As The US “Decouples” From China, Who Will Make Up The Trade Balance?

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Emerging markets loom as China looks for trade growth alternatives 

Op/Ed by Chris Devonshire-Ellis 

Mainstream media has been playing up the “decoupling” of the US and China trade and economy, although the situation is not as bad as many suggest. In fact, US-China bilateral trade is set to reach about US$560 billion this year. As I pointed out in the China Briefing article Which US-China Trade Sectors Are Worth Investing in? certain bilateral areas remain buoyant, while others will recover given time, while Hi-Tech trade will decrease.

From a trade perspective, in fact a re-balancing rather than a decoupling is taking place. The United States wishes to retain technological superiority over China (and Russia) and much of the future trade patterns will and are reflecting this. Accordingly it makes sense to ensure that the business sector you are involved with has a future within the US-China trade space. That said, even fairly safe areas can be hit by a petulant Government officials wanting to score political points. I expect US-China bilateral trade to continue to hover around the US$500-600 billion mark per annum for the foreseeable future, although the component parts of this total will change.

The negative aspects of the US-China trade war have tended to grab the headlines. But in replacing, at least in part, some aspect of U.S. trade, where is China looking to make up shortfalls? From the technological standpoint, that is in fact the overriding question – U.S. manufactured component parts in Chinese computers and software, as well as other hi-tech applications have dominant market share, even in China. That will slowly change over time, and much of the latest trade spat is actually intended, longer term, to slow Chinese (and Russian) advances in technology, to keep them subservient. The trade war is actually a symptom of a far wider struggle. Some, such as Forbes suggest China is ten years behind the United States in production of microchips and other nano technologies. Other analysts, such as the Harvard Business Review suggest that in fact, while envisaged as a business leader for innovation, the U.S. is not cutting-edge in any of the three main technology domains. The South China Morning Post suggests China is already on the path to global tech dominance.

How this will pan out as both China and Russia start to look both internally and in partnership both with each other and elsewhere to lessen dependence upon U.S. technology, and how long this will take, is the real question.

In the meantime though, China isn’t sitting back, static, and observing declining trade, and potential future tariff exposures as regards the United States. Beijing instead is taking active steps to develop alternative supply chains, technology investment and creation and overall trade increases elsewhere. But with whom and where?

Russia & The Eurasian Economic Union 
Russia is a major technological power in its own right although it too, like China, is under US sanctions aimed at stymieing this advancement. However, a point worth considering is this: if, as claimed, Russia has impacted upon US voters, then why has it been able to do this, and why has it been able to bypass US defenses? In suggesting this occurred, the United States is also suggesting Russian experts are smarter. Russia is also a leader in A.I., and is the only nation currently shuttling astronauts into space on a regular basis. It is a major innovator in technological areas. It is also collaborating with China on a number of communications and hi-tech applications, including the development blockchain and crypto technologies. In terms of regular bilateral trade, this is expected to double from the US$100 billion plus expected this year, to US$200 billion by 2024. The China-Russia trade space is expanding, and fast.
In addition to this, China has signed off a Free Trade Agreement with the Eurasian Economic Union. It isn’t effective at present as applicable tariff rate reductions and eliminations are still being negotiated. However the process is well underway, and a deal is likely to be announced within the next 12-24 months.  When that happens, China-EAEU bilateral trade will boom – creating a major boost along the Eurasian land bridge and trade from China to the borders of the European Union. Savvy Chinese, Russian and some EU businesses have already begun investing in facilities along these routes, including the recent announcement of a new Chinese Special Economic Zone being established in Vitebsk, Belarus. While the significance of this may escape many, it should be noted that Vitebsk in well connected to Moscow as well as to the European Union and borders with Poland, Latvia and Lithuania – all entry points to the EU.

China and Russia have also been developing Free Trade Zones near each others borders in addition to establishing a number of billion dollar investment funds to promote bilateral trade. These extend from Russia’s Far East to China’s Guangdong Province.

