Sep 10, 2018 08:13 PM

Caixin View: Front-Loading Provides Temporary Relief for China’s U.S. Exports

*Exporters appear to be rushing shipments to U.S. to avoid getting hit by tariffs down the road

*Front-loading will only exacerbate the eventual hit to exports from higher levies

Even though the first tariffs of the trade war have been in place since June, China’s trade surplus with the U.S. hit a record $31.05 billion in August, according to data from the General Administration of Customs. Exports to the U.S. grew 13.2% year-on-year in August to $44.4 billion, the fastest growth since February.

Part of the reason is healthy demand from the U.S. economy — the Institute for Supply Management’s Manufacturing Purchasing Manager's Index hit 61.3 in August, indicating the biggest expansion in factory activity since 2004. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is also strong, rising 0.4% in June and July.

But we think a more important factor is “front-loading,” as exporters increased their shipments in advance of a new round of tariffs to avoid paying the extra levy. Given the uncertainty over the size of the tariffs and when they will be imposed, this factor could continue to boost exports to the U.S. for a few more months. A second round of levies of up to 25% on a further $200 billion of Chinese goods may be just around the corner, after a public comment period ended last week. A third round on another $267 billion in Chinese goods could be rolled out “on short notice,” according to comments made by President Donald Trump last Friday. But as there’s still no concrete date for either, the front-loading could go on for some time.

Once these sets of tariffs are in place — and given the lack of progress in negotiations, our view continues to be that there’s no reason to assume an agreement will be reached to prevent them — China’s export growth to the U.S. will likely slow significantly, and potentially shrink. This deceleration will be exacerbated by the end of the front-loading effect and could come by the end of 2018, based on the timing of implementation of previous rounds of tariffs.

If the next rounds of tariffs is put in place and Trump implements his threat of a third round, then the total value of Chinese goods affected will be $517 billion, more than the total value of China’s exports to the U.S. in 2017, which were $505 billion according to U.S. government data.

Further escalation of the trade war in terms of tariffs would therefore probably involve increasing existing tariff rates.

How will this affect China’s exports more generally? Former central bank Governor Zhou Xiaochuan said last week that the country could quickly diversify its export markets and ship goods to other countries. But we are less optimistic for two main reasons. First, sales to the U.S. make up such a large chunk of China’s total exports — more than 20% in August, for instance — that it would be very difficult to find new markets for these goods quickly. Second, growth in global demand for Chinese goods seems to be weakening. China’s overall export expansion slowed in August to 9.8% year-on-year, down from a 12.2% pace in July and the lowest since March. Shipments to the EU, Hong Kong and Japan, China’s biggest trading partners after the U.S., all increased at a weaker pace in August — Japan, for instance, rose by just 3.8%, down from July’s 12.3% and the slowest rate since March. Emerging markets were no better: year-on-year export growth to Brazil and Russia shrank more than 14 percentage points in August compared with July.

Our view is that while President Trump’s tariffs have so far had the opposite effect of what he wanted and incentivized greater Chinese exports to the U.S., this cannot last much longer. And given slowing global demand and the importance of the U.S. market, China will struggle to simply reroute its exports to other countries.


September 14: National Bureau of Statistics (NBS) releases industrial production and retail sales data for August, fixed-asset investment, real-estate investment and sales data for January-August and surveyed urban unemployment rate for August

September 15: NBS releases August data on housing prices in 70 major cities

Peoples Bank of China may release money supply and total social financing data for August this week

Ministry of Commerce may release foreign direct investment (FDI) and outbound investment (ODI) data for August this week

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