By He Weiwen Source: China-US Focus Published: 2019-9-18
A couple of good gestures from both China and the United States over the past week, along with the imminent resumption talks, have given the world stock markets a strong boost. The market regards the moves as a silver lining in the protracted trade war between the world’s two largest economies.
The U.S. tariffs on Chinese goods and China’s counter-tariffs on U.S. goods have covered virtually all goods in the countries’ bilateral trade regime. Direct harm and indirect uncertainties for both economies, and even the global economy, have been developing.
Setback in U.S. market, gains elsewhere
According to Chinese customs data, two-way trade between China and the U.S. fell by 9 percent year-on-year to 2.4 trillion yuan ($339 billion) during the first eight months of this year. Chinese exports to the U.S. fell by 3.7 percent while imports from the U.S. fell by 23.5 percent. The Chinese export performance, although considerably better than its imports, still suffered a phenomenal setback compared with the 6.5 percent growth recorded from January to August 2018 — meaning a 10 percent loss in U.S. market potential.
The fall in the U.S. market from January to August this year has been more than covered by the export increase to the European Union, ASEAN and other countries along the Belt and Road. In dollar terms, the net increase of Chinese exports to the EU was $14.67 billion, and to ASEAN $18.99 billion. Combined, the two had a net increase of $33.66 billion, more than offsetting the net fall in the exports to the U.S. ($27.91 billion). As a result, Chinese exports to the world still managed a 0.2 percent increase in dollar terms, or a 6.1 percent increase in RMB, even better than the 5.4 percent growth recorded from January to August last year. It shows that the loss in the U.S. market has not changed the overall picture of Chinese global trade.
Negative effects vary across different industry sectors
Computer and electronic products: According to the Bureau of Economic Analysis of the U.S. Commerce Department, the first half of 2019 saw a considerable fall in U.S. imports of computer and electronic products from China, off 20.1 percent year-on-year, or a net decrease of $17.33 billion, accounting for 56.0 percent of the total U.S. import decrease from China ($30.95 billion). The most dramatic drop happened in semi-conductors and apparatus — 58.7 percent — a net loss of $7.9 billion, followed by mobile telecom equipment, which fell by 13.4 percent, or $6.67 billion. Automatic data processing equipment, or computers, fell by a marginal 5.4 percent.
The sharp fall in the U.S. market has passed to the Chinese global export performance in the electronic IT sector, with total global export delivery growth over the first seven months of 2019 slowed to 4.2 percent year-on-year, compared with 6.5 percent growth from January to July 2018. Total industrial output added value in this sector still grew by a hefty 9.1 percent year-on-year but was 3.5 percentage points slower than the same period of 2018.
Exports of Chinese mobile phones fell globally by 10.4 percent during the first eight months of this year, with home production down 4.5 percent.
Global exports of Chinese automatic data processing equipment and parts grew by 3 percent over a year ago, while that of integrated circuits saw considerable growth of 27.6 percent. Both seemed unaffected by the trade war.
Automotive and parts: According to the Bureau of Economic Analysis, Chinese automotive exports to the U.S. fell by 7.6 percent, or $71 million, and auto parts fell by 10.3 percent, or $770 million during the first half of this year. Chinese global automotive exports from January to August still grew by 4.1 percent to 794,000 units, with a value of 67.09 billion yuan ($9.5 million), up 2 percent. Chinese global auto parts exports during the same period also grew by 3.1 percent in value. However, because of exchange rate changes, both fell in dollar terms (off 3.5 percent and 2.5 percent, respectively). As the U.S. market accounts for roughly 24 percent of Chinese global exports in this sector, the drop for the U.S. market has factored into the flat performance of the latter. Total automotive production in China was down by 13.3 percent to 13.93 million units over the first seven months of 2019, according China’s Ministry of Industry and Information Technology. However, the main reason is not the China-US trade tensions (as the export accounts only for 5.0 percent of China’s total output) but rather a drop in domestic sales.
Apparel: Exports of apparel from China to the U.S. were virtually unchanged in the first half of this year, at $12.29 billion, compared with $12.34 billion a year ago. It has little effect on Chinese global exports which were up 1.2 percent in RMB terms, with domestic sales up 2.1 percent from January to July.
