What would a US-China trade war mean for commodity exporters?

During the election the now President-elect Donald Trump made much of “making America great again” and bringing manufacturing back to America. He singled out steel in particular as a sector that had been destroyed by imports, especially from China, saying during the televised presidential debates that China was dumping steel and “killing our workers.” In January this year Trump even suggested that he would put a 45% tariff on Chinese imports in part to rescue US manufacturing.

In reality Chinese exports of steel to the US have long been in decline – mainly due to the numerous countervailing duties and  anti-dumping tariffs which the US applies to Chinese finished steel products. This can be seen in the chart below which shows Chinese exports of finished steel products to the US and the rest of the world. In 2015 Chinese exports to the US were only 2.4 million mt, down 29% on the previous year, accounting for just 2% of China’s total exports of 112 million mt.

However, when we look at Chinese exports of not only finished steel but also items manufactured from steel and aluminum like pipes, tubes, sheet piling, tanks, drums, fabricated sections, nails, cables and even barbed wire, the picture is somewhat different.

We have used Harmonized System (HS) trade data that classifies traded products into internationally standardized groups to analyze China’s trade with the US. The chart below shows China’s exports of three groups of metal products to the US; iron and steel (HS code 72) – primarily finished steel like HRC and bar; products manufactured from iron and steel like drums, nails and wire (HS code 73); and also aluminum and products manufactured from aluminums (HS code 76).

As can be seen trade in steel and aluminum metals and products has risen over the last couple of years to reach $15 billion last year with articles manufactured from steel items accounting for 70% of this trade.

This makes China the second-largest source of imports of steel and aluminum products into the US after Canada but above Mexico, which sounds significant. But to put these exports in context, steel and aluminum account for just 4% of China’s $410 billion of total exports to the US in 2015. China also imports steel and aluminum from the US, although the trade flow is much smaller at around $1.3 billion in 2015.

Should a Trump presidency put a 45% tariff on Chinese imports then we could expect to see a dramatic fall in these Chinese steel and aluminum exports. But when it comes to trade policy, as in physics, for every action there is an equal and opposite reaction. And the US could expect to see China retaliate, slapping tariffs on US goods exported to China.

Interestingly, although the industries mostly likely to suffer from such an action are high end manufactured goods like commercial aircraft, processors and integrated circuits and automobiles, US commodities could also suffer as China is a major importer of US soya beans which are used primarily as animal feed. Indeed, as can be seen in the chart below when we analyze the 6 digit HS code data for 2015, Chinese imports of US Soya beans were $12.5 billion second only to imports of commercial aircraft which totaled $16.4 billion.

What is interesting about China-US commodities trade is that across most categories of commodities (and here we include steel and aluminum articles in our definition of commodities), China runs a trade deficit. This can be seen in the chart below.

Prior to 2008, China was a net exporter of commodities as exports of iron and steel exceeded imports of agricultural products. Since 2008 Chinese exports of iron and steel to the US have not recovered to the levels we saw before the financial crisis, while Chinese appetite for imported agricultural products – primarily soya beans – as well as metals ores and fossil fuels from the US have all contributed to China’s commodity trade deficit with America.

Whether a Trump presidency will really raise tariffs on Chinese imports remains to be seen. If it does, any attempt to block Chinese steel imports may well have a fairly minor impact on US exporters of coal, oil and metals. But, given that the US exports around 50% of its total soya bean production, any attempt to save US manufacturing may well have unintended consequences for its agricultural sector.

Listen to the related podcast: What will Trump's presidency mean for Asia?