The drop in China-U.S. two way trade seems to be accelerating since the start of this year, following a drastic downturn starting in the third quarter of last year.
According to China Customs, exports to the U.S. entered a free fall in September, with successive month-to-month declines of 11.6 percent, 12.6 percent, 25.4 percent and 19.5 percent. As a result, the whole year of 2022 saw a meager 1.2 percent growth over 2021, at $581.78 billion. Chinese imports from the United States had negative growth of 1.1 percent.
According to official U.S. data released by the Bureau of Economic Analysis, in 2022 bilateral trade in goods was up 19.3 percent with Canada, up 17.6 percent with Mexico and up 19.0 percent with the European Union, but up only 5.2 percent with China. China fell to the fourth-largest trading partner of the U.S., behind Canada, Mexico and the EU, and was no longer the largest import source. It was replaced by the EU.
The tempo has accelerated since the start of 2023. Official Chinese data showed a 21.8 percent fall in Chinese exports to the U.S. and a 5.0 percent fall in imports. As a result, the U.S. lost its position as China’s largest export market. It fell to the third place, behind ASEAN and the EU.
The drastic drop in China-U.S. bilateral trade in goods provided further evidence of decoupling and trade diversion in selected high-tech sectors.
According to the U.S. Department of Commerce, during 2018-22 period U.S. imports of computers and electronics increased by 22.1 percent globally but fell by 13.4 percent from China, the largest source by far. China accounted for 45.0 percent of total U.S. imports — or nearly half — in 2018, but accounted for 31.7 percent — less than a third — in 2022.
BEA data provided further evidence. Advanced technology products (ATP) imports from the U.S. in 2022 increased by 14.7 percent, or $634.6 billion. Imports increased extremely fast from North America (up 22.5 percent) and from the EU (up 24.6 percent), but were relatively slow from the Pacific Rim area, up only 5.9 percent. Within the Pacific Rim area, imports from the Chinese mainland fell by 0.4 percent, while those from the island of Taiwan, along with Japan and South Korea, were up 19.3 percent, 21.7 percent and 22.5 percent, respectively.
However, there has been a drastic change in the regional pattern since the start of this year. The Pacific Rim (excluding China) lost momentum as a source of supply. Global imports to the U.S. in January grew by only $6.36 billion, with $3.48 billion from North America and $ 9.26 from the EU, but off $11.01 billion from the Pacific Rim. Although China continued to account the largest part of the decline (off $9.59 billion), Taiwan, combined with Japan, Vietnam, Indonesia and Malaysia, suffered a loss.
Interestingly, the total fall of the above five suppliers ($2.73 billion) matches accurately the total increase of four other suppliers —India, Thailand, South Korea and Singapore ($2.71 billion). In other words, the Pacific Rim, long the largest source and key part of the supply chain for the U.S., is moving into stagnation and fragmentation.
The sharp fall in trade with the U.S. has made China less important for the U.S., and the U.S. less important for China. Nonetheless, ASEAN and the EU have filled the gap left by the U.S..
Changes in China’s global trade
2018 Jan-Feb 2023 % change
EU * 14.8 15.4 +0.6
U.S. 13.7 11.4 -2.3
ASEAN 12.7 15.4 +2.7
EU* 16.4 18.0 +1.6
U.S. 19.2 14.1 -5.1
ASEAN 12.8 16.3 +3.5
EU* 12.8 12.0 -0.8
U.S. 7.3 7.8 +0.5
ASEAN 12.6 14.1 +1.5
* EU plus UK for 2023
Source : www.customs.gov.cn, and compute thereon
Since the Donald Trump administration imposed unilateral tariffs five years ago, the U.S. has lost 2.3 percentage points in China global trade, and lost 5.1 percentage points in China global exports and gained 0.5 percentage points in China global imports. However, EU and ASEAN have taken all the share yielded by the U.S. The clear trend is a Chinese market shift from the U.S. to ASEAN.
