Chinese demand for American goods has tanked — evidence that economic damage from the trade war isn’t just hurting China, but the United States, as well.
On a year-over-year basis, Chinese imports of American goods dropped by 31 percent in June. Economists say this indicates that the Chinese economy, which was already decelerating, is continuing to slow its rate of growth.
“A country’s imports are indicative of its economy. A strong economy always imports more. This weak import number is an indication of the weaker economic growth in China,” said Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management.
“It’s more reflective of China’s weak domestic demand,” said Jeff Ng, chief economist, Asia, at Continuum Economics, said the data reflected weaker domestic demand and slowing growth. “We expect GDP growth to stabilize at a low level in the coming quarters,” he said. “I expect growth at 6 percent in 2020. Only in the 2020s do I expect it below.
China’s first-quarter GDP growth rate was 6.4 percent, but economists polled by Reuters expect that to fall to 6.2 percent for the second quarter when the Chinese government reports it on Monday.
The sharp drop in U.S. imports also is reflective of how tit-for-tat tariffs are prompting China to shift its purchases of goods to other countries at the expense of export-dependent sectors of the American economy.
“The motivation is twofold,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. “On one hand, yes, it’s retaliatory. A second part of the reason might be that tariffs make goods more expensive,” she said. “Buying from other countries is more attractive.”
In addition to the contraction of imports, Chinese exports to the U.S. fell by nearly 8 percent, while China’s trade surplus grew by 3 percent to roughly $39 billion.
This does not bode well for the future of U.S.-China trade negotiations, experts say.
“Sooner or later, President Donald Trump will realize he’s not getting any of the things he asked for from China,” said Mark Williams, chief Asia economist at Capital Economics.
The president has already been pressing for that on Twitter, saying on Thursday, “China is letting us down in that they have not been buying the agricultural products from our great Farmers that they said they would.” On Friday, he defended his protectionist stance in a series of tweets, saying, “Tariffs are a great negotiating tool, a great revenue producer,” and accusing China of devaluing its currency.
In addition to the plummeting Chinese demand for American goods overall, Williams said Trump seemed to have given more than he got in return during his meeting with Chinese President Xi Jinping during the G-20 economic summit last month, particularly with regard to relaxing restrictions on American technology access. “Mr. Trump has given ground, easing the sanctions on Huawei. It’s hard to see the current truce in the trade war lasting,” Williams said.
The longer the two sides remain at loggerheads, the more it costs the global economy. “If you look at the global import-export data, it’s coming down across the board. That’s basically an indicator that global GDP growth is going down,” Ren said.
This is a situation Federal Reserve Chairman Jerome Powell and other Fed officials are watching closely. In his prepared testimony to Congress this week, Powell expressed concern about the damage trade tensions were inflicting on economic growth both at home and abroad, saying, “Crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook.”
“This confirms a lot of other economic indicators that already show a slower U.S. economy, so this is another reason we’re going to see a rate cut in July,” Ren predicted.
“It certainly underscores the point that he made that eventually the trade war is going to appear on broad macroeconomic variables the Fed has to monitor,” de Bolle said. “That requires the Fed to be not only attentive to these things but also preemptive, if necessary.”
Whether or not the central bank will be able to move quickly enough when the inflection point is reached is an open question, de Bolle added. “It may take some time for the effects to appear, but they do show up."
"Powell's concern is that eventually when these things do show up, they might show up very abruptly,” said de Bolle.