Following Trump's Tariffs.. China Floods the World with Cheap Exports

SadaNews - Chinese exports, driven by President Xi Jinping, have continued to surge robustly even five months after the imposition of high U.S. tariffs, leading the country towards a record trade surplus estimated at $1.2 trillion.

With access to the U.S. market restricted, Chinese manufacturers bet that their products remain popular, as Indian purchases reached an unprecedented level in August, while shipments to Africa are on track to achieve an annual record, and sales to Southeast Asia have exceeded their pandemic-era peaks.

This widespread rise raises concerns abroad, as governments balance the potential harm to their local industries against the risks of provoking Beijing, the top trading partner for more than half the planet.

So far this year, China has faced a public response only from Mexico, which has threatened tariffs as high as 50% on Chinese products including cars, parts, and steel. However, other countries are under increasing pressure to take action, as Indian authorities have received 50 requests in recent weeks to open investigations into dumping cases for goods coming from countries including China and Vietnam, according to an informed source who requested anonymity due to the information's non-public nature. The Indonesian trade minister pledged to monitor the flow of goods after video clips showing Chinese sellers promoting plans to export jeans and shirts priced at no more than 80 cents to major cities sparked a wave of dissatisfaction.

Despite the damages, the chances of taking more serious actions remain limited. Countries already engaged in customs negotiations with the Trump administration appear hesitant to wage a separate trade war with the world's second-largest economy, giving Beijing a respite from U.S. tariffs that economists previously predicted would halve its annual growth rate.

Christopher Bedor, Deputy Director of China Research at Gavekal Dragonomics, stated: "The lukewarm response is likely influenced by ongoing trade negotiations with the United States. Some countries do not want to be seen contributing to the collapse of the global trading system, while others may postpone imposing tariffs on China to use them later as bargaining chips with Washington during their own talks."

Caution on Imposing Tariffs on China

Officials seeking to protect their economies from Beijing are proceeding cautiously. The South African trade minister advised against imposing punitive tariffs on Chinese car exports, which have nearly doubled this year, preferring to attract more investments. In contrast, Chile and Ecuador impose limited tariffs on low-cost imports after the number of monthly active users on the Chinese e-commerce platform Temu in Latin America rose by 143% since January. Meanwhile, Brazil, while threatening a stricter response, granted this summer the Chinese company BYD, the largest electric vehicle manufacturer in the country, a tariff exemption period to accelerate its local production.

Beijing employs a mix of soft diplomacy and economic threats to prevent countries from taking explicit retaliatory actions. Earlier this month, the Chinese president urged BRICS countries to unify their stance against protectionism during a leader's call for the bloc, while Mexico's ministry of commerce warned against "thinking twice" before taking any action, stressing that such measures would be met with retaliatory responses. The risks increase with Trump’s pressure on NATO countries to impose tariffs up to 100% on China due to its support for Russia.

Chinese officials emphasize that their trade with the world is within reasonable limits and that Beijing does not seek to dominate global markets. Deputy Finance Minister Liao Min stated in July: "When there is demand from abroad, China exports accordingly." The official newspaper "People's Daily" responded last month via its social media account to Western criticisms regarding "dumping," asserting that Chinese exporters do not sell below cost.

A Coalition Against China

If Trump can rally other countries against China, that will make it more difficult to tackle internal challenges such as the prolonged real estate crisis and an aging population, according to Zhang Shu and David Kuo from Bloomberg Economics. They explained: "China will likely respond immediately with similar tariffs, but that carries the risk of alienating partners it critically needs at this stage." They added that the situation "may encourage companies over time to localize production in partner countries."

While Chinese exporters defy expectations, the boom in trade has not translated into increased profits for them nor does it help solve the country's internal problems. Industrial profits dropped by 1.7% during the first seven months, as manufacturers, in an effort to limit the production surplus within China under Xi's campaign against "overindulgence," reduced prices to increase overseas sales. However, this exacerbated the deflationary pressures facing the economy, which is on track to record its longest period of price contraction since the opening policy began in the late 1970s.

