Intermodal Features / Tradewinds

The Most Important Ties

Many believe the economic and trade relationship between the U.S. and China is the most important.

February 3, 2014
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China’s long-predicted rise to dominance in world trade may have taken place in 2013. Reports issued in January 2014 indicated China’s total trade reached $4.2 trillion. The second-largest world economy may, therefore, have passed the first in terms of trade.

As the Chinese numbers were released, U.S. trade figures were only available through November 2013. At $3.5 trillion for the 11 months of 2013 that had been reported, the U.S. was not in a position to top the Chinese trade figure.

For those who look at the information like a sports score and only view the final numbers, this is an image-boosting victory for China. But, for those who follow the play-by-play action, it is a very different game.

Reporting on the December 2013 exports, Reuters noted that even though China’s exports slowed in December, this was due in part to a tough year-on-year comparison. The December 2012 base for the monthly comparison was particularly strong, which helped to amplify the drop in December 2013 exports.

The 2013 numbers may also have been affected by a government clamp down on what Reuters termed, “speculative activities disguised as export deals.” In a word, the 2012 trade figures could have included phantom exports that never materialized. This leaves some observers dubious of any trade data coming out of China.

While there is public relations value in claiming a victory, the deeper story, according to economists, is the speed at which the Chinese economy is slowing and in the reforms the central government will be pushing to keep the economy on track.

The Chinese government reported December 2013 exports rose 4.3 percent compared with December 2012. This was in line with expectations that suggested the year-on-year growth would be 4.9 percent.

China’s imports in December were up 8.3 percent, well ahead of expectations. Most analysts view this as a positive sign that China’s domestic economic expansion will continue.

Below Annual Target

China’s Xinhua news service reported that while China’s total trade had surpassed $4 trillion for the first time and would top U.S. trade as well, the 7.6 percent year-on-year growth was below the 8 percent target the central government had published at the beginning of 2013.

Exports were up 7.9 percent to $2.21 trillion. Imports rose 7.3 percent to $1.95 trillion, according to customs data.

The foreign trade surplus widened to $259.7 billion, an increase of 12.8 percent from the prior year, according to Zheng Yuesheng of the General Administration of Customs.

Trade with the European Union increased 2.1 percent year on year to $559.1 billion, Zheng added. Imports of EU goods were $152.6 billion for the year. The EU is China’s biggest trading partner.

Within Asia, China’s trade with ASEAN countries rose 10.9 percent to $443.6 billion.

According to the government report, exports, retail sales, and investment are the three main drivers of China’s rapid economic growth. External demand supports about 12 percent of the country’s gross domestic product (GDP) and absorbs roughly 35 percent of industrial output.

The continued recovery in the U.S. and EU is viewed positively, though shipments to emerging markets now represent 55 percent of China’s exports. These, say economists, are also likely to accelerate in 2014.

China is facing internal reforms which are raising questions on just how the coming year will play out. One of the issues that is often mentioned is the overstatement of export invoices in the first part of 2013. Exporters used these false invoices to justify foreign currency transactions. Financial and other reforms will take time and their full impact could affect growth expectations. Asia-based economist Michael Pettis has commented that broader economic reforms that will move China from a growth model that benefits the elite to one that favors ordinary households will result in slower growth that makes the many projections that China is about to begin a decade of 7 percent to 8 percent per year growth implausible.

Continued Importance

The U.S.-China economic and trade relationships will continue to create economic vigor, economic opportunity, and jobs for both countries, according to C.H. Tung, chairman of the China-United States Exchange Foundation. Each contributes to global economic activities in different ways, he says. “Working together we can do more in such areas as global economic recovery and financial stability. Working together we can further liberalize trade of goods and services around the world,” Tung said during a presentation “U.S.-China Economic Relations in the Next Decade” for the Center for Strategic and International Studies. 

Tung considers the U.S.-China relationship the most important international relationship today.

“From bilateral perspective, the economic relationship over last few decades has developed from non-existent to highly interdependent and mutually beneficial relationship,” Tung points out.

Where is this economic relationship going in the future? Tung says both countries want to establish a pattern of secure, high quality sustainable growth and employment for their people. “A bilateral relationship built and adapted over time can make a material contribution to that shared goal,” he adds.

“We tend to think of the relationship as a zero sum game,” observes Victor K Fung, The Fung Group. “I think that would be very tragic to think of it as a zero sum game – there is a huge white space in the middle for the two sides to cooperate in their own national interests. We need to exploit the cooperative nature of this relationship,” says Fung.

“Without the economic relationship it is difficult to do anything else,” Fung adds.

Ma Xiuhong, chairwoman China Foreign Trade Centre and former vice minister of commerce for the People’s Republic of China, agrees. In the past 34 years, she says, the trade and other initiatives have developed very rapidly. Starting from $2.5 billion, trade has reached nearly $500 billion.

Ma sees a bright future for next 10 years. She suggests that during that time, with deep reform and continued opening up of China, China will become the largest market in the world as well as one of the largest investors in the world. China’s investment (foreign direct investment) in U.S. will be larger than US investment in China, during the period. The precondition is that China and the U.S. will need to maintain healthy and sustainable development in their bilateral relationship.

On a slightly shorter timeline, Ma says China’s imports will reach more than $10 trillion in goods and $2 trillion in services in five years. 

If China and the U.S. can begin studying what is needed to facilitate setting up a free trade agreement, or start the negotiations for an FTA, the result will be a very bright future for both nations, Ma adds.

U.S. Trade Front

On the U.S. economic homefront, Patrick Newport, US Economist for IHS Global Insight, sees some positive signs from a lower trade deficit.

According to Newport, the trade deficit fell by $5.1 billion in November 2013 to $34.3 billion. This was the smallest deficit since October 2009. Contributing to those results, exports rose by $1.7 billion to an all-time high. Imports fell to $39.3 billion, a $4.1 billion decline. And the numbers were helped by a revision in the October deficit figures which brought it down by $1.3 bilion.

Anticipating the final results for 2013, Newport suggests net trade will show positive growth in the fourth quarter, but it will be negative in 2014.

According to Newport, “Petroleum products accounted for most of the trade deficit shrinkage. The overall deficit, excluding petroleum products, dropped from $19.9 billion to $19.1 billion. The petroleum deficit fell to $15.7 billion, the-smallest since May 2009.”

On the export side, exports increased mostly on an increase in exports of goods, says Newport. Industrial supplies and materials and other goods also posted solid gains. Imports fell mostly because of the drop in petroleum products.

Newport adds that since early 2012, the trade balance has been “spiky and narrowing.” The improvement has come from rising exports while imports remained essentially flat.

“The import story remains the same. Imports of petroleum products are declining while imports of other things are slowly rising,” says Newport.

Despite his forecast that net trade will be a positive for growth in the fourth quarter, Newport suggests the outlook for the trade deficit is negative in 2014 because “a pickup in US growth brings in more imports.”

 While there are positive signs on the U.S. economic horizon, it appears this spells a mixed result for the overall trade picture as the increased consumer confidence and economic growth spur more imports. In the meantime, the important relationship between the U.S. and China will remain a top issue and stands ready to fuel even more growth for both economies. Much will depend on political sentiment and continued social and economic reforms in China. Another area to watch is the ongoing negotiations for the Trans-Pacific Partnership. Progress there will maintain pressure on China to continue internal reforms. 

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