As The US “Decouples” From China, Who Will Make Up The Trade Balance?

As The US “Decouples” From China, Who Will Make Up The Trade Balance? by Chris Devonshire-Ellis  for Silk Road Briefing

Emerging markets loom as China looks for trade growth alternatives 

Op/Ed by Chris Devonshire-Ellis 

Mainstream media has been playing up the “decoupling” of the US and China trade and economy, although the situation is not as bad as many suggest. In fact, US-China bilateral trade is set to reach about US$560 billion this year. As I pointed out in the China Briefing article Which US-China Trade Sectors Are Worth Investing in? certain bilateral areas remain buoyant, while others will recover given time, while Hi-Tech trade will decrease.

From a trade perspective, in fact a re-balancing rather than a decoupling is taking place. The United States wishes to retain technological superiority over China (and Russia) and much of the future trade patterns will and are reflecting this. Accordingly it makes sense to ensure that the business sector you are involved with has a future within the US-China trade space. That said, even fairly safe areas can be hit by a petulant Government officials wanting to score political points. I expect US-China bilateral trade to continue to hover around the US$500-600 billion mark per annum for the foreseeable future, although the component parts of this total will change.

The negative aspects of the US-China trade war have tended to grab the headlines. But in replacing, at least in part, some aspect of U.S. trade, where is China looking to make up shortfalls? From the technological standpoint, that is in fact the overriding question – U.S. manufactured component parts in Chinese computers and software, as well as other hi-tech applications have dominant market share, even in China. That will slowly change over time, and much of the latest trade spat is actually intended, longer term, to slow Chinese (and Russian) advances in technology, to keep them subservient. The trade war is actually a symptom of a far wider struggle. Some, such as Forbes suggest China is ten years behind the United States in production of microchips and other nano technologies. Other analysts, such as the Harvard Business Review suggest that in fact, while envisaged as a business leader for innovation, the U.S. is not cutting-edge in any of the three main technology domains. The South China Morning Post suggests China is already on the path to global tech dominance.

How this will pan out as both China and Russia start to look both internally and in partnership both with each other and elsewhere to lessen dependence upon U.S. technology, and how long this will take, is the real question.

In the meantime though, China isn’t sitting back, static, and observing declining trade, and potential future tariff exposures as regards the United States. Beijing instead is taking active steps to develop alternative supply chains, technology investment and creation and overall trade increases elsewhere. But with whom and where?

Russia & The Eurasian Economic Union 
Russia is a major technological power in its own right although it too, like China, is under US sanctions aimed at stymieing this advancement. However, a point worth considering is this: if, as claimed, Russia has impacted upon US voters, then why has it been able to do this, and why has it been able to bypass US defenses? In suggesting this occurred, the United States is also suggesting Russian experts are smarter. Russia is also a leader in A.I., and is the only nation currently shuttling astronauts into space on a regular basis. It is a major innovator in technological areas. It is also collaborating with China on a number of communications and hi-tech applications, including the development blockchain and crypto technologies. In terms of regular bilateral trade, this is expected to double from the US$100 billion plus expected this year, to US$200 billion by 2024. The China-Russia trade space is expanding, and fast.
In addition to this, China has signed off a Free Trade Agreement with the Eurasian Economic Union. It isn’t effective at present as applicable tariff rate reductions and eliminations are still being negotiated. However the process is well underway, and a deal is likely to be announced within the next 12-24 months.  When that happens, China-EAEU bilateral trade will boom – creating a major boost along the Eurasian land bridge and trade from China to the borders of the European Union. Savvy Chinese, Russian and some EU businesses have already begun investing in facilities along these routes, including the recent announcement of a new Chinese Special Economic Zone being established in Vitebsk, Belarus. While the significance of this may escape many, it should be noted that Vitebsk in well connected to Moscow as well as to the European Union and borders with Poland, Latvia and Lithuania – all entry points to the EU.

China and Russia have also been developing Free Trade Zones near each others borders in addition to establishing a number of billion dollar investment funds to promote bilateral trade. These extend from Russia’s Far East to China’s Guangdong Province.

The annual BRICS summit recently concluded in Brazil, where the leaders of the host country as well as China, India, Russia and South Africa all agreed on the need to develop trade. China’s total trade volume with the BRICS nations is currently about US$310 billion. Developing that further will potentially mean the introduction of Free Trade deals between them. There are some practical and political difficulties with this, however I discussed the potential for trade development between China and Brazil here, between China and South Africa here and China and Russia’s developing trade here The BRICS grouping is a key one to watch – they are projected by the World Bank to account for over 50% of global GDP by 2030.

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