Growth of Ser­vice Trade Im­ports and Ex­ports Hits Record High

China's Foreign Trade (English) - - Monthly Data - By Shuang Ding , Hunter Chan

China’s for­eign trade in Jan­uary-fe­bru­ary

An of­fi­cial from the De­part­ment of For­eign Trade pointed out that in Jan­uary and Fe­bru­ary of 2018, China’s for­eign trade mainly pre­sented the fol­low­ing fea­tures:

In terms of the com­modit y struc­ture, the ex­ports of me­chan­i­cal and elec­tri­cal prod­ucts amounted to RMB 1.43 tril­lion, up 18.0% yearon-year, tak­ing up 58.4% of the to­tal. Among th­ese, cell phones and in­te­grated cir­cuits in­creased by 21.8% and 20.1% re­spec­tively. Ex­ports in 7 la­bor in­ten­sive in­dus­tries in­clud­ing tex­tile and cos­tume main­tained rapid growth with the ex­ports vol­ume amount­ing to RMB 492.31 bil­lion, up 19.5% year-on-year. In ad­di­tion, the ex­ports vol­ume of steel reached 9.497 mil­lion tons, down 27.1%. Re­gard­ing the im­ports of bulk com­mod­ity, the im­ported quan­tity of nat­u­ral gas, crude oil, re­fined oil, coal, iron ore and soy­bean in­creased by 36.7%, 10.8%, 10.0%, 14.4%, 5.4% and 5.4% re­spec­tively year-on-year. The im­ports of me­chan­i­cal and elec­tri­cal prod­ucts were RMB 775.94 bil­lion, up 17.4% year-on-year, of which the metal-work­ing ma­chine, in­te­grated cir­cuit and com­puter in­creased by 49.5%, 29.2% and 15.5% re­spec­tively. The im­port vol­ume of au­to­mo­biles reached 177,000 with the vol­ume ris­ing by 14.3%.

In terms of main busi­ness op­er­a­tors, ex­ports of pri­vate en­ter­prises reached RMB 1.18 tril­lion, up 29.4%, tak­ing up 48.6% of to­tal ex­ports, 4.2 per­cent­age point higher than that over the same pe­riod of last year and kept its po­si­tion as the largest busi­ness op­er­a­tor. Ex­ports of for­eign-in- vested en­ter­prises were 998.99 bil­lion, up 8.7%, tak­ing up 41.0% of China’s to­tal ex­ports.

In terms of trade mode, im­ports and ex­ports of gen­eral trade amounted to RMB 2.65 tril­lion, up 22.0% year-on-year, tak­ing up 58.7% of the to­tal vol­ume of for­eign trade, 2.5 per­cent­age points higher than that over the same pe­riod of last year.

In terms of the in­ter­na­tional mar­ket, China’s ex­ports with tra­di­tional mar­kets like the U. S., the EU and Hong Kong in­creased by 20.0%, 18.1% and 12.2% re­spec­tively. At the same time, China’s im­port and ex­port with emerg­ing mar­kets like coun­tries along the Belt and Road routes en­joyed rapid growth. The to­tal im­port and ex­port vol­ume with coun­tries along the Belt and Road routes reached RMB 1.26 tril­lion, up 21.9%, 5.2 per­cent­age points higher than the over­all growth rate, among which, the im­port and ex­port with Viet­nam, Brazil, Rus­sia and In­dia grew by 48.2%, 30.4%, 29.5% and 19.5% re­spec­tively.

Trade in ser­vices and com­mer­cial ser­vices

Both im­ports and ex­ports of tech­nol­ogy soared in Jan­uary. There were 1,341 reg­is­tered con­tracts of tech­nol­ogy im­ports and ex­ports with a con­tract value of RMB 31.1 bil­lion. 642 of th­ese con­tracts were im­ports con­tracts with a value of RMB 17.6 bil­lion, up 22.3% year- on-year; 699 of them were ex­ports con­tracts with a value of RMB 13.5 bil­lion, up 24.6% year-on-year.