The export boom could also undermine Beijing's efforts to rebalance its economy by stimulating consumption, ignoring calls from foreign officials such as U.S. Treasury Secretary Scott Besson, who urged Beijing to make boosting Chinese consumer purchasing power a cornerstone of its five-year plan. The policy document outlining these plans will be of peak interest in the coming weeks during an important meeting of the Communist Party.

For Xi, these risks may seem worth bearing. Demonstrating that China does not need the American consumer strengthens his position ahead of a high-stakes summit with Trump in South Korea. The two largest economies in the world are still negotiating a potential trade deal amid a 90-day truce on tariffs that reaches up to 145%, temporarily maintaining calm.

The Shock of China

Even before Trump surprised the world in April with the highest U.S. tariffs since World War II, emerging markets, threatened with losing millions of jobs in manufacturing, were worried about the surplus of Chinese goods. The former Indonesian president threatened to impose tariffs up to 200% to protect the local industry, while Brazil raised tariffs on Chinese steel. Even Vietnam took temporary measures against Chinese online retail giants that harmed local sellers.

In the end, it was difficult for foreign leaders to protect their economies from China's massive manufacturing fleet. Arthur Kroeber, Head of Research at Gavekal Dragonomics, stated: "U.S. and other countries' protectionism has had no effect because Chinese exporters are highly competitive. They can absorb part of the hit from tariffs, and they also have many alternatives through trans-shipment or moving final stages of production to lower-tariff countries."

The central bank governor in Cambodia, Chea Serey, was candid about the tough balancing act facing small economies dependent on Beijing. In an interview with Bloomberg Television earlier this month when asked about Chinese dumping, she said: "We import a lot from China. We also heavily rely on foreign direct investment coming from China."

The rising shipments to Vietnam suggest that some goods intended for the United States and elsewhere are being redirected to avoid the tariff wall erected by Trump, but that is only part of the picture. The demand for superior Chinese technological innovations has helped drive most recent trade movements, and the increase in sales to wealthy markets in Europe and Australia shows that Beijing has simply found new buyers for many of its products.

India offers an example of how Beijing has benefited from Trump's reshaping of global trade in new ways. Exports to its neighbor reached a record level of $12.5 billion last month, significantly driven by the rapid shift of Apple’s suppliers to produce iPhones in India from China. However, these companies still rely on parts and tools that are mostly manufactured in China.

Shipments from China to India

In July, Chinese companies shipped nearly $1 billion worth of semiconductors to India, along with billions more of phones and parts, according to data released by Beijing. This places exports on track to surpass last year's record figure, with the current value of shipments approaching the total recorded in 2021 as a whole.

Sajid Shinwari, Chief Economist for India at JPMorgan Chase, told Bloomberg Television: "China recorded better-than-expected performance in the first half. Some of that is due to China cleverly finding other export markets, including Europe, which has become a key hedge against a slowdown in exports to the United States."

The weakening currency has given China an additional advantage, as the yuan has fallen alongside the dollar against currencies like the euro. Earlier, Macquarie Bank estimated that the real effective exchange rate of the yuan - which takes into account inflation differentials between the country and its key trading partners - has reached its weakest level since December 2011.

The Federal Reserve's interest rate cut this month may push the dollar, and possibly the yuan too, further down, which will boost global demand and enhance the competitiveness of Chinese exports.

Surplus of Chinese Goods

Despite widespread concerns around the world, the surplus flowing from Chinese goods will not be easy to stop. Chinese electric vehicle exports have continued to progress despite U.S. and Canadian efforts to limit them through punitive tariffs and bans.

During the first seven months of this year, automakers like Nio, BYD, and Xpeng exported vehicles worth more than $19 billion, a figure close to what was exported during the same period last year, and Europe remains the largest market even after the European Union imposed tariffs in October.

China is in a better position than many countries to find alternatives to U.S. markets, according to Adam Wolf from Absolute Strategy Research. The firm’s analysis shows there is an approximate 50% overlap between what China used to export to the U.S. and what it exports to BRICS countries, suggesting that a large portion of what America is no longer buying can be redirected to other markets.

Wolf stated: "China has demonstrated its ability to enter other markets and seize shares in them, and that is likely to continue. I do not think China will see a contraction in exports for the remainder of the year."