US President Joe Biden and his predecessor, Donald Trump secured primary victories on Super Tuesday (when US states elected their presidential candidates earlier this month), racking up enough delegates to cement a rematch of their 2020 election fight this November. Trump’s protectionist rhetoric is one reason why 
his re-election is regarded as a major global macro risk. However, another fundamental risk stems from structural shifts in China’s economy, which could put Washington and Beijing on a collision course over trade, regardless of who wins. 

The upcoming presidential election will unfold against the backdrop of a significant rebound in China’s external surplus, underpinned by a large expansion of its manufacturing capacity during the Covid-19 pandemic. The world under lockdown fuelled concerns about shortages in the global supply of goods, but between 2020 and 2023, the quantity of goods from China—and hence, the world—rose significantly. Instead, it was an even higher growth in demand that led to supply bottlenecks and price increases, Capital Economics explained in a recent blog. As a result, Chinese industrial output has increased by over 25% since the end of 2019. 

According to Capital Economics, the rise in Chinese supply has reduced the inflation of products globally. China’s exports are at an all-time high in volume, but in value terms, they are less than they were a few years ago, suggesting that exporters have had to reduce their prices to stay in business. Although this has only contributed somewhat to the overall decrease in inflation in advanced economies over the past year, central banks have benefited from it. 

The more concerning consequence of China’s export surplus recovery ,however, is the political and geoeconomic implications thereof. Beijing’s efforts to restructure the global trading system to its advantage are well-documented. These are trade agreements that provide Chinese exporters with tariff-free access while also facilitating investment flows from China to other countries. Beijing has so far agreed to 28 such agreements, Capital Economics added.

However, China is constrained by its size. It now accounts for roughly 15% of global manufacturing exports, according to the Organization for Economic Cooperation and Development (OECD). The countries with which it has signed free trade agreements are small, and hence lack the internal demand needed to soak up its 
excess output. In contrast, the US remains the world’s biggest consumer market. Taking into account Chinese trade flows that have been redirected through third countries, China’s exporters are likely more reliant on US consumers today than they were when the trade war began during Trump’s first term. 

Capital Economics believes that Beijing will thus have much less power to alter the global trading system in a way that benefits itself. Furthermore, this implies that China’s export market will continue to be mostly driven by the US and Europe for some time to come. The eventual outcome will be a sustained growth in the 
US’ bilateral trade deficit with China. One of the lingering bipartisan issues in Washington is the uneven character of the US-China trade relationship. Investors may be anxious about Trump’s potential return and the prospect of a new trade war, but Capital Economics notes the likelihood of that conflict is increasing regardless of which party will be in power next

China’s manufacturing output over the last few years

Bottom Line

With US elections in Q4, we are looking at a turbulent time for
trade policy in 2025. The US will reinforce protectionist strategies
to bolster the economy, but in doing so it must navigate an already
sensitive international relations background.

Macros in Brief

Macro Economics 20 March 2024