The impact of trade tensions between China and the US was highlighted last month as China’s exports to the US experienced a significant decline. According to Financial Times calculations based on official data, exports to the US fell by 34% year on year in US dollar terms, marking the largest drop since February 2020 and surpassing April’s 21% decline.
Trade has been a crucial driver of growth for China amidst a backdrop of a property slowdown. Despite the decline in exports to the US, overall exports increased by 4.8% year on year. The data underscores the effects of trade tensions between the two largest economies in the world.
As Chinese and US negotiators prepared to meet in London for trade talks, a telephone call between US President Donald Trump and Chinese President Xi Jinping took place last week. The two leaders agreed to a 90-day truce on May 12, which remains fragile due to a dispute over slow approval of rare earth shipments. China’s restrictions on rare earth exports, in which it holds a near monopoly, have demonstrated its leverage and compelled Trump to return to the negotiating table. However, analysts believe that US tariffs are taking a toll, as shown by the latest trade figures.
Lynn Song, chief China economist at ING, stated, “It’s likely that the May data continued to be weighed down by the peak tariff period. We expect that export growth to the US could recover in the coming months.” In addition to the export data, separate figures released on Monday revealed that China’s consumer prices in May decreased for the fourth consecutive month, while producer prices fell at their fastest rate in nearly two years.
Nomura economists attributed the deeper factory price deflation to trade tensions, as manufacturers engage in intense price competition for export orders. The ongoing trade tensions have compounded pressures from a property slowdown that began in 2021. The persistent weak price growth and periods of deflation have raised concerns over consumer confidence, prompting calls for more stimulus from Beijing.
The People’s Bank of China recently announced cuts to key lending rates as part of a continuous easing strategy, which also included reductions in mortgage rates to support the housing sector. Zichun Huang, China economist at Capital Economics, noted that the trade data indicates US tariffs are impacting overall exports. She mentioned, “Early signs suggest that US demand for Chinese goods has recovered somewhat since the Geneva truce, which should ease the drag on exports in the near term. But it seems unlikely to us that tariffs will be reduced further and there is still a risk that they could be hiked again.”
In conclusion, while there may be some improvement in US demand for Chinese goods in the near future, the potential for further tariff hikes remains a concern. It is uncertain whether there will be a significant increase in the Consumer Price Index (CPI) given the soft domestic consumer sentiment and the potential deflationary pressure caused by tariffs.