The growth of ser­vice trade im­ports and ex­ports hit are cord high, and the im­port and ex­port of the pro­duc­tive ser­vice was re­mark­able. With more rapid ex­pan­sion of China’s ser­vice in­dus­try, the ser­vice in­dus­try showed steady and rapid devel­op­ment at the be­gin­ning, and the growth of ser­vice im­port and ex­port in Jan­uary

re­versed the de­cline in Novem­ber and De­cem­ber of 2017, in­creas­ing by 9.7%, hit­ting a record high since July last year. Ben­e­fit­ting from the growth of goods trade, the im­ports and ex­ports of trans­porta­tion ser­vices, in­sur­ance ser­vices, fi­nan­cial ser­vices, pro­fes­sional man­age­ment and con­sult­ing ser­vices in­creased by 31.1%, 31.1%, 43.6% and 18.4% re­spec­tively.

The ex­port of ser­vices kept grow­ing with its struc­ture fur­ther op­ti­mized. In Jan­uary, the ex­port of ser­vices in­creased by 15.8%, keep­ing a two-dig­i­tal growth for 6 con­sec­u­tive months since last August. The ex­port struc­ture was fur­ther op­ti­mized. The ex­port of emerg­ing ser­vices reached RMB 79.86 bil­lion, up 19% year-onyear, 3.2 per­cent­age points higher than the over­all growth of ex­port, tak­ing up 52.6% of the ex­port of ser­vices, 1.3 per­cent­age points higher than that of the last year. Among th­ese, the ex­port growth of fi­nance, tele­com, com­puter and in­for­ma­tion ser­vices, main­te­nance and re­pair ser­vices and other com­mer­cial ser­vices reached 60.7%, 19.8%, 87.4% and 17.8% re­spec­tively.

The growth of ser­vices im­port in­creased largely and the im­port of high- end ser­vices be­came the high­light. Af­fected by the gen­er­ally strong do­mes­tic de­mand and the Spring Fes­ti­val, the ser­vices im­port in Jan­uary in­creased by 6.6% year-onyear, which was the high­est growth rate since last July. The im­ports of high- end ser­vices such as au­dio-visual and re­lated prod­uct li­cens­ing fees, tele­com, com­puter and in­for­ma­tion ser­vices, per­sonal cul­ture and en­ter­tain­ment ser vices in­creased by 441%, 40.7% and 39.4%, re­spec­tively.

The de­cline of the trav­el­ing ser­vice ex­port de­creased. Tourism was the big­gest part of China’s ser­vices trade, and its changes will have a sig­nif­i­cant im­pact on the to­tal value of China’s ser­vices ex­port and im­port. In Jan­uary, the im­port and ex­port of tourism de­creased by 5.9%, re­vers­ing the con­tin­u­ous sharp de­cline that had been tak­ing place since last Septem­ber. Among th­ese, the value of trav­el­ing ex­ports was RMB 21.6 bil­lion, up 8%.

The re­gional struc­ture was fur­ther op­ti­mized, with the im­port and ex­port pro­por­tion of pi­lot in­no­va­tive ar­eas con­tin­u­ing their growth. The ser­vices ex­port and im­port in the cen­tral and west­ern re­gions reached RMB 62.09 bil­lion, tak­ing up 14.7% of the na­tional to­tal, 0.6 per­cent­age points higher than that in 2017. The im­port and ex­port vol­ume of Shang­hai, Bei­jing and Guang­dong ranked the top three na­tion­wide with their to­tal amount reach­ing RMB 259.34 bil­lion, tak­ing up 62% of China’s to­tal amount. The ser­vices ex­port in pi­lot in­no­va­tive ar­eas reached RMB 80.19 bil­lion, tak­ing up 55.8% of the to­tal; the ser­vices im­port was RMB 142.87 bil­lion, tak­ing up 52% of the to­tal.

