Skies Darken Over U.S.-China Trade

The Sino-American trade conflict I wrote on last month has just become more likely. Chinese trade numbers show exports declining and imports collapsing at the end of 2008, the latter plunging 21% in December. The grave weakness in imports puts paid to the once-popular but unfounded notion that China could help fight the global economic contraction.

It also means there will be more pressure on Chinese exports in coming months. Chinese exports and imports are tied by the processing trade, where raw materials and unfinished products are brought in and transformed into finished goods for shipment overseas. Much weaker imports indicate China-based exporters anticipate lean times. That, naturally, will increase pressure in Beijing to support exports, say with further tax credits.

This will not be well received in the U.S. China officially recorded an aggregate trade surplus of $295 billion for last year, a new record. Import weakness means the last five months of 2008 saw the five highest monthly trade surpluses in history. American data show a very modest weakening in incoming Chinese goods, by 5% in November (the latest figure available). The bilateral deficit is likely to rise only slightly for the year, but will still exceed $260 billion.

It is no surprise there is increasing talk that the incoming Obama administration will focus its trade spotlight on China. As it is usually the President who restrains Congress when protectionist sentiment strengthens, the storm clouds are plainly thickening.