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CvT: All-Time High Exports Cause Concern in Beijing

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In a bid to stimulate the economy, Americans have recently received their third stimulus checks from the government. At the same time, Beijing has been taking steps to promote its new “dual circulation” model intended to transition towards economic self-sufficiency. Unbeknownst to all, a close relationship between these two seemingly unrelated efforts has formed – with an online shopping boom in the US taking center stage. 

Where is the money going?

Of Biden’s US$1.9 trillion stimulus package, US$360 billion is projected to be spent on imported goods. Poignantly, according to the Financial Times, China is slated to be the largest recipient, with American consumers expected to spend up to US$60 billion on goods imported from the world’s second largest economy. 

These projections are in line with manufacturers’ expectations. With two stimulus payments already under their belts, Chinese producers have noted a remarkable trend in which their sales have sharply increased shortly after checks are issued. Americans, largely still stuck at home due to the COVID-19 pandemic, have taken to the internet to buy products like televisions, computers, and household goods. This has been a welcome sight to Chinese manufacturers, who have increasingly turned to Amazon to sell various consumer products to American buyers. Their competitive attitude and focus on consumer reviews has paid off; according to Marketplace Pulse, a whopping 47% of the top 10,000 sellers on Amazon are Chinese.

Little impact of rising prices

Yet, higher-than-normal price tags have not deterred consumer demand. In response to Trump-era tariffs, Chinese manufacturers have passed these costs wholly onto the consumers through price hikes, while producers have also reported rising costs for raw materials and shipping – both of which have been subject to the pandemic’s stranglehold on resource availability. Air freight rates have exploded, and sea freight shipping between China and the US has become inefficient. Widespread port backups on the western coast of the US due to lockdowns have forced costly delays or expensive reroutes; additionally, due to the heavy trade imbalance, cargo ships have been primarily embarked from China to the US rather than engaging in two-way trade, which has greatly decreased profit margins for roundtrip journeys as shipping companies send back empty containers to China.

The relationship between production costs and consumer prices is apparent. As noted in our March 15th edition of The Weekly Steep, “China’s producer prices (PPI) kicked into high gear as they grew at 1.7% y/y in February, the fastest pace seen in more than two years…In the same month…US consumer prices also clocked in at a 1.7% y/y increase. Coincidence? Maybe – but we think not. After breaking a historical record for exports in 2020, China has clung onto its role as the world’s producer. Yet, hidden behind the data is a subtle chain effect. A rise in Chinese production costs has directly exported inflation to the US, particularly as US imports from China have been steadily increasing in recent months.”

Exports at all-time highs are cause for concern for policymakers

While record-level exports will help contribute to a net increase in China’s GDP, there are some concerns. Beijing, increasingly weary of international scrutiny towards what it considers “domestic affairs,” has been pushing to minimize the influence that foreign powers hold over its economic stability. As such, it drafted the “dual circulation” initiative – a new economic model introduced in May of 2020 that segments the Chinese economy into domestic consumption, or “internal circulation,” and foreign consumption, or “external circulation.” In a push to shore up the influence of geopolitical risk on the domestic economy, President Xi Jinping has increasingly stressed the importance of self-reliance through internal circulation in order to reduce reliance on foreign markets and supply chains.

However, the pandemic has delayed the initiative. With depressed consumer spending, many businesses have been unable to sustain themselves and closed up shop. Meanwhile, China’s growth has been unbalanced, with most of China’s recent economic activity coming from exports and investment. Chinese consumers appear to still be wary, and it will be some time before Chinese domestic consumer spending is back to pre-pandemic levels.

Tense bilateral relations also weigh heavily on the minds of policymakers on both sides of the Pacific. For Beijing, the ever growing trade imbalance between Beijing and Washington is another potential flashpoint in the US-China relationship that could encourage Washington to keep Trump-era tariffs fully in place. The recent argumentative Alaska meeting between The US and China surely will rally Washington to action on the tariffs issue. Meanwhile, it remains to be seen how the Biden administration will balance the US-China trade imbalance issues with the needs of domestic American producers and manufacturers.

A return to normalcy clears the path forward for dual circulation

This third stimulus appears to be the last stimulus that will directly provide money to Americans. As more citizens get vaccinated and the pandemic begins to ease, the US economy should continue to recover, while shipping issues subside and global supply chains reemerge intact. At the other side of this slow return to normalcy, Beijing will once again have the maneuverability to focus on strengthening its domestic consumption within the context of the dual circulation policy and reduce foreign economic reliance to gain greater political freedom unbridled by norms within the traditional global order.

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