Ab­sorp­tion of For­eign In­vest­ment

China’s ab­sorp­tion of for­eign in­vest­ment in Jan­uary-fe­bru­ary showed the fol­low­ing key fea­tures:

The newly es­tab­lished en­ter­prises in­creased rapidly and the ac­tual use of for­eign cap­i­tal rose slightly. In Jan­uary-fe­bru­ary, 8,848 for­eign in­vested com­pa­nies were newly es­tab­lished, with an in­crease of 129.2% year-onyear; the ac­tual use of for­eign cap­i­tal reached RMB 139.4 bil­lion, in­creas­ing by 0.5% year-on-year.

The high-tech in­dus­try main­tained the mo­men­tum of growth. The ac­tual use of the for­eign cap­i­tal in high-tech in­dus­try in­creased by 27.9% year-on-year, tak­ing up 19.5%. The ac­tual use of for­eign cap­i­tal in high- tech man­u­fac­tur­ing reached RMB 14.53 bil­lion, with an in­crease of 89.7% year-on-year. Among th­ese, the ac­tual use of for­eign cap­i­tal in phar­ma­ceu­ti­cal in­dus­try, elec­tronic and com­mu­ni­ca­tion de­vice man­u­fac­tur­ing and med­i­cal in­stru­ments and in­stru­men­ta­tion in­dus­try in­creased by 129.6%, 72.6% and 321.8% re­spec­tively year-on-year. The ac­tual use of for­eign cap­i­tal in high-tech ser­vice sec­tor reached RMB 12.72 bil­lion.

The cap­i­tal use in the cen­tral and west­ern re­gions in­creased largely. The ac­tual use of for­eign cap­i­tal in the cen­tral re­gion reached RMB 11.07 bil­lion, up 35.3% year- on-year, and that of the west­ern re­gion reached RMB 10.62 bil­lion, up 76.3% yearon-year.

Among the main in­vest­ment sources, in­vest­ment from Sin­ga­pore, South Ko­rea, Ja­pan, the U. S. and the UK in­creased the most. In Jan­uary-fe­bru­ary, among the main in­vest­ment sources, the ac­tual in­put value from Sin­ga­pore, South Ko­rea, Ja­pan, the U.S. and the UK in­creased by 62.9%, 171.9%, 10.2%, 56.8% and 10.5% re­spec­tively year-on-year.

The ac­tual in­put value from the ASEAN in­creased by 76.9% yearon-year and that from the coun­tries along the Belt and Road routes in­creased by 75.7% year-on-year.

• Trump’s tar­iff on so­lar pan­els was matched by China’s sorghum probe, rais­ing fears of a trade war

• We ex­pect U.S.- China trade fric­tions to in­ten­sify this year, as bi­lat­eral im­bal­ances con­tinue to widen

• Sec­tion 301 reme­dies ap­pear more harm­ful for China, rel­a­tive to im­pend­ing steel and alu­minium tar­iffs

• We ex­pect a mea­sured re­sponse from China, fo­cus­ing on trade

Trade fric­tions de­layed but not averted

U. S.- China trade fric­tions are set to in­ten­sify in 2018, in our view. China’s trade sur­plus with the U. S. widened to USD 276 bn in 2017, 10% more than 2016 (Fig­ure 1). Bi­lat­eral trade im­bal­ances are likely to worsen fur­ther, as the U. S. in­tro­duces fis­cal stim­u­lus and China pur­sues delever­ag­ing. Po­lit­i­cally, Pres­i­dent Trump ap­pears ready to live up to his cam­paign prom­ises to pun­ish China for al­leged un­fair trade prac­tices, es­pe­cially af­ter hopes of China pres­sur­ing North Ko­rea into back­ing down on its nu­clear pro­gramme were shat­tered, and as U.S. mid-term elec­tions draw near. We see Trump’s re­cent de­ci­sion to im­pose a 30% tar­iff on im­ported so­lar pan­els as a pre­cur­sor to more trade clashes.

Trump will likely in­tro­duce im­port re­stric­tions on steel and alu­minium on na­tional se­cu­rity grounds in the com­ing months. The im­pact on China’s trade should be in­signif­i­cant, as steel and alu­minium ex­ports to the U. S. ac­counted for less than 0.2% of China’s to­tal ex­ports in 2017. How­ever, the on­go­ing in­ves­ti­ga­tion of forced tech­nol­ogy trans­fers pur­suant to Sec­tion 301 of the U.S. Trade Act is likely to re­sult in reme­dies that af­fect a wide range of Chi­nese prod­ucts.

