Tag Archives: trade

China Trade Does America A Service

US PRESIDENT DONALD Trump lambasted cheap Chinese imports for destroying American jobs when he was on the campaign trail last year.

A National Bureau of Economic Research working paper by Robert Feenstra of the University of California, Davis and Akira Sasahara of the University of Idaho, which  recently came across our desk though published in August, suggests the damage may not have been as extensive as previously thought once the gain in jobs from US exports to China are taken into account.

Looking at the impact of trade on employment in the United States from 1995 to 2011, the authors say:

For merchandise exports and imports from China, we have found added demand of 3.7 million jobs and reduced demand of 2.0 million jobs, respectively, giving a net gain of 1.7 million jobs.

Including services trade, Feenstra and Sasahara count a much larger net gain of 4 million jobs.

Different modelling approaches give some variation of results, showing that in merchandise trade the net job gain from the China trade could have been as low as 730,000 jobs or as high as 2.7 million and for trade in all sectors from 4 million to 5.1 million jobs. But all show a net gain in jobs.

At least some of that growth will have been as a result of China’s growth stimulating global growth and thus world trade.

Previous studies have estimated that since China’s accession to the World Trade Organization in 2001, unleashing the ‘China shock’ on world trade, Chinese imports accounted for one-quarter of the decline in U.S. manufacturing employment and have contributed to the unusually slow employment growth following the 2008 financial crisis.

Imports from China — or anywhere — else have twin effects. They create import competition and labour-market dislocation, but also benefit domestic consumers through lower prices. Trump concentrated on the former.

But what Feenstra and Sasahara highlight is the importance of services in the United States’ global trade. Thus Trump’s emphasis on restoring manufacturing jobs, if politically salient, is economically misplaced.

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China-America First

US President Donald Trump and China's President Xi Jinping walk in the grounds of Trump's Mar-a-Lago resort in Florida, April 2017.

DONALD TRUMP MARKED his first meeting as US president with the visiting President Xi Jinping with a display of naked American power, Cruise missile strikes against an airfield in Syria in retaliation for the Assad regime’s chemical attack on a hospital. The timing was coincidental, if opportune, but it was an act of defining and defending national interest of which only one of the two superpowers is currently capable, let alone comfortable, in undertaking.

The signalling was palpable. Moreover, it was an action that also had many observers quickly connecting the dots to North Korea, a country Trump had threatened unilateral US action if China did not start to exert the control over its ally that Washington believes it can and should.

Xi’s visit was always going to be scrutinised for the subtle signs of a power play between the two men. The ‘optics’ would be as important as the outcomes. However, it also carried considerable domestic political risk for Xi, making the trip to the United States early in Trump’s presidency (and to a golf course resort, at that) with all the risk of Trump’s unpredictability providing a loss of face for no very certain reward. The deflection of much of the world’s attention elsewhere would not necessarily have been unwelcome.

It is hard, though, to imagine the trip was undertaken without assurances there would be some return. The pre-trip speculation was of an agreement, if longer on affirmation than detail, on a joint reset of tackling North Korea’s nuclear ambition and some public US affirmation to Beijing over arms sales to Taiwan and the ‘one China’ policy.

In the event, the publicly announced outcomes were more modest, though likely of Beijing’s design, a 100-day plan to discuss trade talks directed at boosting US exports and reducing Washington’s trade deficit with China, and an invitation to Trump to make a state visit to China, which the US president accepted for a date to be arranged.

Trade is the lowest-hanging fruit for restoring relations between the two countries to an even keel. The direction of travel favours more US exports to China, especially once the rebalancing of the economy to more domestic consumption takes hold, while the One Belt, One Road initiative, to which the United States has now been asked to join, offers the prospect for more business and investment than China can handle alone.

Difficult issues — North Korea, Taiwan, the South China Sea — offer scant prospect of early harvesting.

The agreement to trade talks is positive, in the sense that it shows Trump can be steered away from his fiery anti-China rhetoric of the campaign trail last year. Further evidence that the reality of office is taking hold over the rhetoric of candidacy is that the Trump administration has so far declined to carry through on pre-election threats to brand China a currency manipulator or impose punitive tariffs on Chinese exports to the United States.

That the US president said that he was willing to further strengthen cooperation with China in economy, military affairs and people-to-people exchanges and support China’s efforts in pursuing corrupt officials who had fled China with ill-gotten gains will all be taken as evidence of success by Xi’s team, whose overarching goal was to restore stability and order to the relationship so they can manage it. Trump’s description of his personal relationship with Xi as “outstanding” will have been a bonus, though Trump will likely find eventually that that friendship will come with trappings.

State media have been quick to present the Florida summit as continuation of policy between the world’s two leading nations. “Expanding win-win cooperation” and “managing differences” and developing “dialogue and cooperation between China and the United States in such areas as diplomacy and security, economy, law enforcement and cyber security, as well as social and people-to-people exchanges” represents a good outcome for Xi, even if it is not the language of concrete gains for American manufacturing workers that reverse trade deficits and job losses that Trump had previously told his blue-collar economic nationalist supporters he laid squarely at China’s door.

