The hail of US tariffs has shone a spotlight on export dependence. For China, dependence on exports, in particular to the United States, has fallen significantly over the last two decades, as has its reliance on foreign direct investment, including from the US.
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Last year, exports – of both goods and services – were 21.2 per cent of China’s gross domestic product, falling to 19.2 per cent in the first quarter of this year, down from a peak of 35.5 per cent in 2006. Its trade surplus has also shrunk, with net exports at 4.37 per cent of GDP last year, down from a peak of 8.55 per cent in 2007.
As the US market became less important, China’s exports to the United States fell to just 2.9 per cent of GDP last year, from a peak of 7.5 per cent in 2006. Exports to the US made up about 14 per cent of China’s total last year. The trade surplus has also dropped dramatically, with net exports to the US worth just 1.74 per cent of GDP last year, from a peak of 5 per cent in 2006.
All of this suggests the impact of additional US tariffs on Chinese imports will not be as large as may be expected.
True, at the latest tariff rates – 145 per cent on US imports from China, 125 per cent on Chinese imports from the US – there is no possibility of trade: because no business has the profit margin to absorb such costs. Trans-shipments through third countries such as Mexico and Vietnam to avoid the tariffs are unlikely to be successful because the “rules of origin” are expected to be applied stringently. Thus, the cessation of US-China trade will be the new normal, at least for a while.
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The recent US announcement of an exemption for imports of electronic products, including smartphones, computers and semiconductors, will cover around US$100 billion, or almost a quarter, of Chinese annual goods exports but it is uncertain how long the exemption will last.