The above pattern changes show the initial results of the following factors:
• First, the U.S. efforts for economic fragmentation and market shifts, reducing China’s weight in its trade relations;
• Second, high-tech decoupling, focusing on microchips and other information and telecom technologies.
• Third, the U.S. unilateral tariffs on more than $370 billion in Chinese goods and China’s counter tariffs on U.S. goods.
These three factors, if they persist and intensify during the coming months and years, bilateral trade will fall further.
Key questions: Is the fall good or bad for both countries? Is the fall sustainable? Answer: The fall is certainly bad, both for China and the U.S. and thus is hardly sustainable.
First of all, the economic fragmentation and market shift is more harmful to the U.S. than to China. For the U.S., recent market shifts show a strengthening trend of a new cross-Atlantic supply chain and North America regional supply chain but a weakening Pacific Rim supply chain, which used to account for over one-third of the U.S. total imports and represented the bulk of the global supply chain of intermediate or assembled goods, with China as the largest player by far. Therefore, the recent fragmentation and market shift is creating gaps in the essential global supply chain — unbalancing and disrupting it — and thus will harm the U.S. economy. For China, losses in the U.S. market are easily filled by demand from ASEAN and the EU, while imports from the U.S. have been stable.
Second, the high-tech decoupling is also hardly sustainable. The exclusion of China from the chip supply chain and the sweeping restrictions on high-end chips and chipmaking equipment have hit the U.S. chip giants hard. CGGT has estimated that eight of the world’s top nine semiconductor equipment makers will suffer a revenue hit during Q1 of 2023. Therefore, the Semiconductor Association of America (SIA) recently attended a world semiconductor industry meeting in Xiamen, China, and Jimmy Goodrich, SIA vice president expressed explicitly its will to cooperate with China. He said that American chip makers can only be successful by depending on the global market, and so ffthe U.S. government needs to support an open global chip supply chain policy.
Wang Rui, Intel’s China chairman, has said that Intel will remain in China and will continue to have 25 percent of its global revenue generated in China. If Washington continues the decoupling, the Chinese indigenous semiconductor industry will take whatever market is left by the U.S., Europe and South Korea. Building up its own chip industries on a massive scale will also fill the market. Hence, the U.S. itself will face a real danger of being decoupled. Therefore, the current China-U.S. high tech trade decline is not sustainable. A rebound looks most likely to happen in the not very distant future.
Third, the unilateral tariffs on Chinese goods also looks unsustainable. A recent ITC report on March 15 found that, the U.S. unilateral tariffs on China have been almost totally paid for by U.S. importers and have increased the burden on American households. The tariffs have cut Chinese imports by 13 percent and lifted the home price level by 0.2 percent. U.S. imports from China of computers and electronics, including audio-video equipment, fell by 25 percent in 2021, resulting in a 3 to 4 percent home price increase. The U.S. courts have received more than 6,000 suits, demanding the revocation of tariffs, as well as compensation. The Biden administration is in a review process and will decide later whether to keep or drop the tariffs.
The fast drop in China-U.S. bilateral trade is harming the interests of the business community and households of both countries and should be addressed with urgency. The above elaboration shows that the basic factors behind the fall are unsustainable. Governments and business communities in both China and U.S. should lose no time for situational assessment and concerted action. Official dialogue on macroeconomic coordination and trade cooperation should be resumed as soon as possible, with the goal of reaching tangible, positive results.
Industry associations of the two countries, covering chips, AI, big data and new energy technologies, should start institutional dialogues and cooperation projects. Sub-national trade and investment exchanges should be encouraged. China will hold numerous trade, technology and investment expositions, fairs, forums and business talks, shorten the negative list and provide further market access and fair treatment to all American businesses. The latest AmCham survey has also discovered strong intentions by members to remain in China and expand business.
It is highly anticipated that, China and U.S. will work together, checking the trade decline as early as possible, making the numbers grow again and bringing more tangible benefits to the people of both countries.