The harsh truth is that it is not that group that stands to benefit from growing US trade with China. The winners will be the same ones that were the winners from globalisation.

The longer-term win for Xi is that summit has steered one of the world’s most important relationships, that between China and the United States, further in the direction of an arrangement of international affairs that is based on bilateral relationships between great powers than the post-World War Two system of international rules — something Xi has previously described as “a new model of great power relations” and which aligns with China’s efforts to construct a parallel architecture for global governance with itself in the centre.

The US president, who seems to prefer to focus on winning battles rather than wars, may well not realise what his guest has walked away with.

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Trump’s Withdrawal From TPP Opens Opportunity For China

THE TRUMP ADMINISTRATION’S withdrawal from the Trans-Pacific Partnership (TPP) free trade agreement opens up space for China to assume leadership of the development of trade and investment within the region.

Its own Regional Comprehensive Economic Partnership (RCEP) goes from being a poor second choice to virtually the only game in town. It limitation is that it encompasses Northeast and Southeast Asia along with Australasia, but not the Americas, the carrot that the TPP offered.

However, without the participation of the United States, the TTP is left floundering, for all the talk from quarters such as Australia that something can be salvaged. That would take several years at the very least.

RCEP would be substantial, accounting for about one-third of global GDP and one-half of the world’s population. It would incorporate all the Asian countries that had signed up for TPP plus TTP waiverers, such as Indonesia, and excluded, such India (not forgetting China itself, of course).

RCEP is considerably less liberalising of trade than TTP, however. The scope for exemptions on awkward sticking points is also greater, which may make reaching an eventually agreement easier, though.

Critically different from the TPP, labour, environmental issues are excluded form the RCEP negotiations, as is the role of state-owned enterprises.

RCEP’s primary focus is the trade in manufactures, although trade in services and investments will be discussed as one at India’s insistence. India is competitive in trade in services though less so in manufacturing and especially light manufacturing. It does not want trade in manufactures to be given priority over trade in services and investment, where its companies are competitive.

Intellectual property rights are also a point of contention. Tokyo and Seoul want high levels of IP protection, particularly for their pharmaceutical sectors, and akin to those proposed by the TPP, whereas poorer countries in the region want access to cheap medicines.

Beijing, however, may have both a short and a long game to play. The high standards proposed under TPP for intellectual property protections and the liberalisation of trade in services may well eventually suit Beijing as it gets more success in rebalancing its economy as a more services-oriented and innovate one.

To that end, it may well be prepared to keep the TPP negotiations lingering on should they be of future use. In the meantime, though, Beijing will seize the initiative that Washington has let drop.

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Industrial Policy’s Global Return

INDUSTRIAL POLICY HAS long been a strong pillar of China’s economic agenda but a pariah in the Anglo-Saxon economies of the West.

It made a return there last August when the UK’s new Prime Minister Theresa May outlined her vision of a post-Brexit state-boosted industrial renaissance some three decades after the UK’s previous female prime minister, Margaret Thatcher, had killed it off.

Now, in the United States, President-elect Donald Trump is picking up the torch with the creation of a White House National Trade Council to facilitate industrial policy. Peter Navarro, a University of California economist who is a sceptic of trade with China, is its proposed head.

This suggests that a more populist approach to trade and manufacturing is in the offing from the Trump administration. US trade policy will more likely be used to promote domestic production and job creation, particularly in infrastructure and defence, two areas where ‘Buy American, Hire American” is easiest to implement.

That would represent a significant change from international trade as a foreign policy tool that it was under the Obama, Bush and Clinton administrations.

It remains to be seen what this means in practice, and more importantly, where the new council fits into a Washington power structure that has to accommodate on economic matters the National Economic Council, the National Security Council, the Treasury, the U.S. trade representative and the commerce department.

Beijing, already sideswiped by Trump’s election win, will take its time to pick that apart.  Trump’s proposed commerce secretary, Wilbur Ross, the soon to be octogenarian investor who made his billions from corporate restructuring of distressed companies, is this Bystander’s pick to emerge as the key figure among that group. But Navarro’s appointment will not offer Beijing much cheer.

Navarro is also an advocate of the theory, controversial among economists, that trade deficits are a drag on growth. The United States ran a $366 billion merchandise trade deficit with China last year.

This Bystander will be watching carefully for signs of the Trump administration seeking to implement a ‘border tax’. This is taxation regime within corporate tax that Navarro and Ross have argued is needed to offset what they say is the hurt other countries’ domestic tax systems impose on US exports, say through the imposition of value-added-taxes that have no equivalent in the United States.

In short, they argued that a 20% border tax could eliminate the overall US trade deficit (if not all of the one with China). Imports would become 20% more expensive to cover the new corporate tax liability while exports, which would be exempt, would be roughly 12% cheaper because of the tax savings exporters would get.

The net effect of what in effect would be an across the board import tariff of 20% and an export subsidy of 12% would be equivalent to a 15% change in the value of the dollar.