A trade war is quite un­likely in our view. We ex­pect China to re­spond by re­strict­ing im­ports from the U. S. and its ac­cess to China’s fast- grow­ing ser­vice sec­tor. De­valu­ing its cur­rency and sell­ing U. S. Trea­suries ( USTS) are both dou- ble- edged swords, and hence un­likely to be de­ployed as first-round coun­ter­mea­sures. We be­lieve a deal can be reached to curb bi­lat­eral im­bal­ances.

Trade war threat loom­ing large

The Trump ad­min­is­tra­tion took its first ma­jor trade ac­tion at the be­gin­ning of the year, rais­ing fears of a

trade war. On 22 Jan­uary, Pres­i­dent Trump de­cided to im­pose a 30% tar­iff on im­ported so­lar pan­els and up to a 50% tar­iff on wash­ing ma­chines, ef­fec­tive 7 Fe­bru­ary. The de­ci­sion fol­lowed find­ings by the U.S. In­ter­na­tional Trade Com­mis­sion ( ITC) that both im­ported prod­ucts had hurt U.S. man­u­fac­tur­ers. The so­lar panel tar­iff is a blow to China, while the washer tar­iff af­fects Ko­rea and Mex­ico the most. As the U. S. rene­go­ti­ates trade agree­ments with Ko­rea, Canada and Mex­ico, the move has sent a strong sig­nal that Trump will fol­low his cam­paign prom­ises to get tough on trad­ing part­ners.

The ITC did not dis­close fi­nan­cial data re­gard­ing so­lar im­ports from China, but es­ti­mated that China’s ex­ports ac­counted for nearly half of global so­lar ex­ports in 2016. Ac­cord­ing to China’s data, so­lar ex­ports amounted to USD 11.4 bn in 2017. As­sum­ing 20% of China’s ex­ports went to the U. S., the newly im­posed tar­iff, which will fall to 15% from 30% within four years, would af­fect roughly 0.1% of China’s to­tal ex­ports.

China was quick to re­spond. On 4 Fe­bru­ary, China’s Min­istry of Com­merce de­cided to ini­ti­ate anti-dumping and coun­ter­vail­ing in­ves­ti­ga­tions on sorghum im­ports from the U.S., to be con­cluded in one year. Mean­while, China is seek­ing com­pen­sa­tion stem­ming from the U. S.’ so­lar and washer tar­iffs, ac­cord­ing to rules of the World Trade Or­gan­i­sa­tion ( WTO).

Trade fric­tions are likely to in­ten­sify this year, as bi­lat­eral im­bal­ances con­tinue to widen. We an­tic­i­pated es­ca­la­tion of U.s.-china trade fric­tions a year ago, but the sce­nario did not ma­te­ri­alise in 2017 largely be­cause Trump had sought China’s col­lab­o­ra­tion in ter­mi­nat­ing North Ko­rea’s nu­clear weapon pro­gramme. The lack of progress in deal­ing with North Ko­rea ap­pears to have made Trump im­pa­tient. More im­por­tantly, China’s trade sur­plus with the U. S. rose by 10% last year and reached USD 276 bn, even though China’s to­tal trade sur­plus shrank by 17%, ac­cord­ing to China’s sta­tis­tics. The U.S. data con­firms the widen­ing of the bi­lat­eral trade im­bal­ance, with the trade deficit with China in­creas­ing by 8% and amount­ing to USD 375 bn in 2017. We ex­pect the bi­lat­eral im­bal­ance to in­crease fur­ther in the near term as the U.S. in­tro­duces fis­cal stim­u­lus (tax cut and in­vest­ment in in­fra­struc­ture) while China pur­sues delever­ag­ing.

More clashes on the hori­zon

A few U. S. in­ves­ti­ga­tions into im­ports from China could lead to re­stric­tive trade mea­sures in the next few months.

