On Dec. 8, the Chinese General Administration of Customs reported preliminary export data, showing 5.4 percent year-over-year growth for November, as illustrated in the chart below. In comparison, the October export growth rate came in at 15.6 percent year-over-year. This 10.2 percentage point differential shows the volatility the Chinese export market is experiencing due to the trade war.
The Chinese export growth rate for October likely was caused by companies trying to beat a potential tariff hike on the third round of the United States’ Section 301 tariffs on China. The third round of tariffs, which was placed on goods with an annual import value of $200 billion, kicked into gear on Sept. 24 at a rate of 10 percent and was expected to be increased to a rate of 25 percent Jan. 1.
However, that increase has been postponed as the U.S. and China attempt to work toward an agreement. The U.S. plans to raise the rate to 25 percent on March 1 if no deal is reached.
On July 6, the U.S. implemented the first round of Section 301 tariffs on China, a 25 percent tariff on goods totaling $34 billion in annual import value; and on Aug. 23, the U.S. implemented a second tranche of 25 percent tariffs on good from China with an annual import value of $16 billion.
The Chinese government already has started initiatives to try and combat the impact of the trade war.
The first initiative is to keep the currency weak as it depends on exports to prop up the domestic industrial sector. A weak currency gives a country a comparative advantage when trading with a country that has a stronger currency.
The Chinese yuan currently trades at a ratio of 6.9:1 with the U.S. dollar, making it significantly weaker.
In order to keep GDP in line with expectations by the Chinese government, exports must be artificially increased by depressing the yuan.
As the Chinese cannot depend on domestic consumers to purchase all products made industrially, they depend on countries with stronger currencies.
If China continues to experience robust economic growth in the future, domestic consumption eventually will be able to support the industrial sector. Until the Chinese economy fully develops, China will need developed countries like the U.S. to buy its goods.
According to the World Bank, more than 13 percent of imports worldwide went to the U.S. in 2016, as illustrated in the chart below. The U.S. is not the only developed country that imports goods, but due to its consumption base and currency exchange rate, it is the best target for exporting countries.
The U.S. is aware of its standing worldwide and thus has been aggressive with its Chinese trading partner.
While the U.S. Justice Department claims to be acting independently, the Chinese viewed it as an escalation in the trade war.
The United States’ aggression might be paying off, as The Wall Street Journal reported Dec. 12 that China is prepared to allow more access to foreign firms as an attempt to resolve trade tensions.
President Donald Trump also announced on Dec. 11 that China would begin purchasing soybeans again. “I just heard today that they’re buying tremendous amounts of soybeans. They are starting, just starting now,” he said.
Bluewater Reporting pays close attention to geopolitical events that can cause externalities in ocean liner shipping data. The trade war between the U.S. and China has caused discrepancies in data that deviate from the historical trend.
This chart was generated using the Capacity Report (with filters) application from Bluewater Reporting. The chart shows the Pacific trade lane between Asia and North America, with the majority of TEUs moving between China and the U.S.
Between August and November 2017, weekly allocated capacity from Asia to North America fell 2.8 percent, or 11,425 TEUs, from 406,472 TEUs to 395,047 TEUs. However, between the months of August and November, weekly allocated capacity on the trade fell only 1.4 percent, or 6,216 TEUs, from 438,405 TEUs to 432,189 TEUs.
The data illustrates that the peak season has extended this year in comparison to last year.
However, spot rates illustrate that peak season is now starting to wind down, considering that the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index fell from a reading of 890.41 on Nov. 30 to a reading of 861.55 on Dec. 7, with the decline largely fueled by significant rate decreases on the Shanghai-to-U.S. trades.
If the trade war between the U.S. and China continues, both countries will face economic challenges in the future, being that both are dependent on one another to bolster economic growth and international trade.
Alexander Ullmann is a BlueWater analyst.