Tag Archives: China

November – Trade Outlook

A Pivotal Meeting – A Closer look at US – China Trade

On the verge of their summit, Presidents Xi and Trump could not be in more different places. President Xi has become the champion of globalisation and a world order at which China is centre-stage. The National Congress of the Communist Party of China confirmed his leadership of the country for at least the next five years with no clear successor. By incorporating Xi’s philosophy to make China great into its constitution, the Party elevated Xi to the same status as Mao Tse-tung and Deng Xiaoping. China’s One Belt One Road policy, alongside its promotion of trade at the WTO means it is has become the focus, not just for trade between emerging economies in the Southern hemisphere, but also a pivot around which trade power is shifting from West to East.

In contrast, Donald Trump travels to Asia on the tide of economic nationalism and isolationism. His anti-trade rhetoric is, at best, damaging many of the multi-lateral structures that have been central to the way in which globalisation, such as the North America Free Trade Area, the EU, and, most recently, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Trump’s discussion with Xi will focus on reducing, even eliminating, China’s trade surplus with the US (Figure 1). This trade surplus is nothing new, but has been widening since the mid 1990’s when China’s market first started to open up; Microsoft, for example, moved into the market around 1996. In 1996 China’s imports from the US were 27% of their exports to the US. This peaked at 35% in 2013, but the gap has been narrowing since and now stands at 31%.

Figure 1:          Value of Chinese Trade with the US ($US bn), 1996-2018 (2017-18 forecast)

Source:            Equant Analytics, 2017

Indeed, it is possible to argue that Chinese exports to the US are a function of the globalisation of US electronics companies. Figure 2 shows the top five Chinese export sectors to the US in 2016 and projected for 2017. The first two, electrical machinery and equipment and components and machinery include mobile phones, washing machines, semiconductors and computers. Clearly, they inherently contain intellectual property which is a key focus for the discussions between the two leaders. These sectors also dwarf trade between the two countries in other sectors which actually might reflect more closely a pattern of trade between an emerging economy and a developed one: furniture, toys and clothing. Top US exports to China include the catch-all “Commodities Not Elsewhere Specified” which proxies well for oil and arms trade, and aerospace. Most of the top export sectors from the US to China show slight declines between 2016 and 2017 except aerospace.

Figure 2:          Value of China’s top five export and import sectors with the US (US$ bn), 2016 & 2017

Source:            Equant Analytics 2017

President Trump’s mantra since his election has been “America first” and most recently his actions in relation to Canada’s Bombardier were directly to support Boeing. In his discussions with President Xi, therefore, it is likely that aerospace could also be a key part of the trade negotiations (Figure 3). For example, exports of large aircraft were worth US$ 124 billion in 2016 and exports of large and smaller helicopters are projected to grow at 24.6% and 11.1% between 2017 and 2018.

Figure 3:          Chinese imports of aircraft from the US, 2016-17 and 2017-18 compared (year on year change, %)

Source:            Equant Analytics, 2017

In spite of all this, between China and the US it is clear who is in the weaker position. Perhaps because the US is realising that the period of globalisation up to around 2014 tilted trade, indeed economic power, towards emerging economies like South Korea and China, President Trump is now fighting a rear-guard action to maintain the central role in global trade that US companies have historically played. Using China’s trade in arms and ammunition as an example; China’s exports have grown at an annualised rate of 6% since 2009 while its imports have shrunk by 20% annually. Its imports are now just 2.5% of its exports in this sector. This tells its own story: while the US assumed it had global trade power leadership, it can no longer take this for granted. Globalisation and trade power is pivoting towards China. Trump’s meeting with Xi may merely confirm this as inevitable.

July – Trade Outlook

Three charts to show why the South and East China Seas matter

Japan does not officially have an army, it has a Self Defence Force. So, when it starts sending warships into the South China Seas in an attempt to keep China’s territorial claims in check, it is clear there is a problem. Its Izumo helicopter carrier’s presence is to provide the assurance to the region that it is willing to move into a more proactive military role in the interests of regional security at a time when US interest is at best only focused on North Korea, and at worst, waning. While the US nominally retains its commitment to the “Freedom of Navigation Operations” (Fonops) to provide a base for regional security, its military operations are taking a lower key and not being publicised as they were under the Obama regime. As the US appears to look away, China continues to build and protect what it deems its sovereign and economic rights. China can play a long game without using its military muscle, but the very fact that it is demonstrating its regional influence reinforces the perception that tensions in the region are dangerous.

The region matters to world trade flows and to its energy security. The importance of the South and East China Seas cannot be understated. It is not just a source of geopolitical tension, it is also a major trading route. The countries in the region’s US$ 10.7tn trade accounted for just over 54% of world trade in 2016. More than this, the countries in the South and East China seas account for just over 40% of world oil trade (Figure 1). Any risk of disruption or threat of instability should make markets and commentators alike feel nervous as a result, not just because of the spill-over effects into the global trade system but also because of the region’s strategic importance.

 

Figure 1:  Share of world oil trade for countries in the South and East China Seas area 2016
Source:  Equant Analytics 2017

The region matters to China as well. Trade with the other countries in the South China Seas account for some 51% of China’s trade (Figure 2)

Figure 2:   China’s trade with nations and Hong Kong in the South and East China Seas
Source:  Equant Analytics, 2017

Hong Kong is China’s biggest trading partner in the region at more than twice the value of trade compared with Japan, its second largest trading partner. The regional partners, Indonesia, the Philippines, Malaysia and Vietnam in particular, are important contributors to regional supply chains in electronics and machinery & components meaning that their regional fortunes are intertwined. As China has gone through its economic reform programme of the past few years, it is these regional partners who have had to adjust. But any political instability in the region threatens trade flows within the region as well as between the region and the rest of the world. This impacts China just as much as it does other countries and as a result, China will be keen to ensure that there is no escalation of tensions beyond rhetorical ones simply because it is in its own strategic interest.

China’s strategic interest is evident in the East China Seas through its relationship with North Korea. As sanctions have become more stringent, China’s share of North Korean trade has increased (Figure 3). The momentum projections suggest that this may well stabilise over the next few years but at over 85% of North Korea’s trade, China has a strong strategic leverage over Pyongyang.

Figure 3:   Percentage share of North Korea’s trade accounted for by China (1996 – 2021)
Source:  Equant Analytics, 2017

The US and China have engaged in talks since their Summit in April, not overtly about North Korea – but about trade. Why? President Trump explained this in a tweet on the 11th April: “I explained to the President of China that a trade deal with the US will be far better for them if they solve the North Korean problem!” In other words, trade is a strategic tool to gain influence over North Korea. An explicit “trade war” between the two countries was avoided because of the post Summit “100 day plan” and although the deals struck since then have been modest, they have the effect of diverting global attention away from the region.

The perception of geopolitical risk in the South and East China Seas is not new. In the South China Seas the disputes are territorial and between countries; the role of the US has been to keep the trade route that it represents open in the economic strategic interests of the world. The risks in the East China Seas and Korean Peninsular are as much about strategic influence as they are about trade.

However, a deliberate armed conflict is unlikely as the example of North Korea and the “trade deals” with China show. It is simply too important to the US and the world, in terms of energy security, in terms of trade flows, in terms of economic interests and more generally in terms of national interest and power. Increasingly, the disputes in the region are centred around strategic influence. Trade, or the threat of disruption to trade is the means by which any conflict will be fought: it is a bargaining chip. China knows this and holds increasingly more of the cards as the US looks away.