FT premium subscribers can click here to receive Trade Secrets by email
Greetings again from Singapore, where it has been sobering — and more than a little scary — to watch the certainties that underpinned my international existence prove themselves instead to be fragile assumptions washed away by the global coronavirus pandemic.
For 28 years after my college graduation, I moved from Boston to Hong Kong to Guangzhou, back to Hong Kong, then on to London and Beijing. Never did it occur to me that, in circumstances short of war, travel between such great cities might be banned outright or rendered impossible by virtue of increasingly strict quarantine regulations.
It was of course international trade — containerised shipping, air freight, China’s entry into the World Trade Organization — that gave rise to the global economy that sustains “citizens of nowhere” such as myself. But even the free flow of goods is now in doubt as evidenced by the recent collapse in China’s exports in January and February, which is the subject of today’s post. Our chart of the day looks at falling exports from Florida to China as the US Democratic primary vote in the state goes ahead today, while our policy watch considers how quickly the US-China trade war that dominated last year’s news agenda has been eclipsed by the coronavirus crisis.
Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to [email protected] or email me at [email protected].
Only a 17 per cent decline?
On March 7 China’s customs administration reported that January-February exports had fallen a greater-than-expected 17.2 per cent compared with the same period last year — greater, that is, than the 14 per cent drop forecast by 25 economists polled by Reuters.
The release was the first concrete evidence of the economic impact of the coronavirus, which raced out of central Hubei province in mid-January. Because of the distortions arising from the annual Chinese new year holiday, which can fall in either January or February, meaningful year-on-year data comparisons must wait until the first two months’ figures are available in early and mid-March.
But while the double-digit fall generated alarmist headlines, my reaction was the opposite: “Only a 17 per cent decline?” In most years, China’s export sector is fully functional in January-February for, let’s say, six weeks and idle for two. This year, however, there were maybe three weeks of normalcy — four tops — before the scale of the problem in Hubei became clear on January 20 when blanket quarantines were enforced across the province of 60m people.
“The [trade impact] from the coronavirus should be bigger than the January-February combined number suggests,” said Larry Hu, chief China economist at Macquarie. Hu reckons that exporters might have been able to empty their inventories to keep shipments up even as they waited in vain for their workforces to return in February.
Kent Kedl, of consultancy Control Risks in Shanghai, points to the possible “interplay” between China’s January-February exports and the US-China trade war, which was temporarily put on hold after a “phase one” agreement was signed on January 15. As had happened many times previously during the course of the two countries’ on-again, off-again 18-month negotiation, it was just as likely that the interim agreement might fall apart, so traders may have well been prepared for the worst.
“To reduce supply chain risk, some buyers stocked up on inventories ahead of phase one being signed, just in case things fell apart at the last moment and tariffs increased,” said Kedl. “This possibly muted the effects of [the coronavirus] on the China supply chain.”
Chen Long at Beijing consultancy Plenum, suggests another possible explanation. Many export goods were “at ports already and they just got out in January”.
Even if China’s exporters are largely back up and running by the end of this month, who is going to buy their wares? © Pan Yulong/Xinhua/AP
In the end, why China’s exports were only down 17 per cent year on year in the January-February period — rather than down 25 or even 50 per cent — may be a moot question given the troubles that could still lie ahead for exporters in the world’s second-largest economy.
Chinese statisticians have tried to temper the terrible January-February trade and other economic data with reassurances that the hit will prove to be “short-term and manageable”.
For Chinese officials, to say anything less would be to tarnish the infallible “wartime” leadership of President Xi Jinping. The rest of us, however, are free to point out the obvious. China’s biggest export of late has been the coronavirus, and the economic effects of that are only beginning to be felt. The 17 per cent fall in exports to date may prove to be a ceiling rather than a floor.
During January and February, the coronavirus produced a supply-side shock within China. But there was no real change in overseas demand for Chinese goods during this period.
Only now, as China’s coronavirus case numbers plateau and those in Europe and the US accelerate exponentially, is the supply-side shock becoming a demand-side one that could well dwarf the one that hit China’s biggest export markets in 2008 and 2009. So even if China’s exporters are largely back up and running by the end of this month — a big if — who is going to buy their wares with more countries in Europe, and more cities and states in the US, resorting to “social distancing” measures that will cripple their economies for months, if not for the rest of the year?
Charted waters
While the Democratic primary vote in Ohio today has been called off, voting in Florida, Illinois and Arizona is set to go ahead. Florida’s exports were hit hard by the trade war with China, falling 34.4 per cent in 2019, led by a collapse in exports of copper and aluminium scrap.
Policy watch
US president Donald Trump, right, and China’s vice-premier Liu He shake hands after signing ‘phase one’ of the US-China trade deal on January 15 © Kevin Lamarque/Reuters
Speaking of the “phase one” agreement that was signed at the White House with such fanfare on January 15, ain’t it quaint that we all thought it was such a big deal at the time?
Little did we know that just four days later the Chinese Communist party would finally acknowledge what it had spent weeks denying — a rare pneumonia-like illness was in fact spreading rapidly through Hubei province via human-to-human transmission. The rest, as they say, is history.
China’s January-February data do suggest that the outcome US president Donald Trump sought — a new era of zero-sum managed trade — was beginning to take shape before all assumptions about this year were cast aside by the coronavirus pandemic. While Chinese imports from the US grew slightly (up 2.5 per cent year on year), imports from the EU and Japan were down 11.4 per cent and 9.3 per cent respectively.
Be that as it may, it is clear that the phase-one trade deal that so preoccupied us last year is no longer the driving force behind global trade.
It is at present hard to imagine Vice-Premier Liu He leading a Chinese trade delegation to Washington for “phase two” talks later this year in the current coronavirus-infected political climate, or President Xi himself arriving in the US capital for his long overdue state visit after Trump’s trip to Beijing in November 2017. The coronavirus has changed everything; global trade is just the least of it.
Don’t miss
- The G7 major economies have pledged to do “whatever is necessary” to stabilise a global economy shaken by the coronavirus pandemic, with its leaders vowing to co-ordinate recovery plans in the face of a possible worldwide recession.
Read more - France has fined Apple €1.1bn — its biggest penalty ever imposed on a single company — for colluding with two wholesalers to stifle competition and keep prices high by handicapping independent resellers, as scrutiny of US tech giants intensifies in Europe.
Read more - UK officials, concerned that restrictions on global trade will hamper imports of equipment and components, have contacted manufacturers to explore hastily setting up new lines to make medical ventilators in the UK.
Read more
Tokyo talk
The best trade stories from the Nikkei Asian Review
- Bowing to pressure from Washington, Taiwanese chipmaking giant TSMC is considering a US plant to supply American companies such as Lockheed Martin and Apple with semiconductors for F-35 fighter jets and iPhones.
Read more - The coronavirus outbreak combined with last year’s African swine flu has left one surprising winner standing: Chinese pork producers.
Read more
