But the Trump administration also won. For the first ten months of 2019 YoY, the US trade deficit with China is down by USD 50 billion. It is down by 16,9% YoY in Q3. Needless to say, this has been achieved without damage to growth (at 2,1% in Q3 2019), to jobs (unemployment is at its lowest since 1969) or to the consumer price index (which at the end of September stood at 2,1% versus 1,8% a year before). Politically, it is impossible to blame the Trump tariffs for damage to the economy, and this is a source of strength both on the domestic political front and against China.
However, there is also a downside for the US. Trade diversion has occurred, in different ways. Some favor China. A complete exemption of duties for single packages valued under USD 800 is used massively by China’s exporters and e-commerce companies, who ship in bulk to Canada and Mexico and redistribute from there. And just like the Japan of the 1980s installed “screwdriver factories”, assembling final products on the Mexican border to the United States, the upsurge in FDI into countries such as Vietnam and Malaysia is not only from foreign companies leaving China: Chinese companies are also shifting final assembly lines elsewhere as staging grounds for their sales to America.
And who else won?
Third countries indeed can benefit on both sides. According to the Nomura Research Institute, US import substitution has benefitted Vietnam, Taiwan and South Korea for electronic products; Malaysia for semiconductors; and South Korea and Mexico on motor vehicle parts. China’s import substitution has led to beneficiaries in copper (Chile); soybeans (Argentina, Brazil, Chile and Canada); gold (Singapore, Hong Kong and South Africa); natural gas (Malaysia, Australia); and aircraft (France and Germany).
The most striking example, one that runs completely contrary to recent media coverage about a Germany trapped between two economic giants, is that of German exports. While their growth towards China has markedly slowed down in 2019, they have surged towards the US (+5,3% YoY in Q2, +7,6% YoY in Q3 2019). Machinery and electronics figure prominently. In general, EU exports to the US are rising – in part driven by US growth, in part helped by the decline of the euro. It is no wonder that the Trump administration is tempted to target Europeans on trade.
Early analysis and estimates tended to exaggerate the harm from the trade conflict to the US economy, and to underestimate the damage to China’s. As tariff escalation occurred, this damage became more evident. In terms of direct bilateral tariff increases, it is even harder to identify damage to third economies – and, on the contrary, one can find windfall benefits that occur with displacements of value chain and staging of final export locations. The increased demand from the US economy picks up the slack from Chinese demand – although East Asian exporters to China such as South Korea may well suffer more than others. It is only by invoking uncertainty, or more accurately angst, fueled by misplaced talk of war, that one can position the US-China trade conflict as a key factor in the global economic slowdown. Much more likely, the end of an extremely long expansionary cycle, or fear of that ending, is the right explanation.
As we shall see in part 4 of this blog, the same judgment does not hold true if one considers that targeted tech export denials and the ban on some suppliers for critical supplies, escalate into a wider decoupling. The disruption would be on a wider scale, although there too one will need to disentangle benefits and losses for each party.