In the eight months to the end of August, China recorded surpluses totalling about $US785 billion, more than 30 per cent higher than for the same period last year. It appears likely to end the year with a record surplus of more than $US1 trillion.
That’s because, as its exports to the US have begun crashing, it has diverted its trade flows elsewhere.
Trump has partially closed the safety valve that China’s net exports provided for its economy.Credit: Bloomberg
In August, exports to Africa were up 26 per cent, those to South-East Asia were 23 per cent higher, and those to the European Union were more than 10 per cent higher. Trade with Latin American economies is also booming.
What isn’t clear yet is whether those increased exports represent real demand from those economies.
During Trump’s first trade war with China, in 2018 and 2019, Chinese companies diverted US-bound exports through third countries like Vietnam, and it is conceivable that they are using a similar strategy today, even though Trump has threatened a 40 per cent tariff on transshipped goods to try to close America’s backdoor to Chinese imports.
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The changing pattern of China’s trade is aligned with its geopolitics, under which it is seeking to build closer relationships with countries within its own direct sphere of influence and with Russia, India and Latin America to counter-balance the dominance of the US and its traditional allies within global institutions, the global economy and the global financial system.
Whether the growth in trade within its newer, less developed markets is sufficient to offset the decline in trade with the US and to maintain China’s exports-driven economic strategy is doubtful.
China’s economy is riddled with over-capacity and is still suffering from a hangover from its now almost four-year-old property market crisis, which has depressed consumption.
President Xi Jinping, who has railed against “involution” – which in the Chinese context relates to excessive capacity, excessive competition, and endless cycles of price-cutting – has prioritised reducing “disorderly” competition and deflationary pressures over the major stimulus package that most Western economists believe China needs.
Xi’s growth strategy has been successful in giving China the dominant position in solar panels, batteries, electric vehicles, ships and commodity semiconductors, but the centrally planned and subsidised targeting of those sectors has led to wasteful and unproductive capacity.
China’s automotive industry, for instance, sold about 30 million vehicles last year, about half of them EVs or hybrids. The industry has the capacity to produce more than twice that volume of vehicles, which explains why it has been engaged in seemingly endless rounds of price reductions and why few, if any, of the auto companies are profitable.
Many of the other sectors targeted by Xi’s “Made in China 2025” strategy a decade ago share similar structural imbalances, competitive intensity, and unproductive use of capital and other resources.
Those imbalances within its domestic economy explain why, having over-stimulated investment in a range of industries, China has become reliant on its exports for growth. Trump’s tariffs threaten that growth.
With the capacity to “front load” exports to the US before the tariffs were in place having waned, and most of Trump’s tariffs now active, their impact on China’s exports can be expected to grow.
Xi has had some limited success with his half-hearted attempts at stimulating domestic consumption via lower interest rates and cash incentives to trade in old appliances, vehicles and electronics for new, more efficient products, but, without a more substantial stimulus program, China’s growth rate will almost inevitably continue to weaken, with the excess capacity and price competition creating a material deflationary threat.
Trump has partially closed the safety valve that China’s net exports provided for its economy.
The risk, in a global environment where there is now a far closer focus on trade relationships, is that the diversion of China’s exports to other markets creates trade tensions and trade barriers elsewhere. No one wants to be the dumping ground for a deluge of redirected Chinese products.
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In this earliest phase of the new global trade environment, China has been able to maintain solid growth in its net exports.
As Trump’s tariffs reorder global trade, the multitrillion-dollar question is whether it will be able to continue to do so.
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