China–US consensus on trade reduces short-term downside risks
On May 19, China and the US issued a joint statement regarding trade consultations in Washington. 1) Both sides have reached consensus on taking effective measures to substantially reduce the US trade deficit in goods with China, and China will significantly increase purchases of US goods and services. 2) Both sides have agreed on meaningful increases in US agriculture and energy exports. 3) Both sides have reached consensus on the need to create favorable conditions to increase trade in manufactured goods and services. 4) Both sides have agreed to strengthen cooperation on intellectual property protection, and China will advance relevant amendments to its laws and regulations in this area, including the Patent Law. 5) Both sides have agreed to encourage two-way investment and to strive to create a fair, level playing field for competition. 6) Both sides have agreed to continue to engage at high levels on these issues and to seek to resolve their economic and trade concerns in a proactive manner.
US–China trade friction likely to ease. Liu He, China’s vice premier and head of China’s delegation to Washington, said to media that China and the US have agreed not to launch a trade war and to stop slapping tariffs against each other. On May 18, the Ministry of Commerce of China announced it would be ending an anti-dumping investigation into imported US sorghum. On May 15–17, the US Trade Representative held a hearing on the proposed Section 301 tariffs on Chinese imports. Though no conclusion has been reached, we think that the possibility of the US imposing additional tariffs on US$50bn of Chinese goods has declined.
The trade imbalance between the US and China will be reduced. China recorded a US$278bn trade surplus in goods with the US in 2017, according to China’s statistics; the US recorded a US$375.2bn trade deficit in goods with China in 2017, according to the US’s statistics (Figure 1). Although US media said that China had offered to cut its trade surplus with the US by US$200bn, the joint statement only stated that the two sides have agreed to substantially reduce the US trade deficit in goods with China without giving any quantitative target. In the first four months of this year, China’s total goods trade surplus decreased US$19.7bn YoY, but its surplus with the US increased US$9.6bn. We expect that China will reduce its trade surplus with the US, but a reduction of US$200bn is unlikely in the short term.
China will increase imports of agricultural products, energy as well as other goods and services from the US. According to US statistics, the US exported US$18.1bn of agricultural products (soybeans: US$12.4bn) and US$8.6bn of energy (crude oil: US$4.4bn) to China in 2017. In recent years, the US’s exports of agricultural products to China declined (Figure 2), but its energy exports to China increased substantially. US exports of crude oil to China surged 1,130% in 2017 (Figure 3). According to China’s statistics, China imported US$21bn of agricultural products and US$7.2bn of energy from the US in 2017, accounting for 20% and 2.9% of China’s total imports of agricultural products (US$105.2bn) and energy (US$245.9bn). There is still great potential for cooperation between the two countries in agriculture and energy trade. China will also increase imports of other goods and services from the US.
Consensus reduces the uncertainty in bilateral trade and investment. China and the US agree on the need to create favorable conditions to increase trade in manufactured goods and services; both sides have agreed to encourage two-way investment and to strive to create a fair, level playing field for competition; and both sides have agreed to continue to engage at high levels and to seek to resolve their economic and trade concerns in a proactive manner. Liu He said that China and the US will strengthen trade cooperation in energy, agricultural products, health care, high-tech products, and finance. The consensus between the two countries will help reduce the uncertainty in trade and investment.
China’s improving protection of intellectual property will help attract foreign investment and promote domestic innovation. In recent years, China has been strengthening its intellectual property protection and has established a number of intellectual property courts since 2014. According to the State Council’s structural reform plan, China will reorganize the State Intellectual Property Office. In addition, China is advancing a fourth revision of its Patent Law. Enhancing intellectual property protection will not only help attract foreign investment but also promote domestic innovation, thereby increasing China’s economic competitiveness.
A decrease in the bilateral trade imbalance between China and the US may not necessarily change the two countries’ total foreign trade balances. According to the national income identity, a country’s current account balance is equal to total savings minus total investment. Without significant changes in Chinese and US savings and investment rates, reduction in the bilateral trade imbalance may not change the two countries’ overall foreign trade balances. On one hand, the Chinese saving rate is much higher than the US (Figure 4). On the other hand, China and the US are implementing divergent fiscal policies. While China lowered its 2018 budget deficit ratio, the US continued its fiscal policy expansion. CBO projects that the US federal deficit ratio will expand from 3.4% in 2017 to 5.4% in 2022. Historically expansions of the US fiscal deficit ratio were often accompanied by expansions of the US trade deficit ratio. Even though China will actively increase its imports from the US, the US trade deficit may not necessarily narrow.
An increase in China’s imports from the US does not mean a decline in imports from other regions. Considering the macroeconomic balance mentioned above, if China significantly increases its imports from the US in the short term, it may have to reduce imports from other regions, but dynamically, China’s total imports are growing rapidly (by nearly 20% YTD) and will expand from US$1.8trn in 2017 to over US$2trn in 2018. As China further opens up and actively increases imports, its import growth rate may still reach 10% per annum in coming years and expand by more than US$200bn annually. Hence, a significant increase in China’s imports from the US need not come at the expense of cutting imports from other regions.
From a long-term perspective, the trade friction between China and the US may not be over yet. There are deeper reasons behind the recent increase in the trade friction between the US and China, including China’s rapid economic catch-up with the US (Figure 6), the slowdown in global economic growth, and the worsening of income distribution and wealth inequality in many countries. Historically trade friction between the US and Japan continued for over three decades from the 1960s to the 1990s. As China’s GDP continues to grow relative to that of the US, trade friction may emerge again, but short term, a consensus reached by China and the US is a positive factor for both sides and the global economy.