Trump and Biden have failed to cut ties with China. Economist Report
The trade decoupling between the United States and China, promised in different ways by both Biden and Trump, is in reality an illusion. The Economist's in-depth analysis
Donald Trump and Joe Biden don't agree on much, but they are of the same opinion when it comes to America's trade relationship with China. They believe that the world's largest economy is simply too dependent on the second largest. For this reason, American officials travel the world to promote the benefits of "friendshoring", i.e. moving production from China to less risky markets. Business leaders give positive speeches, but are genuinely concerned about China's weak economic growth, not to mention its political volatility. The number of comments in budget meetings referring to “reshoring” has exploded.
But how much of this is nothing more than talk? Last year the Economist argued that much of the supposed decoupling between America and China is actually illusory. Looking more closely, we wrote, economic relations between the two countries remain solid, even if this fact is masked by tricks on both sides. Since then, a growing body of evidence confirms and strengthens our initial conclusions. The economies of America and China are not separating. Indeed, some changes in supply chains could bind the two countries even more closely – writes The Economist .
FROM TIKTOK TO SOLAR PANELS
A complete picture of Sino-American trade would include trade in services, including America's use of Chinese applications and China's love of American films. But these flows are difficult to track, so economists have focused their attention on trade in goods, which customs officials measure with reasonable precision. In this case, the main data will cheer Biden and Trump. Last year, Mexico overtook China as America's largest source of imports. Since 2017, the share of American imports from China has fallen by a third, to around 14%, according to American data. Part of this decline occurred after Trump implemented high tariffs in 2018. Another part reflects growing concerns about China's territorial ambitions: If China invaded Taiwan, many Asian supply chains would become unviable.
The headline data, however, doesn't tell the whole story. To understand why, just start with Trump's tariffs, which Biden has largely kept in place. Before their introduction in 2018, American statistics indicated that America received many more imports from China than Chinese ones. Now the opposite is true. China reports that its exports to America increased by $30 billion between 2020 and 2023, while America says its Chinese imports fell by $100 billion. If the Chinese data is correct, the country's share of American imports has still fallen, but by much less.
What causes the gap between measurements? Adam Wolfe of Absolute Strategy Research, a consultancy, suggests that the change reflects the fact that American importers have incentives not to declare how much they buy from China in the categories covered by the tariffs. Wolfe estimates that, as a result, America underestimates its imports from China by 20-25%. At the same time, the Chinese government has reduced taxes on exporters in recent years, reducing the incentive for domestic companies to undervalue goods leaving the country.
SKEPTICISM ABOUT THE AMERICA-CHINA DECOUPLING
Other data provide further reasons for skepticism about decoupling. The "Input-output" tables, published by the Asian Development Bank, show the share of a country's economic activity that can be traced back to others. Looking at 35 industries, we calculated that China's private sector contributed an average of 0.41% of American business inputs in 2017. That doesn't sound like much, but it's higher than Germany's 0.38% and Japan's 0.24%. By 2022, China's share had more than doubled to 1.06%, a larger proportional increase than that of Germany and Japan. It is difficult to understand what is behind this trend. American attempts to build clean energy infrastructure could be a factor in making Chinese electrical equipment imports that much more important. American companies in the service sector also appear to be increasingly reliant on intellectual property owned in China. Whatever the cause, the numbers are difficult to square with the alleged decoupling.
Developments on the Chinese front also push against decoupling. Chinese leaders have no intention of giving up their country's role in global supply chains, even if their largest trading partner is trying to cut it off. In December, the Central Economic Work Conference, China's agenda-setting economic council, made expanding trade in intermediate products (those used to produce finished goods) a priority. State banks are redirecting credit from real estate to manufacturing, raising the possibility of excess Chinese exports. Many of the new titans of Chinese industry, such as Contemporary Amperex Technology, a battery maker, Boe Technology Group, a maker of organic light-emitting diode displays, and Longi Green Energy Technology, a maker of solar panel components, are in the position ideal to benefit from this strategy.
HOW CHINA'S TRADE IS CHANGING
In fact, the growth of these types of companies is already having an impact. According to our estimates, China's global exports of intermediate goods have increased by 32% since 2019, compared to an increase in other types of exports, such as finished goods, of only 2%. The surge is driven by exports to countries like India and Vietnam, which are two of the US government's favorite trading partners. American trade with these countries is also increasing, going from 4.1% of goods imports in 2017 to the current 6.4%. The combination of these trends means that the two countries often act as a sort of packaging hub for goods produced with Chinese inputs and destined for American shores.
Many such agreements are emerging around the world. Take the case of India, where the government is trying to build its manufacturing base. Following the introduction of subsidies, mobile phone exports have soared, leading to speculation that India is eating China's lunch. However, in a recent article, Rahul Chauhan, Rohit Lamba and Raghuram Rajan, three economists, point out that imports of mobile phone components, such as batteries, displays and semiconductors, have also increased. India appears to be more of a mobile phone middleman than a smartphone powerhouse.
Vietnam's trade with America is booming. But its production remains deeply intertwined with Chinese supply chains, meaning much of the increase could be due to products with little Vietnamese content. In the most extreme cases, Vietnamese exports are essentially diverted from China, as the U.S. Department of Commerce sometimes alleges. The correlation between Vietnamese exports to America and imports from China is now significantly higher than before Trump's tariffs were introduced. This suggests that the Southeast Asian country is increasingly playing an intermediary role, matching Chinese production with American demand.
THE CASE OF MEXICO
In Mexico the situation is more complicated. Standards set by the United States-Mexico-Canada Agreement require higher “regional value content,” meaning exports are examined to ensure manufacturing was conducted in North America. In some sectors where Mexican exports to America are booming, such as auto manufacturing, the growth is difficult to attribute to decoupling, as China has never exported large quantities of vehicles and parts to America: in 2018 it was the source of just 6% of American imports of such goods. However, Mexican imports of Chinese industrial supplies have surged, increasing about 40% since 2019. Even in America's backyard, decoupling is not going according to plan.
DOUBLE PLAY
The big picture is therefore clear: Chinese supply chains may be less visible, but they remain extremely important to the American economy. Will they maintain their central role? Trump has threatened huge tariffs on all Chinese products if he becomes president in November. Such tariffs could be enough to encourage some companies to leave China for good. An aggression by Xi Jinping, whether in Taiwan or elsewhere, could have a similar impact. Over the decades, some countries that currently serve as final stops in production lines may develop more impressive industrial capabilities and challenge China's position.
In the absence of drastic changes in American or Chinese politics, things should not be expected to change anytime soon. Many countries are more than happy to play a double game: receiving Chinese investment and intermediate goods and exporting the finished products to America. Economic efficiency, guaranteed by China's enormous size and manufacturing expertise, is a powerful force in favor of the status quo. Decoupling may be strong rhetoric, but it is not the same thing.
(Extract from the eprcomunicazione press review)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/trump-biden-relazioni-cina/ on Sun, 03 Mar 2024 06:47:57 +0000.