BRICS 
The annual BRICS summit recently concluded in Brazil, where the leaders of the host country as well as China, India, Russia and South Africa all agreed on the need to develop trade. China’s total trade volume with the BRICS nations is currently about US$310 billion. Developing that further will potentially mean the introduction of Free Trade deals between them. There are some practical and political difficulties with this, however I discussed the potential for trade development between China and Brazil here, between China and South Africa here and China and Russia’s developing trade here The BRICS grouping is a key one to watch – they are projected by the World Bank to account for over 50% of global GDP by 2030.

ASEAN
China’s trade with the ASEAN bloc has grown at over 10% this year and is poised to hit about US$576 billion – more than China’s bilateral trade with the United States. This has been accelerated by amendments to the ASEAN-China Free Trade Agreement earlier this year, which have simplifying the rules for trade of goods, services, and investments in the ASEAN-China trade corridor. This growth can be expected to continue.

Africa 
China has been very busy developing commercial infrastructure in Africa, and was instrumental in seeing the African Continental Free Trade Agreement (AfCFTA) come into effect earlier this year. That is abolishing 90% of all tariffs on intra-African cross border trade over the next five years, a major boost for businesses based in a specific location in Africa but sourcing from across the continent. Who has been developing Free Trade and Special Economic Zones throughout Africa? Chinese companies. China-Africa Investment Funds have also been created to develop trade further, currently standing at just over US$100 billion per annum. Many analysts predict a large growth in that figure over coming years.

Belt & Road Initiative 
The World Bank estimates some $575 billion worth of energy plants, railways, roads, ports and other projects have been built by China, or are in progress along the Belt & Road routes. Trade data appears to suggest that in 2019, this realized China trade volumes worth about US$117 billion. The World Bank also estimates that the BRI could reduce transportation times on many corridors by 12 percent, increase trade between 2.7 percent and 9.7 percent, increase income by up to 3.4 percent, and lift 7.6 million people from poverty. If the figures quoted are correct, it appears that China is reckoning on a basic infrastructure RoI of between 4 to 5 years in trade development. Research & Markets, the worlds largest trade research platform, estimate that BRI trade with China will reach US$3 trillion by 2030 – just a decade away. In comparison, the total US global trade in 2018 was about US$5.6 trillion.

The current trend for global international trade is in fact upwards – the end of year 2018 UNCTAD report suggested that global trade, after a difficult few years, grew by 10% in that year and would probably continue to do so. That is good news for China, which unlike the United States has been actively engaging in free trade and reducing trade barriers. The US recently has been rather more protectionist. It remains unclear which economy will take advantage of the global growth in trade – however in terms of trade development projects such as the Belt & Road Initiative, it appears China has taken the upper hand.

While that may not be enough to shake off the dominance of US global trade, it will have the effect of drawing some geographical trade lines between China and the United States in terms of trade partners. The established wealth of the EU, much of Europe and Australiasia will stick with the US, and maintain some hostility towards China trade, and remain partially protectionist. The U.S. will continue to take the role of confronting China in trade terms as and where it can.

China meanwhile has huge dynamics throughout Asia and Eurasia, and has probably taken the lead in Africa too. India remains on the shelf and is likely to do so – unable to adapt and take advantage of new trade opportunities due to protectionist tendencies from its political business elites who remain afraid of competition. Delhi is missing the global trade bus, and will be a side show rather than a serious player. That leaves South America, dominated by Brazil and the Mercusor bloc. Given that Brazil and the US have friendly relations, lobbying and trade incentives can be expected to keep China at arms length.

Global businesses therefore will need to adapt, and will need to deploy an increasing amount of political thought to their international operations. The United States and its policies will determine much of the current business and trade environment in the West. Beijing, and to a lesser, yet still important extent, Moscow will retain the balance in the East, Middle East, and Africa. Splicing the two together to create definitive global development policy as an MNC will be a future headache for many boardrooms and institutional shareholders.

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm provides strategic analysis, legal, tax and operational advisory services across Eurasia and has done since 1992. We maintain 28 offices throughout the region and assist foreign governments and MNC’s develop regional strategies in addition to foreign investment advice for investors throughout Asia. Please contact us at asia@dezshira.com or visit us at www.dezshira.com

 

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