• In April 2017, the Trump ad­min­is­tra­tion said it would re­view whether U. S. im­ports of cheap Chi­nese alu­minium and stain­less steel threat­ened na­tional se­cu­rity, us­ing Sec­tion 232 of the Trade Ex­pan­sion Act of 1962. In Jan­uary 2018, the De­part­ment of Com­merce for­mally sub­mit­ted to Pres­i­dent Trump the results of the in­ves­ti­ga­tion. The Pres­i­dent has 90 days to de­cide on any po­ten­tial ac­tions based on the find­ings of the in­ves­ti­ga­tion.

• In August 2017, the White House launched a sep­a­rate in­ves­ti­ga­tion un­der Sec­tion 301 of the Trade Act of 1974 into China’s in­tel­lec­tual prop­erty prac­tices. The in­ves­ti­ga­tion sought to de­ter­mine whether acts, policies and prac­tices (APPS) of China re­lated to tech­nol­ogy trans­fer, in­tel­lec­tual prop­erty and in­no­va­tion bur­den or re­strict U. S. com­merce. The U.S. Trade Rep­re­sen­ta­tive is ex­pected to make af­fir­ma­tive find­ings and rem­edy rec­om­men­da­tions well ahead of the August 2018 statu­tory dead­line.

• Both in­ves­ti­ga­tions, us­ing laws writ­ten be­fore the es­tab­lish­ment of the WTO, would al­low the U.S. ad­min­is­tra­tion to levy tar­iffs on the Chi­nese goods.

Higher im­port tar­iffs on steel and alu­minium would have an in­signif­i­cant im­pact on China’s ex­ports. In 2017, China’s steel ex­ports to the U.S. amounted to USD 2.0 bn, about 3.6% of China’s to­tal steel ex­ports; China’s alu­minium ex­ports to the U.S. amounted to USD 1.9 bn, about 16% of China’s to­tal alu­minium ex­ports ( Fig­ure 2). Steel and alu­minium ex­ports to the U.S. ac­counted for only 0.17% of China’s to­tal ex­ports. From the U.S.’ per­spec­tive, China ac­counted for 7% of im­ported steel and 10% of im­ported alu­minium ( Fig­ure 3). Levy­ing high im­port tar­iffs on China’s steel and alu­minium could give Trump a po­lit­i­cal win in the Rust­belt states with­out ma­te­ri­ally dis­rupt­ing bi­lat­eral trade.

Reme­dies in the Sec­tion 301 inves-

tiga­tion would af­fect a broader range of prod­ucts. Af­ter the U.S. Trade Rep­re­sen­ta­tive makes an af­fir­ma­tive de­ter­mi­na­tion, the next steps will likely pro­ceed in two tracks: (1) the U.S. may choose to ini­ti­ate a WTO dis­pute re­gard­ing China’s APPS if they are con­sid­ered to be in vi­o­la­tion of WTO com­mit­ments; and/or (2) the U.S. may take uni­lat­eral re­tal­ia­tory ac­tion, in­clud­ing du­ties or im­port re­stric­tions. Ac­cord­ing to me­dia re­ports, the U.S. Trade Rep­re­sen­ta­tive has al­ready com­pleted the in­ves­ti­ga­tion, and is now con­sid­er­ing whether to im­pose steep tar­iffs on a large num­ber of im­ports from China. In­side U.S. Trade said the reme­dies against China would in­clude “sig­nif­i­cant tar­iffs cov­er­ing re­tal­ia­tory ac­tion in the tril­lion-dol­lar range”, and such a high num­ber is based on “the cu­mu­la­tive dam­age, the U.S. be­lieves China’s in­tel­lec­tual prop­erty and tech­nol­ogy trans­fer policies have caused over the past 10 years.” Ax­ios Me­dia in­di­cated that Trump may in­crease tar­iffs on Chi­nese con­sumer elec­tron­ics in re­tal­i­a­tion to the coun­try’s al­leged theft of Amer­i­can com­pa­nies’ in­tel­lec­tual prop­erty. Based on ITC data, con­sumer elec­tron­ics im­ports from China amounted to USD 17 bn in 2014, about 0.7% of U.S. to­tal im­ports.

