The Trade Numerologist: Early Impacts of US-China Trade War

On Friday, US customs kicked off Washington's latest line of trade defense against China, putting tariffs on $34 billion worth of products, including automotive and aviation parts, electronics, and other industrial components. Beijing has promised to respond with duties on pork, poultry, soybeans and corn. The US says it could tax an additional $200 billion worth of Chinese goods.

These headline volleys suggesting a spiralling trade war has grabbed the most attention, but the governments have traded protectionist moves since last year. And while there hasn't yet been a dramatic slowdown in trade between the world's top two economies -- the richest trading relationship in dollar terms in global history -- there's enough customs data now available to assess some early impacts of the US-China trade war.

The evidence suggests that tariffs, other trade restrictions and protectionist rhetoric are dampening trade flows in only a few categories of goods, while in others shipments are actually increasing, as some importers rush in shipments before tariffs hit. The US trade deficit with China actually increased during the first five months of 2018.

US-China trade deficit, first five months

• 2014: $125.9 billion
• 2015: $140.4 billion
• 2016: $131.1 billion
• 2017: $138.5 billion
• 2018: $152.2 billion

The most basic way that tariffs impact trade is by making imports more expensive, and less appealing, to buyers. For example, The US last year imposed tariffs on imports of aluminum foil in the US, a multi-billion dollar market commodity market for the stuff used to package food, drinks and pharmaceuticals. Already, imports of aluminum foil from China, which amounted to almost half a billion dollars in 2017, have fallen off a cliff.

US imports of Chinese aluminum foil, first five months

• 2013: 36.6 million kg
• 2014: 47.2 million kg
• 2015: 59.1 million kg
• 2016: 68.7 million kg
• 2017: 80 million kg
• 2018: 27.6 million kg

There's also a psychological impact - and that can cut both ways. Imports can fall because buyers are worried about the possibility of governments raising import tariffs. Companies don't like to lock in orders of goods from a country if they have to worry about the price suddenly going up because of a new tariff. Manufacturers want to lock in long-term supply contracts they know they can count on. An automaker isn't going to sign a three-year deal to supply steel if they know that the price is going to increase 25% because of a tariff in the second year.

In the first four months of 2018, the US has stopped importing seven categories of goods from China including weapons, antiques, sugars, rare-earth metals and some chemical products. Imports of fertilizer have dropped precipitously.

US imports of fertilizer from China

• 2014: 235,264 kg
• 2015: 1.026 million kg
• 2016: 589,990 kg
• 2017: 468,262 kg
• 2018: 49,217 kg

But sometimes, buyers accelerate their pace of imports ahead of a possible imposition of tariffs or other trade-restricting measures. For, example, China has ramped up imports of aircraft parts, fuel and medical equipment from the US.

Chinese imports of aircraft parts from US, first three months

• 2014: $3.6 billion
• 2015: $3.5 billion
• 2016: $1.2 billion
• 2017: $1.6 billion
• 2018: $2.9 billion

However, in some categories, they fell by a lot. Significantly, China has demonstrated its ability to reduce imports strategically, for example cutting imports of US soybeans, causing prices to plummet and undermining some of Trump's support among his Midwestern agricultural base.

Chinese soybean imports from US, first three months:

• 2014: 13.7 billion kg
• 2015: 14.5 billion kg
• 2016: 13.1 billion kg
• 2017: 15.4 billion kg
• 2018: 12.3 billion kg

Governments can also make life difficult for importers in ways that don't involve duties. For example, they can add more inspections of cargo in port, or toughen requirements for obtaining health and safety licenses. Already, US companies say that Chinese customs officials have increased their frequency of inspections.

The question for the rest of 2018, and beyond, is whether the Trump protectionist move is a blip, or part of a trend of disengagement with Chinese suppliers. If it's the latter, it could have dramatic repercussions on the global economy.

The worst-case scenario is a cyclical shrinking of global trade flows. Trade theory, and history, suggests that trade goes up and down exponentially. As the US imports less, partner countries will lose revenue and currency value, and buy less from US exporters. Protected economic sectors, such as India's industries, generate high prices and inflation, making their exports less competitive.

The hope in the business community is that corporate leaders can lobby the Trump administration to retreat, make peace with Beijing, and stem the protectionist cycle.

Both sides have multinational companies, including Apple, Lenovo and ZTE, which use integrated supply chains that include parts made in China and the US. Investors in both countries have hundreds of billions of dollars invested in the other's economy.

The Trade Numerologist is IHS Markit's unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from IHS Markit's Global Trade Atlas database, the world's most complete and accurate set of trade numbers.

Posted 09 July 2018 by John Miller, Guest Blogger