Under double pressure since 2018, China’s foreign trade is facing increasingly severe challenges. There is an urgent need for extraordinary measures to ease the pressure on foreign trade and maintain the stability of the China-centric supply chain.
From China’s entry into the WTO in 2001 to the end of 2019, China’s goods imports and exports (RMB-denominated) have compound growth rates of 11.5% and 12.1%, respectively (Figure 1), and China’s share of global imports has also increased from 3.8% in 2001 to The export share increased from 10.7% in 2019 to 12.7% in 2019 (Figure 2). On the whole, China’s foreign trade has benefited from the dividends of joining the WTO in the past 20 years. At present, China has formed many global supply chains with China as its core. Among the total global exports in 2019, China’s share of mechanical and electrical products accounted for 5.9%, a fourfold increase from 2001; the export of vehicle equipment increased threefold; the share of optoelectronics and precision equipment increased fourfold (Figure 3).
With the continuous integration of China and global trade, on the one hand, global factors will have an increasingly important impact on China’s imports and exports, and on the other hand, Chinese factors will increasingly affect global trade. The most obvious is the Sino-U.S. Economic and trade friction since 2018, which has had a short-to-medium-term impact on China’s foreign trade, and the new crown pneumonia epidemic that broke out at the end of 2019 was due to the postponement of production after the Chinese New Year, which impacted China’s own exports and passed Supply chains affect global production. It can be said that under the double pressure since 2018, China’s foreign trade is facing increasingly severe challenges. There is an urgent need for extraordinary measures to ease the pressure on foreign trade and maintain the stability of the China-centric supply chain.
I. Impact of Sino-US Economic and Trade Frictions on China’s Foreign Trade
(1) China’s trade surplus is facing downward pressure, especially the US trade surplus.
China’s merchandise trade surplus reached a record high in 2015, at $ 593.9 billion (Figure 4), and then gradually declined. With the increase of China’s per capita annual income and strong consumer demand, the rapid increase in imports leading to a reduction in the surplus in goods will exist in the medium and long term. However, the Sino-US economic and trade friction has accelerated this process. From 2001 to 2019, China’s total nominal trade surplus in goods was US $ 4.7 trillion (without consideration of added value), of which the US surplus was US $ 3.4 trillion. Therefore, if China ‘s surplus with the United States decreases sharply, it will seriously affect China ‘s overall trade surplus. According to the first phase of the Sino-US trade agreement, China will purchase an additional US $ 200 billion of goods within two years. Based on this, we expect that China’s trade surplus with the United States will fall to the level of 200 billion US dollars in 2020 and will continue to decline in 2021. Under the influence of Sino-U.S. Trade friction, China’s surplus with the United States has fallen much faster than the natural decline in China’s trade surplus in goods.
(2) The adjustment of US imports from East Asia has already impacted China’s major commodities exported to the US.
The substantial impact of the Sino-US trade friction began in November 2018, when the United States began to experience negative growth in imports from China, and this trend continued into December 2019. Judging from the growth rate of US imports, the decline was mainly due to the decline in imports from China. Starting in October 2019, the United States has rebounded from the growth rate of global imports, but its imports to China have not improved (Figure 5). Relatively speaking, Canada, Vietnam, South Korea and the United States have formed closer trade relations.
(3) China’s share of East Asian supply chains involving exports to the United States has declined.
We analyze the exports of the relatively advanced economies of East Asian manufacturing to the United States, including China, Japan, South Korea, Taiwan, and Malaysia:
From the perspective of automotive products, China’s position in the global supply chain continued to strengthen in 2018 and before, especially the rapid growth of exports of automobiles and parts to the United States. Relevant exports to the United States in 2018 were 17.4 billion U.S. dollars, but affected by Sino-U.S. Economic and trade frictions in 2019, relevant exports fell to 14 billion U.S. dollars. From the perspective of East Asia’s automotive supply chain to the United States, South Korea has the fastest growth and has begun to partially replace China’s share (Figure 6).
In terms of mechanical and electrical equipment, China is the main supplier of the United States, but the United States has significantly slowed down the pace of imports from China, while imports from Malaysia are accelerating, partly showing signs of the supply chain in this area moving to ASEAN and Malaysia ( Figure 7).
In terms of office computer equipment, mainland China is also the main supplier of the United States, but since 2018, mainland China’s exports to the United States have gradually declined; on the other hand, Taiwan’s Taiwanese exports to the United States have gradually increased, and some of them show Affected by the Sino-US trade friction, office computer production is a sign of return to Taiwan (Figure 8).
In terms of mobile phones and communication equipment, as China is still the world ‘s largest mobile phone manufacturing base, especially the most important production base of Apple mobile phones, the United States ‘demand for Apple mobile phones produced in China has not been substantially affected by trade friction. Still the most important and stable mobile phone supplier in the United States (Figure 9), but does not rule out future changes
In general, East Asian supply chains, especially those related to exports to the United States, have changed under the pressure of the United States on China trade. The main feature is that China’s exports to the United States in terms of automobiles, mechanical and electrical equipment and computers have begun to slow. However, this slowdown is gradual in the short to medium term, and no sudden and substantial changes will occur. Unless the United States puts pressure on China sharply, this possibility is small, because the United States itself will also be more affected if the United States significantly increases tariffs on Chinese products.
