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US-China trade war: Digging the trenches

Eugenia Fabon Victorino, head of Asia strategy at SEB’s Singapore branch, analyses the recent developments in the US-China trade war.

TEXT: Eugenia Fabon Victorino
25 OCTOBER, 2018

Upping the ante, on 18 September the US imposed higher tariffs on an additional US$200 billion of imports from China. This comes on the back of earlier tranches of tariffs on US$50 billion of goods. In this latest round, an initial 10 per cent rate was implemented on 24 September, before rising to 25 per cent by 1 January 2019 (Chart 1). What started with US tariffs on washing machines and solar panels at the start of the year now covers almost half of all imports from China. In retaliation, China slapped similar rates of tariffs on a further US$60 billion of US imports. Subsequently, China pulled out of proposed trade talks with Washington a day after both sides imposed fresh tariffs on each other.

Despite the escalation in tariffs, the effect on the trade balance has been limited so far. In fact, China’s bilateral trade surplus reached a historical high of US$31.1 billion in August, widening the year-to-date surplus to US$193 billion. As it stands, the bilateral surplus with the US accounts for 6.7 per cent of China’s total trade.

Chart 1: Evolution of tariffs in 2018
Sources: CEIC, Bloomberg, SEB
Chart 2: Top exports to the US
Sources: CEIC, Bloomberg, SEB

Exports to the US are rising faster than exports to the rest of the world. Even as total export growth eased to 9 per cent year-on-year in August (from 11.4 per cent in July), exports to the US accelerated by 13.2 per cent. Focusing on the top five export product categories to the US, we note a strong pickup in growth in the last three months (Chart 2). Combined, these five categories represent almost 80 per cent of the shipments to the US. More importantly, the growth of the same product categories exported to the rest of the world trail behind those to the US. This supports our view that Chinese exporters have been frontloading cargoes in anticipation of a broader scope in tariffs.

In contrast, the rate of expansion of US imports to China has been declining. In the last three months, import growth from the US averaged at 7.6 per cent year-on-year, lagging behind the average rise in total imports of 20.6 per cent. The trend is mixed across the top five import-product categories, which make up around 68 per cent of imports from the US. Imports of vehicles and other transport equipment and vegetable products have been contracting for some months. Meanwhile, imports of machinery and electrical equipment as well as mineral and oil products have been the main drivers of growth. However, we see some pullback in the growth of imports of mineral and oil products in the medium term.

Considering that the rise in oil prices has propped up the expansion in total imports, we note that the trend of oil imports from the US has turned south in the last three months. Indeed, Sinopec, China’s state-owned oil giant, has suspended its plan to raise US crude oil imports as trade tensions have escalated. Seeing that oil imports from the US represent only 3.2 per cent of total oil imports, we expect China to easily re-allocate this demand.

What started with US tariffs on washing machines and solar panels at the start of the year is now covering almost half of all imports from China.”

We believe China will roll out more domestic-focused policies to stabilise growth. In light of the weakening sentiment due to the trade war, the Chinese authorities announced their intention to cut average tariffs on imports from most of its trading partners as early as October. A reduction in personal and corporate income tax may also be in the offing. In view of the central bank’s hawkish stance on market volatility, we do not expect a competitive devaluation of the yuan. Since the reinstatement of the counter-cyclical factor (CCF) in the USD/CNY fixing model in late August, the pair has pulled back from its peak of CNY6.93. Even so, rising expectations of a prolonged trade war has capped further downside moves. As such, we expect the USD/CNY to continue trading around CNY6.9 towards year end, paring back our expectations of a recovery in the yuan. b

FOOTNOTE: This article was first published in the SEB China Tracker on 26 September, 2018.

Eugenia Fabon Victorino joined SEB in August 2018 as the head of Asia strategy focusing on macro research in the Asia-Pacific region. Prior to SEB, Victorino spent almost six years as an economist at Australia and New Zealand Banking Group (ANZ Bank) in Singapore covering ASEAN and South Korea. She is a frequent speaker at major international media outlets like Bloomberg TV and the BBC. She has also worked at ING Bank in Amsterdam, focusing on country risk in emerging markets.

Previously, she worked as a university lecturer at Ca’ Foscari University of Venice, Italy, and Ateneo de Manila University, the Philippines. Victorino holds double Bachelor degrees in mathematics and economics from Ateneo de Manila. She is a PhD candidate in economics at the Ca’ Foscari University, during which she spent some years as a graduate exchange student at the Universiteit van Amsterdam in the Netherlands.