There is considerable investor interest in the release of China’s trade balance on Friday. It will cover the period right after the Trump Administration ratcheted up tariffs to as high as 245% on some products. Of course trade has already been significantly disrupted for a couple of months, but this will provide some key insight into the real tariffs impact the trade war is having on major exporters.
China is the largest industrial exporter in the world, as well as the largest consumer of raw materials. Sales to the US amount to around 14% of China’s exports, and are expected to see a substantial reduction. But China is facing trade challenges with other nations, including the EU. Additionally, the tariffs might be an opportunity to shift export targets, which could reduce the overall impact on the number.
A Rise and a Crash
Tariffs have been having an impact on China’s trade since the start of the year, even though Donald Trump didn’t take office until January 20th. His stance on tariffs was well telegraphed, however, and many businesses rang in the new year by working to stock up ahead of the uncertainty of what, who and how much tariffs would be applied.
This meant that China posted record trade surpluses in the first few months of the year, while the US saw record trade deficits. But now that situation is likely to reverse now that the tariffs have actually gone into effect starting in the second quarter. The point of the “front-loading” of orders is to have inventory so as not to have to order while the tariffs are in place.
“Temporary” and Market Shifts
There are a couple of interpretations of tariff policy. One is that the levies will be applied for a long time. The other is that they are meant to be a pressure tactic and will be reversed soon. Either interpretation can change the behavior of importers and US businesses. If it’s just a temporary tactic, then businesses can burn through existing inventory, hoping to last until the tariffs are reduced. This could mean a sharp, initial drop in exports that slowly increases if the tariffs are long-lasting.
Shipping companies report that demand across the Pacific for cargo has reduced by as much as 60%. But Chinese companies have not been idle, pushing to sell their products in other markets. Additionally, exporters who cut prices to absorb the cost of tariffs would reduce the value of the trade balance as calculated, even if that doesn’t reduce the volume.
What the Market is Looking For
The consensus among analysts is that China’s trade surplus will fall to $70.0 billion from $102.6 billion in March. Exports are expected to decline by -2.0% compared to +12.4% in the prior month. Meanwhile, imports are projected to accelerate their decline to -5.0% from -4.3% prior.
The latter could be particularly significant for the Aussie, as the price of iron ore has been below $100/ton so far this month. Slowing demand from Australia’s largest trade partner could add to pressure on the economy. The RBA has been coming under increased pressure to ease, which could drag on the Australian dollar now that the election is over.