US trade deficit with China narrows, as effects of trade war-induced export front-loading begin to fade

The United States’ trade deficit with China narrowed in November, led by a decline in imports of consumer goods such as cars and mobile phones.

The latest data from the US Department of Commerce, which had been delayed by the long-running government shutdown, will be well-received by US President Donald Trump, who has railed against the perceived lopsided US trading relationship with China.

For decades, China has sold a far greater volume of goods to the US than it bought, leading Trump to declare on the presidential campaign trail in 2016: “We can’t continue to allow China to rape our country, and that’s what they’re doing.”

The bilateral deficit – which measures the gap between a country’s exports and imports – fell US$2.8 billion to US$35.4 billion in November, a monthly fall of 7.3 per cent.

The narrowing is part of an overall slump in bilateral trade between the world’s two largest economies, with the US buying and selling less to China in November, although the decline in imports was much greater.

The figures still show that when compared with a year earlier, the US trade deficit with China actually widened by 7.1 per cent despite the fact that half of US imports from China are now subject to substantial tariffs.

It shows that the effects of front-loading of export orders, where companies issued purchase orders earlier in order to avoid paying trade war tariffs, are beginning to fade, analysts said.

“The deficit fell more than expected, consistent with some of the earlier rise being due to accelerated imports ahead of threatened tariffs,” said Jim O’Sullivan of High Frequency Economics.

Trump has been waging an all-out tariff war with China since July last year in a bid to force Beijing to make sweeping economic changes that would benefit American firms, such as an end to forced technology transfer and the elimination of intellectual property theft.

Currently, US$250 billion of Chinese exports to the United States are subject to tariffs of either 10 per cent or 25 per cent.

The proportion of goods on the higher tariff range will increase on March 2, should US and Chinese negotiators not reach a deal to end the trade war.

Analysts said that the impact of tariffs are starting to become clear in the data, and that US imports of Chinese goods will continue to drop over the course of 2019.

“We find strong evidence that the 25 per cent tariff on US$50 billion of imports from China [imposed in July and August last year] is having a significant negative impact on prices and volumes,” the Institute of International Finance said in an analysis of the tariffs’ impact.

“Overall imports from China are holding up relatively well because of front-loading of orders for goods on the US$200 billion list and strong overall import demand. The bilateral deficit is also boosted by a large reduction in China’s imports from the US.”

The most recent Chinese trade data, for December, also bore the scars of the trade war.

The figures, released on January 14, showed that total exports fell to US$221.25 billion, down 1.4 per cent from November and 4.4 per cent from December 2017.

“Today’s data reflect an end to export front-loading and the start of payback effects, while the global slowdown could also weigh on China’s exports,” wrote analysts from Nomura at the time, echoing the views of trade-watchers in the US that the impact of front-loading is fading.

China will release the trade figures for January on February 14, although while the purchasing managers’ index for January, released last week, suggested an overall decline in factory activity, there was a slight upturn in export orders in the first month of the year.
Source: South China Morning Post