With the clearly worsening trade war between the US and China, marked by US President Donald Trump’s Twitter tirade on the eve of the G7 summit in France, including his ‘ordering’ of US companies out of China, the news Tuesday of a marginal expansion of China’s manufacturing industry, comes as a rather intriguing nugget in an otherwise dismal scenario.
It’s tempting to see a glimmer of hope in the results of August’s Caixin China General Manufacturing Purchasing Managers’ Index (PMI) which moved into positive territory for the first time in two months. The index, after all, is the leading industry barometer on what is happening in China’s manufacturing sector, and by some extension, the global economy.
Yet Caixin is coy. Steering largely clear of forecasts, the PMI simply gives the picture at the most recent moment possible, which obviously has much value, but doesn’t portend the future beyond what the pundits want to read into the numbers, now.
While certainly good news to see an expansion of China’s manufacturing, it would be obviously foolish to read too much into this, particularly given global business sentiment is increasingly bleak.
Consumer sentiment is taking longer to take a hit, but surely at some point consumers in the world’s largest economy are going to wake up to the increased cost of their beloved, formerly ‘Cheap from China’ consumer goods.
And most of all, with no positive signs in the ongoing trade war, what is driving this increase in manufacturing orders, one can only wonder.
Much has been said of the transfer of manufacturing out of China and also the transhipment of China-origin cargo through Southeast Asia and other regions. It begs the question as to whether this apparent circumventing of tariffs is driving this growth, or is it simply a race to beat the tariffs… albeit a bit late one surmises.
For Zhong Zhengsheng, director of macroeconomic analysis at investment research firm CEBM Group Ltd., a subsidiary of Caixin Insight Group, China’s export trade lanes have changed in response to the trade war, with Europe, Southeast Asia and other ‘Belt and Road’ related countries figuring importantly into the equation.
In July, China’s exports to ASEAN, Europe, the US and other regions all accelerated, especially for Europe and other regions, Zhong notes. Likely the US growth was an early push to get shipments in under the ‘tariff wire’, or was it?
Zhong notes that exports out of China have tended to move to the US from countries in Europe and Southeast Asia. He points out that since the beginning of 2019, the country structure of China’s exports have undergone quite significant change in a short time span.
China’s exports to the US saw the trade ratio drop significantly (even though the numbers are relatively small, it does mean a substantial volume in terms of trade) with the annual moving average dropping from 19.2 per cent in 2018 to 18.3 per cent in June 2019.
At the same time the proportion of Chinese exports to Europe has risen, from 16.5 to 17.1 per cent and the proportion of exports to Southeast Asia has further increased from 12.9 to 13.5 per cent.
So in other words, the global supply chain, as unwieldy as it seemingly is, has been ‘tweaked’. The result of this global supply chain ‘re-jigging’ in the short term means that China’s exports won’t not fall off the proverbial cliff, but may well come at some cost down the road, Zhong cautions.
This includes medium – and long-term effects – including the loss of export comparative advantage, the difficulty of transformation and upgrading, and the shift in the balance of payments structure.
And for countries like Vietnam and others in Southeast Asia, which have undeniably been benefiting from the ‘re-export loop-hole’, the good times may well also come at a cost.
With the acerbic ‘trade warden’ in Washington watching every single percentage change in trade balances – not a good indicator say many economists – this is clearly a dangerous game.
Trump has already called out Vietnam on its trade imbalance and Hanoi has been quick to clamp down on some of the transhipment, fearing problems from the unpredictable and often acerbic US President.
While transhipment is one issue, the shift of production out of China is another. The shift out of China is actually not a new phenomenon, but one driven over recent years by increasing wages in China which has led companies to explore other parts of the world in search of cheap manufacturing labour.
The best example being South Korea-based Samsung which has, for a number of years, manufactured products in Vietnam. New trade agreements are also making Southeast Asia more attractive for countries in the broader Asia-Pacific region. But the trade war has clearly been a substantial, ‘extra’ push in this direction.
Exports out of Vietnam have risen from about USD 176.6 billion worth of goods in 2016 to USD 290.4 billion in 2018, according to the International Trade Centre. Vietnam had a USD 39.5 billion trade imbalance with the US, in Vietnam’s favour, according to the US Census Bureau.
But Vietnam isn’t the only winner. Mexico passed China this year to become the US’ largest trading partner, though the US still imports more products from China than Mexico. The USD 9.9 billion trade deficit between the US and Mexico, in Mexico’s favour, for the month of June this year was the largest monthly imbalance on record between the two countries, according to the Census Bureau.
India, Malaysia, Thailand, and Taiwan all saw up-ticks in exports to the US and around the world last year, as the US trade deficit hit a record high of USD 891.3 billion for 2018.
The bottom line being, the innocent bystander of trade is adjusting to the war going on around it. While economists argue that trade deficits aren’t necessarily a bad thing, Trump obviously thinks differently.
Clearly the current situation where China’s exports filter out through other markets and into the US is not sustainable in the long-term, long-term changes to global supply chains will surely result.
For now, consumers still want to buy and to some extent e-commerce is proving a counterweight to the whole trade war mess, but this has its limits. For the short-term, like water flowing through the easiest path, goods will move – as easy as they can – as trade statistics have shown thus far.
But this is neither the most efficient, nor practical, nor economically satisfying of situations. Only a much needed reconciliation of the world’s two biggest economies will put things right… and for now, that doesn’t seem remotely possible.
If, as pundits suggest, the trade war is really more about Trump getting re-elected than anything else (certainly a very plausible theory), then it’s going to be a strange year ahead that could well redefine global trade and with it global supply chains and the air cargo sector that supports it.