Growth of Service Trade Imports and Exports Hits Record High
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)