China trade: US, EU de-risking isn’t going away, ‘the worst is yet to come’ for exports
- A global supply-chain upheaval is set to persist for years, according to analysts, but China’s entrenched advantages and ‘resiliency’ still give it a manufacturing edge
- China is shipping fewer goods than it has since the onset of the pandemic, as all major trade partners except Russia are ordering less from Chinese exporters
While the widespread reach of a global economic slowdown is seen as the primary reason behind China’s sharp drop in exports, economists and trade experts warn that the impact of “de-risking” efforts by developed countries cannot be underestimated, as “the worst is yet to come”.
Chinese exports suffered their steepest decline in June since the early months of 2020, tumbling by 12.4 per cent compared with a year earlier, after turning negative growth and dropping by 7.5 per cent in May.
The June slump occurred across most of China’s trading partners, including developed and emerging economies – except for Russia, to which Chinese exports increased by 91 per cent, year on year. But Russia’s share of China’s total exports was only 3.4 per cent.
These types of trade pains are also being felt across other Asian export powerhouses. In June, South Korea recorded a 6 per cent year-on-year drop in exports, which have declined for nine months in a row. Taiwan’s exports plunged 23.4 per cent, the 10th consecutive month of declines and the steepest slump in almost 14 years. Shipments from Vietnam also declined for the fourth straight month, by 10.25 per cent.
‘Only the wearer knows where the shoe pinches’: tough times for China’s exporters
“There’s a genuine slowdown in global activity, which is hitting most Asian economies pretty hard,” said Nick Marro, the lead analyst for global trade at the Economist Intelligence Unit (EIU).
The slowdown, particularly in regards to the electronics sector, has hit the export sectors of Taiwan and South Korea the hardest, given their heavy reliance on electronics demand, he said.
“China’s export activity has been slightly more resilient, given the greater diversity in its trade basket,” he added. “But it also hasn’t escaped this downturn in trade activity, given signs of weakening demand in the United States and the European Union.”
Shipments to the US and EU account for around a quarter of China’s total exports, according to Chinese customs data. But slowing economies and rising inflation in the West have suppressed consumer demand for Chinese goods since late last year.
Chinese exports to the two regions were generally strong during the pandemic, driven by demand for stay-at-home goods and medical products. And a more resilient manufacturing sector emerged much faster from the pandemic shadow in 2020-21, resulting in China vastly outperforming the rest of the world in terms of export growth.
“As economies have reopened and consumption has shifted back towards pre-pandemic trends, that’s consequently caused a correction in demand,” Marro said.
According to statistics from the World Trade Organization, China’s share of global goods exports peaked at 15.03 per cent in 2021, then declined to 14.43 per cent in 2022. From 2015-19, the percentage hovered around 13 per cent.
The share is likely to continue declining modestly to pre-pandemic levels by 2028, according to Steven Altman, senior research scholar and director of the DHL Initiative on Globalization at the New York University Stern School of Business.
“Even with the modest declines in China’s share implied by recent forecasts, China looks set to remain the world’s largest exporter by a wide margin, and to keep intact most of the rise in its share of exports that was achieved over the last few decades,” he said.
Recent emphasis ... on diversifying China-centric supply chains suggests rising headwinds for China’s exports moving forward
Still, there is cause for concern, as both economic and geopolitical factors are contributing to China’s declining competitiveness, Altman added.
The evidence is mixed on China’s changing competitiveness due to economic factors alone, since China has also achieved success at growing more advanced products such as electric vehicles while rising costs have naturally pushed some low-end production to other countries, Altman said.
Geopolitical factors are more likely to weigh even more heavily in the coming years, he said.
“Changes to supply chains take time for companies to execute, so the recent emphasis we have seen from companies and governments on diversifying China-centric supply chains suggests rising headwinds for China’s exports moving forward,” Altman explained.
According to International Monetary Fund (IMF) data, the Chinese mainland’s share of US imports peaked in 2017 – before the US-China trade war – at 21.58 per cent. Despite a slight rebound in 2020, it did not reverse the overall trend, with the share dropping to 16.53 per cent last year.
The trend is particularly remarkable in textiles and apparel. In the first four months of this year, 20.9 per cent of textiles and apparel that the US imported were from China – down about 4 percentage points from 2022, and falling to almost half of the total seen 10 years ago, according to figures from the Office of Textiles and Apparel under the US Department of Commerce.
Sheng Lu, an associate professor with the Department of Fashion and Apparel Studies at the University of Delaware, said the impact of the “de-risk” movement on China’s exports should not be underestimated, as there is a strong and growing sentiment among fashion companies in the US to “reduce China exposure” further due to concerns about the forced labour risks in the supply chain and escalating US-China tensions.
“Many Companies in the EU and elsewhere in the world share the same concerns. I am afraid the worst is yet to come,” Lu said.
China’s recent trade pattern has substantiated the country’s diversification efforts, as rising shipments to emerging economies have partially offset the lost momentum derived from weakening Western demand.
According to the Ministry of Commerce, exports from China accounted for 14 per cent of the global total in the first quarter – a 0.3-percentage-point increase compared with a year earlier.
In the first half of the year, trade with the Association of Southeast Asian Nations (Asean), Latin America and Africa increased by 5.4 per cent, 7 per cent and 10.5 per cent, respectively, compared with a 1.9 per cent increase with the EU and an 8.4 per cent decline with the US, the ministry said.
The shift is also a reflection of the ongoing trend of global supply-chain readjustments, as China serves as a critical intermediary supplier for countries such as Mexico and those in Asean.
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“Trade diversification is causing a shift in demand for Chinese goods between different markets, but it’s not necessarily eliminating demand for Chinese products, given that China remains an integral part of these regional supply chains,” said the EIU’s Marro.
He added that while many companies are realising how difficult it is to wean themselves off of the incredibly competitive Chinese production and logistics ecosystems, it has also been difficult for other Asian governments to fully replicate the scale or sophistication of Chinese industrial parks.
Still, there’s a limit to how far Chinese policymakers can position Asean or Belt and Road Initiative nations to make up for any decline in Western demand, as the US and EU remain incredibly important global destinations for final consumption, he added.
“If the US or EU final demand weakens, then that has an effect on the entire value chain,” Marro said.
Altman from NYU said that the strength of China’s exports to countries such as Mexico and the Asean region, which have growing shares of US imports, can be helpful for China, but it is still coming at a rising cost to China’s exports that will grow over the medium to long term.
“Over time, just as China did, those countries will also strive to build up domestic and regional supply bases, gradually raising the pressure on their suppliers in China,” Altman said.
Guan Tao, a former Chinese foreign-exchange official and global chief economist at the Bank of China International, said that while China cannot control external factors, it should continue pushing for trade diversification, promote high-level opening up, and further facilitate foreign trade and investment.
“[China should] participate in the process of reshaping the global industrial and supply chains with a more active attitude, to form the country’s new competitive advantage,” Guan said.
