The story of China’s trade over the past half-decade or more has stayed relatively consistent: countries exporting commodities to China have seen enormous inflows of money as the country has consumed huge quantities of raw materials, while developed countries in Europe and North America have run persistent and politically contentious deficits as they consume the output of China’s factories. Over the past year and a half, however, this story has changed significantly. Commodity prices have fallen sharply, and China’s economy is slowing from its double digit growth. Many economies around the world are reeling as a result.
China’s trading partners have seen once dependable surpluses wither away, or already existing deficits grow to frustrating levels. This presents a starkly different picture than during the heyday of China’s global growth — where GDP growth rates topped 10 percent per year, versus below seven percent today. The map below shows worldwide monthly average trade deficits and surpluses with China from January 2015 to July 2015. Red indicates a deficit; the deeper the red, the higher the monthly deficit. Click on any country for data:
Source: China General Administration of Customs, calculations by Rhodium Group
As China has entered deeper into a structural adjustment, with lower levels of investment and infrastructure growth, as well as lower energy intensity in economic activity, its trading partners have felt the squeeze. The map below shows the drop or rise in each country’s trade balance with China when comparing the January-July 2015 time period against the same period the previous year. Red indicates a drop; the deeper the red, the sharper the monthly drop. Click on any country for data:
The United States has long had large deficits with China, and those have only gotten larger over the past year. Germany has seen its surplus shrink by more than a third as export of automobiles has fallen. And India, in the midst of advancing a bold economic program to support domestic manufacturing, has seen its deficit increase drastically. In China’s near periphery, Thailand is now running a deficit. Myanmar and Singapore have seen their deficits explode.
Particularly hard hit is Australia, which during the first seven months of 2014 ran a surplus of more than $5.5 billion a month with China, a growing interdependence that caused many to ask how the country would balance the security relation with the United States and a trade relation with China. But over the first seven months of 2015, Australia’s monthly surplus has fallen by an average of more than $2.3 billion versus one year ago, as commodity prices, largely iron ore, have fallen and China’s construction has slowed.
Other countries have seen similar declines. Brazil’s monthly surplus, driven by sales of iron ore and petroleum, has fallen by more than $820 million in 2015, contributing to an economic crisis that has led to the downgrade of the country’s credit rating to junk. Angola and South Africa, which mostly sell oil and minerals like chromium and manganese, have seen even greater declines, of $1.2 billion and $1.4 billion, respectively. That adds up quickly; the Angolan economy has seen $9 billion less in the first seven months of the year from China alone. These falling revenues have knock-on effects as well; investors, seeing the declining revenues, defer or cancel fixed asset investment. Africa has been hit hard by these shifts. It’s an open question whether Beijing will continue to find itself feted on the continent if the money stops flowing.
And some countries have shifted from running surpluses to running deficits. Costa Rica had been averaging a surplus of $300 million a month from sales of computer parts; it is now running a deficit of $24 million. Perhaps sensing that its trading partners’ positive feelings towards it were buoyed by these surpluses, China has turned to gifts to maintain positive relations: Beijing recently gave the Costa Rican Ministry of Public Security two aircraft, valued at $18 million. These changes extend into Asia as well. Thailand, which sells oil and rubber to China, buying electronics and machinery in return, has reversed its once-hefty surplus with China, and is now running a deficit as well.
To be sure, there are many ways to evaluate trade relations, especially with the world’s largest exporter. It’s not necessarily counter to a country’s interests to have a trade deficit with China; neither is it necessarily beneficial to have a surplus. But there’s no question that the balance of trade affects each country’s domestic perception of China, as well as China’s bargaining power worldwide.
As China works its way through a growth transition, individual reforms will have complex impacts on a wide range of economic factors, including trade and financial flows. It is hard to predict where these changes might lead. But both bullish and bearish observers should realize that their mental models of China’s economy may have a shorter shelf life than they did a few years ago.