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In times of war, ceasefires allow for a temporary suspension of fighting. They give both sides time to bury the dead, attend to their wounded and reload for the next battle.
One of the most famous ceasefires was the Christmas Truce of 1914 during World War I, when British, French and German soldiers on the western front crossed trenches to exchange seasonal greetings and souvenirs.
A ceasefire also opens the path towards – but does not guarantee – a resolution to conflict. That also goes for the trade war between the U.S. and China.
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As we’ve written before, nobody triumphs in a trade war, and the one that we’re in today isn’t about to go away. Trade wars create a lot of confusion and uncertainty among buyers and sellers of goods. They raise the cost of doing business, and if they go on long enough will also hurt consumers with higher prices.
Trade wars also put companies’ long-term business plans into deep freeze until they have a clearer picture of what the future holds.
The U.S.-China trade war was set to escalate by January 1, with the U.S. raising tariffs on US$200 billion of Chinese exports from 10 percent to 25 percent.
U.S. President Donald Trump and Chinese President Xi Jinping declared a 90-day ceasefire to the eight-month long trade war at the G20 Summit in Argentina on Saturday. So that escalation is deferred for now. But like all ceasefires, it won’t last long – or change the face of the war.
Tariffs only shift the deficit to other countries
China’s ballooning trade surplus with the U.S. has been one of the biggest points of contention. President Trump says it’s helped China develop at the expense of the U.S.
There’s truth to this.
China’s exports to the U.S. have grown eight-fold in the last 20 years. From US$62.5 billion in 1997, its exports have soared to US$505.5 billion.
Over the same time, U.S. exports to China have grown 10-fold, hitting US$129.9 billion last year.
That resulted in the largest annual U.S. trade deficit with China in history in 2017, worth US$375 billion, and helped build on China’s already massive US$3 trillion in foreign currency reserves.
But you can’t wipe out trade imbalances the size of the economy of Nigeria overnight… or even over eight years.
As part of the truce, Trump stressed that China would be substantially increasing its purchases of U.S. goods. But there were no concrete figures – or a specific definition of precisely who would be buying more of what and from whom.
It would need to be a big number. Even if China quadrupled its orders of all existing imports of U.S. goods, it would only reduce the U.S. trade deficit with China by 44 percent, based on full-year 2017 figures.
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Meanwhile, Economics 101 insists that higher demand has to be met with higher supply. Otherwise, a shortage results in higher prices.
U.S. tariffs against China are only accelerating the shift in global manufacturing into neighbouring nations that still enjoy relatively low cost of labour and which aren’t (yet) in the crosshairs of U.S. tariffs. Some of the biggest winners include Vietnam, Cambodia and Bangladesh.
Over the last five years, for instance, the U.S. trade deficit with Vietnam surged 145 percent to US$38.3 billion. The U.S. trade deficit with Cambodia is expected to surpass US$3 billion for the first time this year. That’s small, but shows a bigger trend.
Beyond trade, the Trump-Xi meeting yielded no meaningful details relating to other important U.S. demands of China. Steps to control and eradicate the theft of American intellectual property, for example – a reasonable U.S. demand – were not announced.
China also agreed to lower the existing tariffs on imported U.S. automobiles from the current 40 percent. But no details were given as to when the cuts would be made, or by how much the tariffs would be reduced.
In short, both sides avoided a worsening of trade relations without resolving the fundamental differences between them. It buys both sides some time.
Trade naturally ebbs for the next 90 days
Every year, U.S.-China trade tends to pick up during the month of August, and peaks in October/November, as manufacturers rush to fill orders for the year-end holiday season. As shown below, nearly 10 percent of total annual trade between the two countries takes place in October. Just 6.8 percent of total trade happens in February.
That means we’ve already entered the traditional slow season for U.S.-China trade.
Goods headed for U.S. department stores ahead of the year-end shopping season have already been delivered, or are waiting at ports to be trucked to Amazon, Target and Walmart.
With China exporting less to the U.S. in the coming months, the trade deficit will narrow when figures are reported.
But it doesn’t mean that the world’s two largest economies are already on a path of mutual understanding when it comes to evening out trade imbalances.
More likely, the trade deficit will rise again in March.
Front-loading means a bad first quarter for China
One of the unintended consequences of Trump’s tariffs has been the surge in U.S. imports of Chinese-made goods in recent months.
That’s because U.S. buyers rushed to beat the anticipated January 1, 2019 tariff increase. This process is called front-loading. It’s like stockpiling canned tuna when the local shop announces that it’s soon going to be increasing prices on canned tuna. It can lead to significant shifts in the usual pattern of growth in trade.
This is why even with 10 percent tariffs already imposed on nearly half of China’s exports to the U.S., Chinese exports have been rising since the trade war began. In September alone, exports to the U.S. grew 10.1 percent, driving up the trade deficit to a monthly record US$40.2 billion, according to the United States Census Bureau. That’s the opposite of what the U.S. government was aiming for.
Official figures for October U.S.-China trade aren’t out yet. But China’s exports grew 15.6 percent during the month, which was well above the forecast average growth of 11 percent. So there was likely a good deal of front-loading in October as well, as American buyers bought more in anticipation of higher prices.
So even with the latest round of tariff increases suspended until at least early March, there won’t be a sudden drop in Chinese exports to the U.S. anytime soon.
The first quarter for China’s manufacturing will be weak because it normally is during this time of year, and because of front-loading this year.
But at the same time, the U.S. economy’s growth is accelerating. That means demand for goods – and imports from China – will continue to be robust, adding to the deficit, once the effect of front-loading dissipates later next year.
Editor, Stansberry Pacific Research