One of Trump’s more-welcome results from the tariffs on Chinese goods was a reduction of the trade deficit with China. Last year, trade data posted ambiguous results, where, despite the introduction of tariffs, the deficit in trade rushed to a new negative record. However, in early 2019 there was an unexpected improvement whereby China began to export less to the US and the trade imbalance fell to only $20.75 billion. The lowest level seen since March 2014:
In the first quarter of 2019, Chinese exports to the US fell by $15.2 billion, or 12% in annual terms.
As we can see, the numbers were collected prior the last round of tariff hikes (up to 25% on $200 billion). Conventional wisdom suggests that the new tariffs should lead to an even greater reduction in the deficit – marking Trump’s crushing advantage in the trade war. However, is it enough to use the US-China bilateral trade, only to estimate the pain from tariffs?
The Nikkei Asia Review article says that’s not enough.
Data from the US International Trade Commission and the International Trade Center, analyzed by Nikkei staff, shows that China is actively using its neighbors to circumvent tariff restrictions. If exports of machinery, electrical equipment, auto parts, and other major exports from China to the US dropped significantly, shipments of these goods to neighboring Vietnam, Taiwan, and Mexico increased sharply. This suggests that Chinese exporters are rebuilding their supply chains and involving middlemen to neighboring Asian countries.
The chart shows that although China’s top 5 export items to the United States declined by 15% in the first three months, exports of these items to Vietnam, Taiwan and Mexico grew by 20.1%, 23.1% and 14.3% respectively! The intermediaries then began to freely increase exports to the United States of these same goods without any tariffs. Vietnam was the most successful so far, reaping benefits from the tariff battle which increased exports by 57.7%.
Since the United States began to penalize China with tariffs, exports of six large Southeast countries, including Taiwan, have unexpectedly experienced a “qualitative increase” in 1,600 new categories. At the same time, about a thousand of this number of goods are on the US blacklist (if they were exported from China).
In addition, China has other ways to deal with tariffs. Trump has repeatedly accused the government of subsidizing the production of certain goods, as well as weakening the yuan to maintain competitiveness. The US Treasury is still refraining from attaching a currency manipulator label to China.
Even despite attempts to circumvent, the slowdown in the Chinese manufacturing sector indicates a rather destructive effect of the tariffs. However, over time, the trend to create intricate intermediary chains may ultimately compensate sufficiently for the effect of tariffs, and Chinese manufacturers may start to revive again.
The ability of Chinese firms to circumvent the limitations is the main argument in favor of curbing the tariff confrontation between China and the United States, and the transition to pinpoint attacks.