The sharp fall in imports from the U.S. (23.5 percent off in RMB) dragged down Chinese global import growth by 1.9 percentage points from January to August, leading to a meager 0.8 percent growth in the latter. It also contributed to a fall of China’s total soybeans imports by 5.68 million metric tons (9.2 percent), a 25.5 percent fall in the value of machine tool imports and a 6.2 percent fall in the import value of integrated circuits.
Chinese economy slows but remains stable
The trade war with the U.S. has had negative but limited effects so far on the Chinese economy. The manufacturing PMI has stayed below 50 for two months, with 49.7 for July and 49.5 for August. The August production index remained above 50, at 51.9, showing continuing expansion. The index for new orders was slightly under 50, at 49.7, indicating a possible slowdown in three to six months. The export order index for August was 47.2, slightly higher than the July index of 46.9, indicating an uncertain future as a result of the trade war.
There has been no meaningful shift of production out of China, although scattered shifts started well before the trade tensions began — the result of cost-benefit considerations. A recent US-China Business Council survey showed that 97 percent of its members made money in China in 2018, with 78 percent of them having higher or equal profitability compared with their global average. However, with uncertainties mounting, a shift of production base is a real choice for some members in mapping their future plans.
The general situation in China’s FDI inflows remains sound, with $89.26 billion during the January-August period, 3.2 percent up from a year ago. High-tech foreign investment increased by a staggering 39.3 percent year-on-year, accounting for 28.9 percent of the total. The Trump administration’s increasing technology restrictions seem to have had little effect, as U.S. and Chinese businesses are inextricably intertwined in the global supply chain. With a series of new Chinese policies and measures encouraging foreign investment in the pipeline, any production shift will not likely be a major issue in the foreseeable future.
China’s retail sales rose by 8.3 percent during the first eight months of 2019, with the whole year growth rate likely to be around 8 percent, thus providing a firm base for the stable growth of the overall economy. During the same period, capital investment accelerated slightly to 5.7 percent year-on-year, compared with the 5.5 percent recorded from January to August last year.
China’s GDP grew by 6.3 percent during the first half of 2019, with consumption contributing 3.8 percentage points, capital formation 1.2 percentage points and net exports 1.3 points. It is worth noting that as a result of the trade war with the U.S., the sharp import decline helped the net export contribution to GDP growth reach its highest level since the “new normal” was identified in 2012. If the trade war continues, net exports will continue to contribute positively to GDP growth for the remainder of this year, although probably smaller than during the first half. The consumption contribution will remain roughly the same, while that of investment is likely to increase slightly. GDP growth for the whole year of 2019 is likely to end up in a comfortable range between 6.1 percent and 6.2 percent, though slower than the 6.3 percent for the first half and the 6.6 percent of 2018.
The IMF estimated in a report in April that a full-fledged China-U.S. trade war could reduce China’s 2019 GDP by 1.5 percent and U.S. GDP by 0.6 percent. Based on the above elaborations, China’s GDP growth rate for 2019 will likely to be only 0.3 to 0.4 percentage points lower than 2018. The trade war with the U.S. is certainly eroding Chinese growth momentum, but it is not the main factor. As shown before the trade war, China’s growth had been slowing since 2012, as a result of structural changes and supply-side reforms. If the trade war continues into 2020, the Chinese economy will likely to slow further, with GDP growth at around 6 percent, still one of the highest in the world. It will be supported by the domestic consumption and investment.
China is sure to weather a long trade war. The cognition that the extreme pressure of high tariffs and stringent restrictions will severely damage the Chinese economy is apparently unfounded.
Talk and agreement the only right solution
China clearly does have the capability to weather a long trade war, which means that the extreme pressure from the U.S. will be futile. However, China does not want the dispute to continue because it does hurt China, the U.S. and the world economy to little purpose. It is anticipated that positive gestures from both sides mentioned at the start of this article will not be mere symbolic tactics but solid steps toward serious troubleshooting. Again, constructive, rule-based consultation and negotiation for a win-win solution is the only way to address not only the current China-U.S. trade tensions but also to achieve long-term benefits of our two peoples.
The author is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.