Are Eurozone Manufacturers The Big Losers In The US-China Trade Deal?

are-eurozone-manufacturers-the-big-losers-in-the-us-china-trade-deal?

18-12-19 10:17:00,

Via Strategic Macro blog,

So unless something dramatic happens with the Chinese economy, if they comply with the US trade deal, they will be buying $100bn more from the US and less from someone else each year for the next two years.

As I discussed here, the developments so far in the trade war have backfired on the US. China’s trade surplus is up $85bn in 10 months or $102bn annually for 2019. Europe has been the dumping ground for $60bn annualised in manufactured goods that would have gone to the US. The reduction from 15% to 7.5% on $120bn in goods might alleviate that a little, but only a little.

Per the deal, the Chinese will buy $100bn a year more in goods and services. China bought $130 billion in U.S. goods in 2017, before the trade war began and $56 billion in services. That’s a 54% step change, which is not happening organically as a function of 6% Chinese economic growth.

As such, the Chinese government will have to pull levers and third countries have to lose export orders. In terms of manufactured goods the only games in town are the EU, Japan and Korea. The IMF in their recent Article 4 paper on China estimated that about half of the import displacement would be born by Europe.

In the chart below, the IMF had assumed a $200bn/ year deal to halve the US trade deficit with half of that falling on the Eurozone.

Based on a $100bn a year deal the EU would lose about $42bn a year in goods exports. Korea and Singapore could potentially lose exports amounting to about 1% and 1.9% percent of their GDP.

Looking at the phase 1 deal numbers, China has committed to increase purchases of U.S. agriculture products by $32 billion over two years. That would average an annual total of about $40 billion, compared to a baseline of $24 billion in 2017 before the trade war started.

So if we deduct $16bn in Ag purchases from the $100bn, that leaves $84bn in goods and services. Its easier for the Chinese government to encourage goods substitution over services,

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