Trillion-dollar pirouette: How Chinese exports beat tariffs
China's trade surplus has exceeded the $1 trillion mark for the first time in history. A few months ago, hardly anyone could have imagined such a scenario, given the harsh tariff pressure from the Donald Trump administration in the United States. However, the Chinese export machine is showing wonders of adaptability, finding workarounds to Western markets and capturing new niches. The main victim in this situation is Europe, which is trying to find at least some ways to protect its weakening industry. Details can be found in the Izvestia article.
The illusion of isolation
By the end of 11 months, China's surplus reached $1.076 trillion. For comparison, over the past year, this figure only came close to the trillion mark, but did not overcome it. The record was set immediately after some detente in relations between Washington and Beijing — in October, the parties agreed on a one-year truce. Nevertheless, US duties against China are still in effect, and some types of products are subject to downright protective tariffs. The success (for China) was achieved despite the efforts of the American administration. If we delve into the structure of export-import data, it is clear that the record was set due to a large-scale strategic maneuver by the government and business of China.
Trade with the United States has really collapsed. The 29% year—on-year drop in exports to the United States is a direct result of Trump's "America First" policy. For any other economy, the loss of a third of its key sales market would be a disaster (which, by the way, we see through the prism of relations between a number of countries and Russia). For China, this was the reason for a "geographical pirouette."
The American volumes that fell were more than offset by expansion into the Global South. Chinese containers went en masse to places where political risks are lower and demand is growing at double-digit rates. Exports to ASEAN countries increased by 6-8%, to Latin America — by more than 10%, and the African direction showed explosive growth of 20-25%.
Shipping industry analysts are recording a tectonic shift in global logistics. Trans–Pacific routes are becoming empty, but the Asia-Middle East and Asia–Africa lines are overloaded. Operators are forced to reorient their fleet, moving giant container ships to destinations that were previously considered secondary. In fact, China has created an alternative trading network that is less vulnerable to Washington's sanctions and tariff pressure.
However, it would be deceitful to talk about the complete withdrawal of Chinese goods from the American market. A significant part of the record exports to Southeast Asia and Mexico are "classics" of workarounds. The goods are shipped to Vietnam, Thailand or Malaysia, where they undergo minimal processing or simply change the labeling in order to then go to the end consumer in the United States or Europe as "non-Chinese".
Economists note that US regulators have not yet been able to effectively block this channel. Demand in the United States remains stable, and American consumers continue to buy Chinese products, simply overpaying for complicated logistics. That is, at the moment, it can be noted that globalization has not died, but has become much more confusing and expensive.
The critical dependence persists
It is worth noting that Beijing is forced to rely on foreign markets not from a good life. Domestic demand is growing quite slowly, and the crisis in the real estate market has been dragging on for the fifth year. At a meeting of the Politburo, Xi Jinping stated the need to "rely on domestic demand," but immediately called for the development of "new growth drivers" — electric vehicles and robotics. In fact, this means continuing the course of export expansion of high-tech goods, at least partially.
In addition, China has radically changed the very structure of its exports. If ten years ago it was textiles and cheap electronics, today the growth drivers are the "new three": electric vehicles, lithium batteries and solar panels. China's dominance in these sectors is so great that it is physically impossible to find alternative suppliers at the moment. Morgan Stanley analysts predict that by 2030, China's share of global exports will grow to 16.5%, and no amount of protectionist measures will be able to stop this process, given Beijing's technological gap in advanced industries. And the number of industries that this process captures is constantly growing. So, although China is still lagging behind in the production of state-of-the-art semiconductors, it is becoming a leading force in the total volume of chip production. Over the past 11 months, Chinese chip exports have grown by a quarter compared to the same period last year.
It seems that attempts to isolate the "global factory" so far only lead to a complication of logistics chains, but they do not change the essence: the world is still critically dependent on Chinese production. As Zichun Huang of Capital Economics notes, the role of workarounds in trade is only growing, and China's surplus is likely to get even bigger next year.
