China’s Trade With US: Down But Not Broken

International | Jul 13 2021

While further trade decoupling between China and US/rest-of-world would hurt China the most, there’s no corporate or political appetite for the costs or disruption associated with severing trade with the world’s second largest economy.

-Asia/ROW key beneficiaries of further trade decoupling with China
-US imports from China remain around a fifth below pre-2019 trend projections
-China has most to lose if trade with US/ROW decouples further

By Mark Story

In light of recent speculation of a new cold war between China and the US and its allies, Oxford Economics has explored situations that could potentially lead to deeper economic decoupling between today's two global superpowers.

There is no shortage of evidence to suggest the US-China trade war has had a major negative impact on bilateral trade.

Fuelling further speculation that China-US trade was decoupling were US tariffs on imposed China in 2018 that led to both trade diversion and import substitution. What’s noteworthy here, adds Oxford Economics, is import substitution in sectors like electronics, where it was initially thought such switching of suppliers might be difficult.

Declining trade was restored somewhat by the Economic and Trade Agreement reached between the two sides in late 2019 (known as phase one) and by the coronavirus crisis, which has boosted US imports from China.

However, despite this improvement Oxford notes the losses remain substantial, with US imports from China around -20% down on where they might have been based on the 2009-2018 trend.

Two scenarios point to major trade structure shifts

To pressure-test the notion that the declining China/US trade trend could escalate continued decoupling between China and the US, Oxford Economics developed two scenarios.

Firstly, there’s a ‘US-centric’ scenario, in which existing trade and geopolitical tensions worsen. This would lead to a further sharp rise in trade barriers against China on the part of the US and a lesser rise involving other US allies.

Within this scenario, trade barriers are raised on around 11% of China’s imports and 25% of its exports.

Then there’s a broader decoupling scenario in which the economies of US-Canada-Mexico, Japan, South Korea, Taiwan, and Europe all raise trade barriers against China dramatically in an attempt to cut China off economically. Within this scenario, trade barriers increase on around 55% of China’s imports and 63% of its exports.

In summary, Oxford Economics' analysis suggests US-China trade decoupling would lead to major shifts in trade patterns. On the US side, in both scenarios China’s share in US imports falls from 16% to 4%-5%, with gains spread among the other regions.

The forecaster found that both scenarios point to major shifts in US and Chinese trade structures.

China the bigger casualty

The forecaster’s analysis also reveals that US-China trade decoupling would have a significantly greater impact on China’s GDP than on the US.

In the US-centric decoupling scenario China’s GDP falls by just under -1% in the long run, and in the broader decoupling scenario by around -2.5%. However, Oxford Economics assumes short-run losses would likely be considerably bigger, at up to -2% and -5% respectively.

In both scenarios, trade barriers rise on around 16% of US imports and 7% of exports, which to the forecaster also suggests bigger economic impacts on China than in the US, and more so in scenario two.

While China’s total exports fall -7% in the US-centric scenario, within the broader scenario they fall by as much as -22%. By comparison, in both scenarios the share of China’s exports going to the US drops from 20% to 7%-8%.

Overall, the net effect of the forecaster’s scenarios reveals that higher trade barriers would cut trade between China and key trading partners. This would lead to trade diversion to other Asian economies and the rest of the world.

US total exports fall by -3%-4% in both scenarios. Elsewhere the forecaster notes the North East Asian group – Japan, Korea, and Taiwan – sees the biggest falls in total exports, mostly due to lost intermediate exports to China.

In the US-centric scenario the share going to other Asian and rest-of-world destinations rises from 37% to over 50% and in the broader decoupling scenario to 70%.

Broader decoupling: Neither proof nor desire

While the economic impacts from deeper trade decoupling of China and the advanced economies would be substantial, Oxford Economics found no proof of a broader decoupling process involving China’s other major trade partners.

Given that many US firms are keen on such engagement, and with governments of most advanced economies -the biggest allies of the US- equally reluctant to curtail economic engagement with China, the forecaster’s analysis concludes the likelihood of a broad decoupling scenario is low.

While some commentators have linked decoupling to a ‘new cold war’, the forecaster thinks this analogy is inappropriate, especially given China is far greater integrated into the world economy than the USSR was in the 1950s.

This makes large-scale decoupling much more expensive, which Oxford Economics concludes greatly reduces its likelihood.

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