In a Year of Trade War, U.S. Deficit With China Shrank

Date: Wednesday, January 15, 2020
Source: The Wall Street Journal

But China still exports more to the U.S. than the other way around

BEIJING—President Trump’s trade war with Beijing reduced the U.S.’s trade deficit with China last year, although Chinese manufacturers still export far more to the U.S. than vice versa.

China’s widening surplus had provided ready ammunition to the Trump administration as it placed round after round of tariffs on the country’s goods to get Beijing to correct what it called unfair trade practices. The trend is set to reverse, with the two countries poised to complete the first phase of a trade deal this week, although many economists dispute Mr. Trump’s view that trade deficits are inherently bad.

Chinese customs data on Tuesday showed that the country had a trade surplus with the U.S. of $295.8 billion last year, compared with a record $323.3 billion in 2018. The figures represent China’s first full year of trade data since the trade war began.

China’s 12.5% decline in exports to the U.S. last year would have narrowed the U.S. deficit more, but Chinese imports from the U.S. dropped even faster. Beijing retaliated against Washington, imposing tariffs on American goods and directing state-owned companies to buy less from what had been its largest single-nation trading partner. China’s imports from the U.S. fell nearly 21%.

Now that China has promised in an imminent trade pact to buy more from the U.S., though it hasn’t specified by how much, its trade surplus with the U.S. should narrow further, economists say.

Washington, for its part, has agreed to remove some of its tariffs on China. Still, 25% punitive levies on $250 billion in Chinese goods, or about half of what China sells to the U.S. each year, remain in place. That could continue to curb American demand for Chinese goods.

“The tariff rollbacks are fairly marginal compared with tariffs that remain in place,” Julian Evans-Pritchard, an economist at Capital Economics, said of the U.S. concessions. “On the import side, China’s committing to quite a big step up.”

President Trump and Chinese negotiators are scheduled to sign their pact Wednesday in Washington. U.S. officials have said Beijing will increase purchases of U.S. goods and services by at least $200 billion over the next two years from 2017 levels. The Chinese side hasn’t made any promises in public. Details about what the two countries agreed on could emerge after the signing. The U.S. is expected to release a version of the agreement.

“If fully implemented, it will make a difference,” Myron Brilliant, executive vice president of the U.S. Chamber of Commerce, said of the agreement’s potential impact on U.S.-China trade relations.

The hope, however, is that the two countries will continue discussions on how to create a better environment for business. “We should not forget that the tariffs are still in place,” he said.

An emerging worry among China’s global trading partners is that Beijing would need to direct purchases away from some countries to hit the buying levels Washington demands. Tuesday’s data showed that last year, Southeast Asian nations collectively replaced the U.S. as China’s second-largest trading partner by country and region, behind the European Union.

Exports to Southeast Asian countries grew 12.7% in 2019 from a year earlier, a slight decline from 14% growth in 2018.

At a media briefing, China General Customs deputy chief Zou Zhiwu sought to project a positive outlook, citing the strong rebound in exports and imports in December.

Though the country still faces uncertainties, risks and challenges from changes to the global economy since the financial crisis, he said, the government is working to stabilize economic growth.

He added that China’s promise to buy more U.S. products doesn’t necessarily mean imports from other countries would get squeezed because the Chinese market is huge.

Growth in Chinese exports to regions other than the U.S. slowed to 3.6% last year, less drastic than the 12.5% contraction in exports to the U.S. Exports overall inched up 0.5% in dollar terms, compared with nearly 10% growth in 2018. That was the slowest pace since 2016, when Chinese exports contracted.

China’s overall exports started soaring after Washington announced that the two sides had come to a truce. Analysts attributed a 7.6% year-over-year jump in December, following a contraction in November, to slightly improved demand from China’s trading partners combined with a low starting point at the beginning of the month.

Meanwhile, Chinese imports climbed 16.3% year over year in December, following November’s 0.3% increase. For the year, imports dropped 2.8%, reversing a surge of 16% in 2018.

Still, economists’ expectations are modest for Chinese trade this year. Watchers of the U.S.-Chinese trade dispute say tensions could escalate yet, should the two sides not make good on their first pact, or if other issues get in the way of implementing it. The World Bank expects global growth to clock in at 2.5%, slightly higher than 2.4% in 2019.

“Exports in 2020 won’t see a significant rebound,” Lu Ting, a China economist at Nomura, said of China’s annual trade figures.

There are headwinds on China’s domestic front, too: Demand from Chinese consumers has flagged in the past year, with the economy growing at its slowest pace in about three decades. The Chinese yuan has strengthened against the U.S. dollar since crossing the 7-to-1 threshold in August. A stronger local currency squeezes profits Chinese exporters derive overseas.

At the customs briefing, Mr. Zou expressed approval of Washington’s move earlier in the week to drop its labeling of China as a currency manipulator, saying it had “immediate significance.”

 

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