Tag Archives: trade

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?

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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China And The EU Drift Towards A Solar Trade War Neither Wants

Politics is complicating the trade dispute between China and the EU over solar panels. Meanwhile, the two are drifting towards a trade war neither wants.

Last September, the European Commission launched an anti-dumping investigation in to China’s $25 billion-worth of solar panel exports (2011 sales) to Europe. Beijing made a tit-for-tat response, threatening duties on EU exports of polysilicon, which is used in making solar panels.

Which is pretty much where things still stand. China’s leadership transition and the likely departure of trade minister Chen Deming in March has left everything in stasis.

Yet the trade disputes clock is ticking down. Beijing is to due to make a decision on polysilicon duties by the end of this month. The outcome of the EU investigation has to decided by mid-April so EU officials can make a formal recommendation in June to the European Commission on how to proceed.

These investigations overwhelmingly lead to the imposition of anti-dumping duties (only in one case over the past four years has it not), though EU leaders have shown no appetite to follow the U.S. in imposing duties on Chinese solar products. They don’t want any retaliation that might make recovery from Europe’s recession more difficult.

Yet there is no wiggle room in the European timetable. That will not leave much time for a new trade minister in Beijing to get his feet under the table, let alone negotiate a resolution to what is anyway a tricky trade dispute.

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Treat China’s January Trade Figures With Optimistic Caution

Caution should be exercised in interpreting China’s newly published trade and inflation figures for January. Next week’s New Year holiday will have caused distortions. Importers and exporters will have tried to get as much business as possible done before work stops for the holiday. In addition, the timing of the festival, which fell in January last year but this month this, will have made year-on-year trade growth appear stronger and inflation weaker. A clearer picture will appear after February’s trade and inflation figures are published in March and the first two month’s numbers can be compared in aggregate.

With that those caveats, on the face of it, the numbers suggest that the calendar year has started with solid growth both in China and abroad. Exports rose a greater than expected 25% from a year earlier, the fastest pace since April 2011, and up from 14.1% in December. Imports increased 28.8%, more than four-times December’s 6% rise. The boom in imports trimmed China’s trade surplus to $29.2 billion in January, from $31.6 billon a month earlier. Inflation also receded, slowing to 2% from 2.5% in December, though food prices spiked.

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