US and China face bumpy ride as talk of decoupling intensifies


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Hello from Hong Kong, where the seven-day average of new coronavirus cases remains rooted in the low single digits, and the humidity remains rooted in the high double digits. 

Our main piece today is on the relationship between China and the US. As tensions appear to worsen, what will the effects be on trade?

Charted waters looks at the latest freight rates for shipping containers from east Asia to northern Europe.

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Tensions rise despite higher trading activity

It’s only Tuesday, and it’s already been a bumpy week for relations between China and the US. Yesterday, the former accused the latter of treating it as an “imaginary enemy” during talks between senior officials in the northern city of Tianjin.

In the financial sphere, meanwhile, stocks of Chinese education companies listed in the US collapsed after Beijing unveiled new regulations that prevent after-school tutoring companies from operating for profit, and banned foreign investment. This came weeks after US investors in Didi Chuxing, the ride-hailing company, were blindsided by a Chinese regulatory intervention following its New York listing at the end of June.

But signs of stock market decoupling and geopolitical tensions are, for now, juxtaposed with the recent trade data between the two countries. China’s exports to the US have hit record levels over the past year, despite an array of tariffs and restrictions from a trade war launched in 2018.

Will this trade dynamic survive if tensions continue to worsen?

The same coronavirus which has added to mutual hostilities between the two countries has also, at least in the short term, helped their trading relationship. China’s swift recovery from the pandemic early last year allowed it to direct the weight of its manufacturing machine to the production of goods that have become more sought after during the pandemic. These include not only masks and other personal protective equipment, but also sales of home appliances and electronics in western consumer markets where governments responded to the crisis with stimulus measures.

China’s exports rose 32.2 per cent year on year in June in dollar terms, and have grown by double-digit amounts in every month this year, in part because of base effects compared with a collapse in activity in the first half of 2020. But late last year, compared with pre-pandemic 2019, Chinese exports were rising at a rapid pace.

Economists have suggested this relationship may already have peaked. Julian Evans-Pritchard, chief China economist at Capital Economics, suggested this month that “the pandemic-induced surge in retail sales in advanced economies has started to reverse recently as consumption patterns begin to normalise amid reopening”. 

“Once retailers in these countries have rebuilt their inventories, softer consumer demand will feed through into weaker foreign demand for Chinese exports,” he added. Ting Lu, at Nomura, expects downward pressure on Chinese growth in the second half of the year, partly because of exports weakening as other markets shift back to the kind of services consumption that lockdown measures have severely constrained.

Others point out that China’s trade relationship with the US, while helped by the pandemic, is not as good as it should have been. Adam Slater, at Oxford Economics, estimates that US imports from China are still down about 20 per cent based on expectations of the 2009-2018 trend. In 2018-2019, the average US tariff on Chinese goods rose 15 percentage points.

From a policy perspective, the trade trajectory has not been entirely negative, and has depended in part on sectoral sensitivities. A trade agreement in late 2019 has been followed by higher US activity in particular sectors in China, especially the role of its biggest companies in financial services as the latter builds out its investment market. At the same time, China’s recent education shift will sharply reduce foreign involvement in the sector.

Slater has modelled a scenario in which a trade decoupling occurs either only between China and the US, or between China and other developed economies around the world, including western Europe, Japan, South Korea, Taiwan and the US, Mexico and Canada.

In both scenarios, he found, the hit to Chinese gross domestic product would be much greater than the hit to US GDP. But, in contrast to tensions between the USSR and the US over much of the 20th century, he noted that China’s deeper integration into the global economy — as its export dominance throughout the pandemic illustrates.

Governments of most advanced economies and the prospective allies of the US in a broad-based decoupling were, he concluded, “likely to be reluctant to curtail economic engagement with China”.

Charted waters

Container shipping rates on the major Asia-to-Europe and Asia-to-US routes have soared since the early days of the pandemic. Nowhere have the hikes been more dramatic than on the route from east Asia to northern Europe.

Data from Xeneta, which specialises in information on freight rates, show that the cost of shipping a 40ft container is now close to all-time highs.

US president Joe Biden has recently sought to clamp down on the rise in shipping costs (though not the freight rates specifically) for US importers. The question now is whether leaders in Europe, where many of the world’s main shipping lines are based, follow suit. Claire Jones

Trade links

The UK is to consider easing restrictions on travel from the EU and US, boosting the tourism sector and helping to reopen Britain to mass foreign travel. However, the US, concerned about the Delta variant of coronavirus, is still resisting reciprocating. 

Meanwhile, Singapore is hoping to relax border restrictions in September, by which time about 80 per cent of the country’s 5.7m population should be fully vaccinated (Nikkei, $, subscription required). And the US is urging countries to back the creation of low-cost manufacturing hubs for vaccines to counter the lack of access to jabs across much of the developing world. 

The latest Chartbook from the excellent Adam Tooze digs into a World Bank report from the early 1980s that explained why China was in a position to secure rapid growth in the decades to come.

And, finally, Intel is setting an ambitious goal of producing the most advanced 20A semiconductors in two years to regain the global chipmaking crown from TSMC and Samsung by 2025 (Nikkei, $).

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