there are plenty of things in the global economy to worry about, let’s not just assume the worst. Global growth is still around 3.75 per cent, unemployment is low and falling and wages are rising in virtually every advanced economy, which suggests consumers will show some resilience to the financial market volatility which we have seen of late.
Certainly even if Trump and Xi can reach some sort of interim agreement around trade in the near future, there is a broader deterioration in the relationship between the countries which is likely to be long-lasting. But its effects are only likely to emerge over time.
Globalisation paid dividends over decades; de-integration is likely to have a similar impact schedule. What’s not going to happen is for the tariff war, as it’s currently applied, to directly kneecap China’s exports.
But as Fitzgerald may well have written of Trump: “Let me tell you about the very rich. They are different from you and me.”
Richard Yetsenga is Chief Economist at ANZ