Europe is in the red
The surprise of the November statistics was a sharp jump in exports to the European Union — by 14.8% in November (against a modest 0.9% in October). This can partly be attributed to the weakening of the yuan, which fell in price against the euro in sync with the dollar, making Chinese goods even more attractive. This causes great irritation on the part of Europe, which was confirmed once again after the visit of French President Emmanuel Macron to Beijing. Apparently, he left with nothing, because shortly after the trip he expressed dissatisfaction with mutual trade with China, threatening "retaliatory measures."
However, the problem is not only that China is selling too much, but that it has stopped buying. The strategy of "double circulation" and technological sovereignty has led to the fact that China has successfully replaced the import of Western equipment. We can say that China today is a "student" who has surpassed the "teacher." Previously, Beijing bought machine tools, turbines and complex industrial equipment from Germany and France, but now it produces them itself. European businesses are aware that China does not want to complement European industry, but to be its competitor. And a competitor with an advantage in the form of a colossal domestic economy, relatively cheap labor, a different work ethic and a well-thought-out industrial policy.
The recent revision of Goldman Sachs forecasts for German GDP growth (a decrease of 0.3 percentage points due to the Chinese factor) clearly demonstrates this new reality. The growth of the Chinese economy is now taking place due to the loss of market share from Europeans, turning international trade from a positive-sum game into an elimination battle.
The European Union finds itself in the position of a defender who is also "running out of bullets." Europe is experiencing a systemic industrial crisis, exacerbated by high energy prices (thanks to sanctions against Russia) and falling global demand. Against this background, the Chinese export rink is perceived as an existential threat.
The situation for Brussels is complicated by the fact that it is actually in a vice. On the one hand, the EU was forced to make serious concessions to Washington by signing de facto unequal trade agreements in order to avoid a tariff war on two fronts. On the other hand, dependence on China is much deeper than that of the United States, which is more self—sufficient, with a much lower weight of exports and imports in national GDP.
Europe, which has been teaching the world the principles of free trade for decades, is forced to slide into protectionism in order to preserve a rapidly shrinking industry. But unlike the United States, the EU has neither energy independence, nor a single decision-making center, nor technological leadership in new sectors.
Little-used plans
Plans are being developed in the corridors of the European Commission, which ten years ago would have seemed like heresy to adherents of free trade. We are talking about the introduction of localization requirements ("Made in Europe") for strategic sectors, investigations into the use of subsidies and, of course, tariff increases. The head of the G7 working group on imbalances, Helene Rey, has already stated that trade distortions threaten financial stability, which in fact gives the "green light" for the application of protective measures.
However, the effectiveness of these plans causes skepticism. First of all, there is no unity in the ranks of the EU. Germany, whose car companies still make the lion's share of profits in the Chinese market, is terrified of Beijing's retaliatory measures. France, whose industry is suffering the most, advocates a hard line. Hungary, which is closely tied to cooperation with Beijing, is blocking pan-European initiatives as much as possible.
Secondly, China's response may be painful. Beijing has already demonstrated its willingness to use targeted strikes: the anti-dumping investigation against European brandy and dairy products has become a clear hint. If the EU closes the market for Chinese electric cars (by imposing duties of up to 40%), China could cut off oxygen to European farmers or, even worse, limit the supply of critical raw materials for the "green transition" and the defense industry. The threat has already affected the United States. Moreover, if America can eventually establish the production of the same rare earths (there are actually many of them almost everywhere) at home, then the EU will definitely not be able to do this without repealing 90 percent of environmental regulations.
Brussels plans to fight the "Chinese threat" with quotas and tariffs, but these tools look hopelessly outdated in a world where China controls supply chains from a lithium mine to a ready-made electric car. While European officials are agreeing on the wording of the next package of restrictions, Chinese container ships continue to explore ports in Africa, Latin America and the Middle East, reshaping the world trade map for themselves.
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