Market Report

China – A US$1tn deal

by Haixu Qiu / Apr 16, 2019

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In the event of a trade deal, China is set to significantly increase imports from the USA – something that may conclude in coming months, perhaps even weeks. In China HQ’s Plan B report, we forecast that a comprehensive trade deal between Beijing and Washington will seek to address issues across three major areas. These are the trade imbalance, IP protection, and structural reforms aimed at reducing preferential policies for the state-owned economy.

Political rather than economic considerations
While it is true that the context of a grand deal between China and the USA is about much more than trade, it would also be wrong to underestimate the magnitude of the proposed expansion and
rebalancing of Sino-US trade and its profound implications for China’s economic roadmap over the next decade.

A deal is in everyone’s interests
In China HQ’s view, although Beijing persistently complains that President Trump’s attempt to wipe out China’s trade surplus with the USA is unfair and makes little economic sense, it will also have realised that the political benefits of increasing imports from the USA is more important than the tally on economic gains and losses.

Economic cold-war scenario
One of the most catastrophic scenarios for China is that it falls into an “economic cold war” with the USA, or it becomes delinked from the US economy. Such a scenario, which is on the agenda of the China hawks within Trump’s administration, would lead to a massive relocation of foreign-invested capacity in China, thus undermining China’s core competitive advantage – the largest and most sophisticated industrial supply chain in the world.

US$1-1.2tn of imports over six years
It has been widely reported that China will agree to increase imports from the USA by US$1-1.2tn over a period of six years. According to the US Bureau of Economic Analysis under the Department of Commerce, total goods exported to China from the USA fell 7.4% YoY in 2018 to US$120.3bn due to the trade tensions. At the same time, total service exports to China rose 2.2% YoY to US$58.9bn, putting total exports (goods plus services) at around US$180bn.

Low-end target
That is to say, to achieve the low-end target of increasing US$1tn exports to China on top of the scenario of a no trade deal, China’s imports from the USA need to maintain a 19% Cagr through 2019-24, which would be a remarkable acceleration from the 2.5% Cagr over 2013-18. For 2019 and 2020, US exports to China need to increase by US$34bn and US$75bn from 2018.

Australia, Brazil, the EU and Taiwan are vulnerable
China HQ takes a thorough look at the key sectors that, combined, would help meet about 61% of the import target in 2019-20. To meet such a large increase in imports from the USA, China would almost certainly need to reduce imports from elsewhere. Australia, Brazil, the EU and Taiwan would be the most vulnerable.

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