An employee manufactures leather belts at the Guangzhou Jinhuamei Leatherware Co. factory in Guangzhou, China. (Photographer: Giulia Marchi/Bloomberg)

China’s Slumping Trade Adds Pressure for Settlement With Trump

(Bloomberg) -- China’s exports slumped in December as a rush of orders to beat expected tariffs showed signs of fading and as domestic buyers succumbed to a worsening economic outlook.

The worse than expected figures, with exports falling 4.4 percent in December from a year earlier, set a grim domestic backdrop for China’s negotiators as they seek a deal to end the stand-off with the Trump administration. The fall in exports was the worst result since 2016 in dollar terms while imports slumped 7.6 percent, also the worst reading since 2016 and hinting at softening demand at home.

At the same time, China’s overall trade surplus with the U.S. hit a record in 2018, underscoring the political imperative to cut a deal ahead of a March 1 deadline after which U.S. President Donald Trump has threatened to impose additional tariffs on Chinese goods.

The numbers show how the world’s biggest trading nation is being hit by a confluence of slowing global growth and by uncertainty linked to the trade war -- factors that are expected to linger in the near term, at least.
“The bad trade data will quite likely increase the pressure on China to achieve a deal, or at least a suspension of the U.S. tariff hikes,” said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. “At the same time, the U.S. side also seems to be under more pressure to de-escalate tension in terms of news on the economy and financial markets than a few months ago.”

U.S. stocks opened lower on Monday over concerns about slowing global growth, with the S&P 500 Index dropping 0.6 percent by 10:06 a.m. in New York.

U.S.-China Trade War Talks: What’s Happened and What’s Next

Chinese Vice Premier Liu He is slated to travel to the U.S. for further talks around the end of this month, with little progress seen so far on the tougher areas of the dispute such as China’s treatment of intellectual property or support for state firms. The headwinds from trade comes at a time when policy makers are already grappling with decelerating consumption, falling factory sentiment, fears of producer deflation and a worsening employment outlook.

China’s Slumping Trade Adds Pressure for Settlement With Trump

“Cargo volume to the U.S. on trans-Pacific trade increased until November as exporters pushed cargo forward to avoid the U.S. increase,” according to a spokesman for Hyundai Merchant Marine Co, South Korea’s biggest container line. “From December to now cargo volume has returned to normal levels, indicating that forward shipment of good before the tariff increase has concluded. Still we are expecting cargo volume to pick up before the Lunar New Year toward the end of January."

There’s worse news to come, according to economists at Commerzbank AG and Australia & New Zealand Banking Group Ltd.

Strap In for Another Few Days of Jittery Trade Data

Chinese shipments are already under pressure from slowing demand from top trade partners -- Europe’s recovery is under question, with Germany triggering recession fears, Japan is facing a tougher 2019 and the U.S. itself forecast to see waning growth after a robust 2018. China’s exports to the U.S., European Union, Hong Kong, Japan and Taiwan all fell from a year earlier. South Korea’s exports--often viewed as a bellwether for world trade--fell in December.

"There is a clear downward trend," said Zhou Hao, an economist with Commerzbank in Singapore who was among the few to accurately forecast a December contraction in exports. "This is not just due to the trade war and tariffs. On top of those, the major drag is slowing global demand."

China’s Slumping Trade Adds Pressure for Settlement With Trump

While China is no longer as dependent on trade, as the world’s largest exporter, factory output, profits and employment still hinge on demand from overseas. Its domestic appetite also affects production by commodity and machinery exporters around the world. Stabilizing trade is one of the goals the leadership set for 2019, on top of supporting employment, investment and the finance sector.

What Our Economists Say...

The 2019 outlook for exports is not promising. Signs of progress in trade negotiations between China and the U.S. are encouraging, but the outcome is by no means certain... 
The extent of external slowing will be an important factor affecting the intensity of China’s pro-growth policies.
-- Chang Shu and David Qu, Bloomberg Economics
For the full note click here

Negotiators expressed optimism after mid-level talks wrapped in Beijing last week, bringing some temporary relief to global investors. Less certain are the further results, as Trump is trying to both appeal to the stock market with a deal, and get expanded tariff powers under a new draft law.

Few economists are betting on a grand deal that would dissolve the economic confrontations between China and the U.S. for good.

"Significant uncertainty remains as to whether there could be a ‘deal’ after March 1," Citigroup Inc economists led by Liu Ligang wrote in a note. "We believe trade growth next year will slow significantly on huge uncertainty and a high base."

©2019 Bloomberg L.P.