It should be pointed out that our analysis shows that under the influence of Sino-US economic and trade frictions, the deviation between the growth rate of the US economy and the growth rate of imported Chinese goods cannot be ignored. For a long time, the high GDP growth rate in the United States has led to a high growth rate in the imports of Chinese goods and vice versa. There is a positive relationship between the two. To a certain extent, this shows the inherent logical relationship between the increase in demand for Chinese goods brought about by the strength of the US economy and strong consumption. However, since 2019, the rapid growth of the US economy has not led to the simultaneous growth of Chinese goods, indicating that the United States has reduced its dependence on Chinese goods. Such divergences deserve high attention (Figure 10).
Impact of New Crown Pneumonia on China’s Trade
The pressure on the foreign trade industry is mainly reflected in four aspects:
First, among the top ten provinces / cities with the confirmed number of patients except Hubei, Guangdong, Zhejiang, Jiangsu, and Shandong are all major foreign trade provinces in China. Their total exports accounted for 65.4% of China’s exports. . On the other hand, Henan, Anhui, Sichuan, Jiangxi, Hunan, and Chongqing, among the top ten confirmed regions, are the main labor source regions for export companies. The epidemic situation in both the major foreign trade provinces and the major labor exporting provinces is relatively severe (Figure 11), which poses severe challenges to foreign trade production.
Second, the resumption time of supporting production enterprises in different places is inconsistent, resulting in insufficient supply of upstream raw materials, and the domestic industrial chain is facing problems such as disruption and ineffective connection and matching, which makes it difficult to reach the conditions for resumption of work or restore to daily production levels.
Third, the epidemic situation has superimposed Sino-U.S. Trade friction pressure. In addition, the epidemic situation has been classified by the World Health Organization as an “public health emergency of international concern.” challenge.
Fourth, the structure of Chinese export companies has changed in recent years. Private enterprises have surpassed foreign companies to become the largest export force. In 2019, private enterprises accounted for 49.7% of total exports, an increase of 8.9 percentage points from 2014 (Figure 12). Considering that many labor-intensive private export companies are already relatively disadvantaged in terms of financing and competitiveness, the impact of the epidemic is bound to be the most severe.
In addition, there are already signs of spillover effects from the epidemic. One is that some overseas importers are delaying or canceling the import of goods from China because of concerns about the epidemic; the second is that Chinese manufacturers are unable to resume work in a timely manner, which has an impact on the export of goods and the supply chain. Partial production suspension; Third, Singapore’s Minister of Trade and Industry, Chan Chun Sing, said on February 5 that, based on the impact of the epidemic, governments should re-examine the state of excessive dependence on China’s supply chain.
Based on the above considerations, we analyze the impact of the epidemic on China’s foreign trade and industrial chain in two scenarios:
The first is a relatively optimistic scenario (the current basic scenario): the epidemic basically ended at the end of the first quarter. Taking into account the changes in virus toxicity, China’s current slow post-holiday return to work and effective restrictions on population movements, we expect that the newly diagnosed cases will basically disappear in mid-March (Figure 13), and the epidemic can be effectively controlled. Under this scenario, the impact of the epidemic on China’s foreign trade and supply chain is relatively limited, which will not cause a large-scale adjustment of the supply chain. China’s export growth rate will decline by about 5% in 2020, and will return to positive growth in 2021. The global industrial chain will not show a significant shift from China.
The second is a serious scenario: if the epidemic cannot be effectively controlled before June, China’s trade and supply chain will be greatly affected. Under this scenario, the transfer of East Asian supply chains in 2019 will further accelerate. China’s export growth will decline by about 10% to 15% in 2020, and will return to positive growth in 2021, but remain at a low level (Figure 14) .
Response measures to ease the pressure on foreign trade and maintain the basic stability of China’s supply chain
(1) First and foremost is to maintain China’s core position in the global main product supply chain. Under the circumstance of strengthening the protection, the production and related logistics and transportation of the export industry should be restored as soon as possible. In particular, it is related to China’s important position in the global supply chain and a highly automated export industry, including mechanical and electrical and electronic industries, which should resume production as soon as possible.
(2) In order to isolate the impact of the domestic epidemic on production and export, it is necessary to set up a strict “green zone factory”, that is, the enterprises and employees in the “green zone factory” are safe, and the exported products have undergone strict quarantine. One way is to stabilize the production of these enterprises, and the other is to increase the confidence of overseas users.
(3) Take more favorable measures to attract top global companies to set up factories in China, and form and cultivate high-end industrial chains. In this regard, Tesla is the best example. Tesla’s investment and establishment of a factory in China directly drives and upgrades the accelerated development of the electric vehicle industry and strengthens China’s dominant position in the global supply chain.
(IV) Strengthen research and development investment in high-tech fields, and support industries similar to Huawei’s 5G to lead global development, including integrated circuits, high-end medical care, artificial intelligence applications, and big data technologies. This will strengthen China’s core position in the global supply chain.
(5) Encourage the eastern industrial chain to shift more to the central and western regions rather than overseas. The central and western regions continue to improve in terms of basic transportation facilities and business environment. They have already fully accepted the conditions for the transfer of industrial gradients in the east, and another advantage of moving to the central and western regions is that they can better use the “Belt and Road” Silk Road Economic Belt. To expand trade more easily to Central Asia, South Asia, West Asia and Europe.
(6) Export companies seize opportunities to accelerate digital and intelligent transformation. With the strong support of 5G, artificial intelligence and big data technologies, the digital transformation of enterprises will usher in a golden window period. Turning the pressure from the epidemic situation into a driving force and accelerating the automation and unmanned production and transformation of enterprises is not only a need to improve efficiency, but also helps to prevent similar risks from occurring in the future.
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