Strik­ing a grand bar­gain

While trade fric­tions are ex- pected to in­ten­sify, a trade war is quite un­likely in our view. Nar­row­ing trade im­bal­ances and cre­at­ing jobs are the ultimate ob­jec­tives of Trump’s for­eign trade agenda. Wag­ing a trade war would lead to re­tal­i­a­tion and in­ef­fi­cient al­lo­ca­tion of re­sources, caus­ing out­put and job losses for all coun­tries in­volved. If the U. S. im­poses high tar­iffs on China’s prod­ucts, it will have to ei­ther im­port from other coun­tries at a higher cost, or pro­duce those goods at home by di­rect­ing re­sources away from in­dus­tries in which it en­joys a com­pet­i­tive ad­van­tage. More im­por­tantly, in the con­text of a global sup­ply and pro­duc­tion chain, a trade war can cause col­lat­eral dam­age to all the pro­duc­ers in­volved, in­clud­ing U. S. firms.

• For ex­am­ple, the tar­iff on China’s so­lar pan­els is likely to cost 23,000 jobs in the U.S., es­pe­cially among in­stall­ers, as the ris­ing cost of so­lar pan­els de­presses de­mand, ac­cord­ing to the So­lar En­ergy In­dus­tries As­so­ci­a­tion.

• Higher steel and alu­minium tar­iffs will help U. S. pro­duc­ers, but the ben­e­fits are likely to be offset by job losses in the steel and alu­minium con­sum­ing in­dus­tries, which col­lec­tively em­ploy far more Amer­i­cans than steel and alu­minium pro­duc­ers com­bined.

• If Trump levies high tar­iffs on con­sumer elec­tron­ics from China, U.S. con­sumers, re­tail­ers and com­pa­nies in­volved in the tar­geted prod­ucts’ sup­ply chain will suf­fer. China’s de­mand for U.S. semi­con­duc­tors and in­te­grated cir­cuits has re­mained strong in re­cent years, driven by its assem­bly and man­u­fac­tur­ing op­er­a­tions for elec­tron­ics prod­ucts.

China’s re­sponse to the trade fric­tions is likely to be mea­sured and fo­cus on trade in goods and ser­vices.

• China will likely tar­get U.S. agri­cul­tural prod­ucts, ve­hi­cles and air­crafts (Fig­ure 4). In 2017, China ac­counted for 55% of U.S. oil seeds ex­ports (USD 12 bn), 20% of pri­vate-car ex­ports (USD 11 bn), and 12% of air­craft ex­ports (USD 16 bn). The U.S. would be in a vul­ner­a­ble po­si­tion as China can im­port from al­ter­na­tive sources.

• China may re­strict U.S. ac­cess to China’s fast-grow­ing ser­vice sec­tor, which grew 8% in 2017 and com­prised al­most 52% of China’s GDP. The U.S. has had a ser­vice trade sur­plus with China in re­cent years, show­ing strength in trans­porta­tion, travel and ed­u­ca­tion, fi­nan­cial ser­vices, and in­tel­lec­tual prop­erty ser­vices. In 2016, 3mn Chi­nese tourists vis­ited the U.S., spend­ing USD 33 bn.

We do not think China will re­tal­i­ate by sell­ing USTS or de­valu­ing its cur­rency, at least not at the early stage of trade fric­tions. The au­thor­i­ties reg­u­larly re­view its re­serve man­age­ment pol­icy. It is quite likely that as a re­sult of such re­views, China changes the tar­geted share of USTS in the as­set al­lo­ca­tion, and grad­u­ally (and qui­etly) reshuf­fles its as­set hold­ings. The role of USTS in re­serve as­sets is ir­re­place­able in the fore­see­able fu­ture, given its mar­ket size, liq­uid­ity and risk-ad­justed re­turns. With China be­ing the big­gest for­eign holder of USTS, a UST sell­off would push UST yields higher and cause mark-to-mar­ket losses al­most im­me­di­ately. De­val­u­a­tion is also a dou­ble-edged sword that could fuel cap­i­tal out­flows and dis­rupt in­ter­na­tion­al­i­sa­tion of the Ren­minbi (RMB).

