US Versus China — May the Cheapest Man Win

US tariffs on China are having an unexpected effect.

This from Maritime Executive:

According to Maersk CEO Soren Skou, American imports of Chinese goods are rising, not falling, despite the Trump administration’s sweeping tariff measures on Chinese-made imports. Conversely, Maersk’s internal data suggests that China’s imports of American goods have plummeted by a third in recent months. 

‘The administration’s tariffs were not intended to increase America’s trade deficit with China, but the gap rose to a record monthly level of $40 billion in September, according to the Bureau of the Census. The deepening trade imbalance is an “ironic development,” Skou said. “After Trump has turned up the volume, the U.S. has only increased their imports from China even more.”’

The US has been running a large trade deficit for decades, mainly with China. A trade deficit is basically when a country imports more than what it exports.

US president Donald Trump has complained that this trade deficit has led to a loss of jobs in the US and is the cause why wages aren’t growing.

Trump has vowed to eliminate the US trade deficit. That is, he is looking to increase exports and reduce imports by imposing tariffs and renegotiating new trade deals with partners like NAFTA or the EU.

He has imposed a set of tariffs this year to discourage imports. Yet even with tariffs the deficit is not decreasing, but increasing.

The US trade deficit hit US$ 54 billion for the month of September, a 1.3% increase from the month before and a 10.1% increase year to date.

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As the article continued, Skou thinks this could be a temporary effect because of companies buying more goods and stocking them before tariffs hit:

The acceleration of American buying from China may be temporary, as it appears to be related to retailers’ interest in stockpiling Chinese wares before the next round of tariffs takes effect. Skou warned that it will tail off sharply next year as vendors draw down this extra inventory. “There will definitely be a price for the container industry to be paid,” he said in an earnings press conference Wednesday.

‘Overall, Maersk predicts that global containerized freight volumes will contract by 0.5 to 2.0 percent next year, with all growth erased by trade restrictions – primarily those imposed by China and the United States.

But, we don’t think this explains the whole story.

Some of the biggest exports to China from the US include aircraft parts, motor vehicles, soybeans and oil.

US oil exports have been a saving grace

If it wasn’t for oil, the overall US trade deficit would be much higher than what it is today, as World Oil recently reported:

The total U.S. merchandise trade deficit in 2017 was nearly $250 billion lower than it otherwise would have been if the petroleum (crude oil, refined products and natural gas liquids – petroleum liquids separated out from natural gas and also known as NGLs) trade deficit had remained at its 2007 level, the report finds. IHS Markit projects that the U.S. petroleum trade balance will further improve by roughly $50 billion between 2017 and 2022.

The thing is that, as you can see below, Americans are still buying a lot of goods from China. Cell phones…computers…furniture…toys.


Top Exports

Source: US Trade Numbers

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And that demand for cheap Chinese goods could remain strong in the short term for two reason.

For one, the US economy is getting stronger. Unemployment is low and Americans are seeing their wages grow, which will increase consumer spending.

But also because the US is seeing a stronger dollar. The US federal reserve has been increasing interest rates, which is making the US dollar appreciate against the Chinese yuan. 

As you can see below, the US dollar has appreciated almost 7% since the beginning of the year.


USD to CNY

Source: XE

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This makes imports from China cheaper and exports from the US look expensive. And let me tell you, this won’t help in reducing the US trade deficit.

Yet as Reuters reports, China could be trying to stop the yuan from devaluating further:

Major state-owned Chinese banks were seen selling dollars at around 6.97 per dollar in the onshore spot foreign exchange market in early trade on Tuesday, three traders said, in an apparent attempt to arrest sharp losses in the local currency.

‘“Big banks were selling (dollars) to defend the yuan,” said one of the traders.

The move by the state-run banks helped the yuan recover to 6.9550. The onshore spot yuan was trading at 6.9645 as of 0237 GMT.

A devaluing currency will eat up China’s foreign reserves.

So far tariffs are backfiring on the back of US companies stockpiling goods before tariffs hit, a strong economy and a strong currency.

But, this could all change in the long run.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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