Given that the United States was a $482 billion export market for China last year, that would give a very different hue to the China-US trade relationship. Not surprisingly, talk of a coming China-US trade war is in the air in both countries.

That may be of less import to China than once might have been the case now that it is rebalancing its economy away from cheap-export-led growth and towards domestic consumption, and that trade in services is becoming as important as trade in goods.

Nonetheless, this is probably not a moment to be sanguine about the prospects and the negative impact on China’s growth of a border tax could be material, and felt far wider than in China alone.

However, the new battle lines between Beijing and Washington may be drawn up over national champions as both countries seek to dominate the new industries that will shape the coming global economy. And that will come down to which nation will be better at picking winners — the perennial Achilles Heel of industrial policy.

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China’s February Export Slump: New Year Distortion Or Full-Year Herald?

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LUNAR NEW YEAR always makes forecasting China’s February export numbers something of a lottery. Yet few if any foresaw the 18.1% decline just announced.

Throw in slowing credit growth, the National People’s Congress meeting going as expected — i.e. offering no new answers of how both a 7.5% growth target for the year and reforms to rebalance the economy will be achieved — political tension over Ukraine and the mystery disappearance of the Beijing bound Malaysia Airlines’ passenger jet and it is scant surprise investors, already jittery about growth prospects, have taken umbrage. Shares hit a five year low in Shanghai and the yuan weakened against the dollar, with the ripples being felt in Hong Kong and in U.S markets beyond.

Most forecasters had expected an increase in exports for February, if a modest one. The most recent official purchasing managers index had pointed to weakness in new export orders, thought to be a consequence of the untypically harsh winter in the U.S., China’s second largest export market after the E.U. In addition, exporters tend to front-load their deliveries ahead of the New Year’s holiday when factories are closed for a week or so.

Nonetheless, across January and February taken together exports were down 1.6% while imports rose 10%. That has taken a chunk out of China’s trade surplus. February’s was the largest monthly trade deficit in two years. Across the two months, the surplus was $8.9 billion, down 79.1% on the same period a year earlier.

The question, of course, is whether this is all just a holiday induced blip in long-term deceleration of the growth rate or harbinger of a harder than previously expected braking of the economy. The March trade figures will be looked at closely for clues to the answer.  However, exporters will have to go at it if they are to make good the forecast of the State Information Center, a government think tank affiliated to the top economic planning agency, the National Development and Reform Commission. It is forecasting an 8.1% growth in exports in the first quarter, and about 7.5% GDP growth. Investors would be delighted, and surprised.

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China Uncooks Its Trade Books

That China’s reported trade figures are, to put it mildly, a bit dodgy will come as no surprise. The 21st Century Business Herald has put some numbers on those suspicions.

Quoting commerce ministry sources, the paper says that $75 billion of fake invoicing covering the months of January to April have been uncovered. That is sufficient to change the export growth for that period to 7%, against the 17.4% reported and to cut the corresponding imports number to 6% from the reported 10.6%.

The fake invoicing was part of a scheme by some Chinese companies who were cooking their order books in order to get funds to speculate on the appreciation of the yuan against the dollar. In short, they were disguising hot money as trade payments. This was done by parking goods in Hong Kong and booking them as exports so they could get forex  loans from the banks, or in some cases, it is now clear, by just creating phantom export orders.

Authorities cracked down on the practice in May. The $75 billion figure has been derived by applying May’s trade growth rates to the previous four months for China’s special customs regulation zones, the bonded warehouses in places like Shenzhen on the border with Hong Kong.

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China’s Dodgy Trade Data

On the face of it, China’s April trade figures look healthy: exports were up 14.7% year-on-year; imports were up 16.8% on the same basis; the trade surplus was $18.2 billion. All three figures were better than forecast. And from there it is possible to draw a straight line to the notion that these figures  indicate a revival of global demand which in turn will boost China’s GDP growth.

The question is, how reliable are the base figures. March’s trade numbers were incredible, in a bad way. The suspicion was that some Chinese companies were cooking their order books in order to get funds to speculate on the appreciation of the yuan against the dollar, essentially disguising hot money as trade payments. This was done by parking goods in Hong Kong and booking them as exports so they could get forex  loans from the banks, or in some case, we suspect, by just creating phantom export orders.

The practice was so widespread that authorities earlier this month announced measures to crack down on these hot money inflows, and threatened “strict supervision” of any import-export operation whose booked and actual shipments appeared out of kilter. These measures take effect at the the end of June, giving companies time to get their books in order. But meanwhile monthly trade figures have to be looked at with a healthy dose of skepticism.

This Bystander notes, for example, that April’s purchasing managers’ indexes showed manufacturers’ new export orders shrank, the opposite to what the April trade figures imply. Nor do China’s monthly trade figures jibe with those of South Korea and Taiwan, both of which reported weakening trade for the month. As we can’t trust the trade figures, we won’t be drawing an assumptions about what they mean for the economy as a whole.

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