Chinese exporters start to take trade war hit – but US consumers also hurting, UN study shows

Chinese companies have started to absorb the cost of US tariffs, cutting prices on exports to the United States about a year into the trade war, according to a new study.

The research, by the United Nations Conference on Trade and Development (Unctad), indicates that Chinese exporters held off on price cuts until the second quarter of this year, when they reduced prices of tariff-hit goods to the US by an average of 8 per cent.

In addition to greater desperation among Chinese companies to cling to market share, the research suggests that, until those cuts, the costs of US President Donald Trump’s tariffs were being passed onto the US consumer, the other big loser of the trade war.

The study bolsters suggestions that Chinese manufacturers have been struggling to break even, with China’s producer price index – which measures the prices that owners can charge at the factory gate – falling for the past three months after stagnating in June.

The report also highlighted a 65 per cent drop – a loss of almost US$10 billion – in US imports of Chinese office machinery in the first half of 2019.

US buyers found alternatives for 45 per cent of that shortfall, with Taiwan being the major beneficiary, but the US$5.5 billion in lost trade suggests that these goods are not always easily replaced.

Overall, American buyers found replacements for about two-thirds of the US$35 billion in lost US imports from mainland China, with Taiwan often the new supplier of choice, followed by Mexico, the European Union, Vietnam and Japan.

But the gap points to full warehouses in the US due to frantic bursts of front-loading, lower demand in the US and the failure of any economy – or combination of economies – to replace China’s giant export engine.

The report said that China’s ability to hold on to 75 per cent of its US market share for goods subject to tariffs also suggested residual strength among exporting companies there.

Many US buyers had reluctantly sought replacement suppliers and contract manufacturers, but as the tariff war continued, more would be forced to find alternatives, it said.

There is pressure in China and the United States for a deal to ease the year-long trade war.

According to former White House trade adviser Clete Willems, the Trump administration is aware that US tariffs planned for December 15 would cause more harm to the US consumer than previous duties because they target the sort of consumer goods – iPhones, laptops, gaming consoles – that US officials previously ring-fenced for fear of hitting voters in the pocket.

Meanwhile, China, the world’s second-biggest economy, grew at 6 per cent in the third quarter, its slowest pace on record. Exports have also fallen for two months in a row, while imports have dropped every month this year except in April.

While much has been made of the role the economy will play in the US presidential election next year, China-watchers also said that a weak economy and the trade war were piling the pressure on Chinese President Xi Jinping.

“He is unable to turn the economy around and he is unable to handle the tough challenge from Trump,” Willy Lam Wo-lap, a veteran political scientist, said in Hong Kong on Tuesday. “He may be unable to stop the trade dispute from turning into a full-blown cold war.”

Lam said that these sorts of “black swan events” combined with the ongoing crisis in Hong Kong “taint” Xi’s authority among China’s civil society, even if there is no real challenge now to his tight grip on power.