In our base sce­nario, a grand bar­gain will be reached, with lim­ited dam­age to bi­lat­eral trade. Trump may im­pose higher tar­iffs on China’s steel and alu­minium to ap­pease

his sup­port­ers ahead of the midterm elec­tions. China is likely to file WTO com­plaints while iden­ti­fy­ing agri­cul­tural prod­ucts, ve­hi­cles and air­crafts as tar­gets for re­tal­i­a­tion. The trade fric­tions may in­ten­sify as Trump seeks reme­dies un­der Sec­tion 301, rais­ing fears of a wide­spread trade war. How­ever, this is very likely a tac­tic of the Trump ad­min­is­tra­tion to win the big­gest pos­si­ble con­ces­sions.

The set­tle­ment of the 1994-95 Ja­pan-u.s. auto trade dis­pute can pro­vide some clues on how things may evolve un­der the Sec­tion 301 in­ves­ti­ga­tion. In Oc­to­ber 1994, the Clin­ton ad­min­is­tra­tion ini­ti­ated an in­ves­ti­ga­tion into Ja­pan’s auto mar­ket un­der Sec­tion 301, and threat­ened to im­pose a 100% tar­iff on im­ports of lux­ury cars from Ja­pan in May 1995. By end-june 1995, the U. S. and Ja­pan reached a set­tle­ment over ac­cess to Ja­pan’s auto mar­ket. The set­tle­ment averted the im­po­si­tion of a puni­tive tar­iff. Ja­pan also with­drew its com­plaints with the WTO against the uni­lat­eral sanc­tions. The U.S. gained in­creased ac­cess to the Ja­panese mar­ket for sales of Amer­i­can-made cars and parts. We think the U. S. and China can reach a sim­i­lar agree­ment aimed at curb­ing bi­lat­eral im­bal­ances.

• China will likely com­mit to in­crease im­ports from the U.S. (en­ergy and agri­cul­tural prod­ucts for ex­am­ple), and the U.S. may ease ex­port re­stric­tions on some high-tech prod­ucts.

• China may fur­ther open up the ser­vice sec­tor, in­clud­ing ed­u­ca­tion, med­i­cal ser­vices, en­ter­tain­ment and fi­nan­cial ser­vices. This is an area where China wants to up­grade to meet ris­ing do­mes­tic de­mand and where the U.S. has a com­pet­i­tive ad­van­tage.

• China may ad­dress some of the con­cerns raised in the Sec­tion 301 in­ves­ti­ga­tion, such as ad­min­is­tra­tive ap­proval pro­cesses that pres­sure trans­fer of tech­nolo­gies and in­tel­lec­tual prop­erty to Chi­nese com­pa­nies.

• China may also com­mit to con­tinue pur­chas­ing U.S. Ts to help fi­nance the en­larg­ing U.S. bud­get deficit, and par­tic­i­pate in in­vest­ment to im­prove U.S. in­fra­struc­ture.

With the trade sur­plus nar­row­ing and ser­vices trade deficit ex­pand­ing, China’s cur­rent- ac­count sur­plus dropped to merely 1.4% of GDP in 2017 from a peak of c.10% in 2007. Wors­en­ing trade re­la­tions with the U. S. could lead to slower- than- ex­pected ex­port growth. If the ser­vices trade deficit con­tin­ues to fol­low the ris­ing trend, the cur­rent- ac­count sur­plus could be wiped out quickly ( Fig­ure 5). China has run a cur­rent- ac­count sur­plus in the past 25 years. A shift to a deficit, for which the mar­ket is ill pre­pared, could fun­da­men­tally change how the mar­ket views the RMB and fuel RMB de­pre­ci­a­tion ex­pec­ta­tions.

(Authors: from Stan­dard Char­tered Bank)

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