Non-ferrous metals: The reciprocal tariffs between China and the US have limited overall impact on the supply side of non-ferrous metals. (1) For copper, China imports copper scrap and concentrate from the US. Together, the two account for 3.4% of domestic apparent demand, a relatively low share that can easily be replaced by supply from other regions; therefore, the impact on domestic copper supply is limited.
(2) For zinc, China's annual import of zinc scrap totals only 13,800 tonnes, so it can be inferred that the volume imported from the US is extremely limited. In addition, zinc concentrate imported from the US accounts for only 0.4% of China's total zinc concentrate imports, and refined zinc accounts for only 0.1% of imports. Together, the two account for 0.1% of domestic demand.
(3) For aluminum, China imports about 600,000 tonnes of aluminum scrap from the US annually, accounting for about 1.5% of total domestic aluminum supply. Given that domestic aluminum capacity is relatively oversupplied, even if imports were completely stopped, this output could be easily made up as long as bauxite supply remains stable.
(4) For nickel, China's nickel industry has limited overlap with the US. Even if import tariffs are expanded to include ferronickel and electrolytic nickel in the future, there will be no impact.
The impact of the US-China trade war on the demand side needs to be closely monitored. If GDP growth is dragged down by 1 percentage point, demand may decline by approximately 70,000 tonnes of copper, 200,000 tonnes of aluminum, 37,000 tonnes of zinc, and 14,000 tonnes of nickel. However, it is also necessary to watch whether China, under the pressure of domestic economic slowdown caused by the trade war, will introduce economic stimulus measures to offset its impact. Increasing infrastructure investment will undoubtedly increase demand for non-ferrous metals. The US's imposition of high tariffs on China and other countries and regions will encourage the rise of global trade protectionism. Other countries may follow the US in establishing high tariff barriers to protect their own enterprises. Particular attention should be paid to the subsequent actions of the EU and Japan.
I. Changes in China's economy since the mutual imposition of tariffs
1. The mutual imposition of tariffs has had a significant impact on Sino-US trade. After October 2018, Sino-US trade faced an environment of increased tariffs. As shown in Figure 1, the year-on-year growth rate of bilateral trade deviated from the previous trend and declined sharply. However, by comparison, China's import growth rate from the US fell much more than its export growth rate. Many factors may have jointly contributed to this result, but the two most obvious reasons are probably as follows. First, China's imports from the US are relatively price-elastic; when import prices rose, China chose to reduce the volume of imports from the US. Second, China conducted entrepot trade in goods imported from the US to avoid the impact of tariff increases on import costs. However, entrepot trade also involves cost considerations, so the total volume may not be very large.
2. The mutual tariff imposition has had limited overall impact on China's imports and exports of goods. After October 2018, China's import and export growth rates declined to varying degrees. The year-on-year growth rate of imports fell sharply from above 20% to around -5%. During the same period, export growth also declined, but the overall decline was far smaller than that of import growth. The mutual tariffs between China and the US have had a certain impact on China's total trade. However, other factors also had important and non-negligible effects on trade during the same period. First, economic activity in the euro area, Japan and other countries slowed sharply, dragging down China's exports. Second, China's domestic economic downward pressure gradually emerged, and domestic demand slowed severely, dragging down imports. Third, oil prices fell notably, reducing the value of crude oil imports. Fourth, the RMB exchange rate depreciated markedly, helping to expand the trade surplus. Although the mutual tariffs have had a significant impact on bilateral trade between the two countries, it is difficult to isolate the impact of this single factor on China's overall goods trade without considering other factors. It can only be said that under the combined effect, China's goods trade pattern has undergone certain changes.
3. The Sino-US trade friction has had a significant impact on entrepreneur confidence. Starting from the third quarter of 2018, affected by the escalation of the Sino-US trade friction, the entrepreneur confidence index surveyed by the People's Bank of China continued to weaken. By the end of 2018, the index had fallen rapidly from a high of 75.8 to 67.8. In the first quarter of this year, as Sino-US trade negotiations improved and the government successively introduced counter-cyclical and structural policies, which gave entrepreneurs confidence, the index rebounded somewhat. Looking at the historical data of this index, fluctuations are relatively small in normal years. The recent fluctuations have been clearly influenced by the Sino-US trade issue.
4. In Q1 2019, import and export trade contributed 1.5% to China's economic growth. For the full year of 2018, net exports made a negative contribution to GDP growth of -0.6%. In the first quarter of this year, net exports contributed 1.5 percentage points to GDP growth, the highest since last year. Although China's export growth was relatively high and export volume relatively large in 2018, import growth was even higher in the same period, leading to a sharp contraction in overall net exports and a negative drag on GDP growth. The first quarter of this year was just the opposite: although exports were weak, imports fell even faster, so net exports instead strongly boosted GDP growth. Of course, it cannot be said that the Sino-US trade friction has been beneficial to China's economy. Dialectically speaking, first, the expansion of the surplus is related to many factors and is not caused solely by tariffs. For example, in the first quarter of 2019, oil prices averaged 2.5% lower than in the first quarter of the previous year, and oil prices were even lower in the fourth quarter of last year, reducing the import value. In addition, the RMB exchange rate depreciated by 6.1% year-on-year in the first quarter. These two factors have a relatively large impact on China's trade pattern. Second, China's economic situation in the first quarter was still relatively poor, and domestic pessimism was relatively serious, affecting imports, especially imports of capital goods. Finally, there is the impact of the Sino-US trade friction. Objectively speaking, the tariffs did expand the bilateral surplus between China and the US, thereby expanding the overall trade surplus.
II. Possible impact of the mutual tariff imposition on China's economy
Raising the existing tariff of 10% on Chinese products exported to the US to 25% will affect the economies of both China and the US in many ways, and even threaten global economic growth.
1. Raising tariffs may significantly reduce the volume of Sino-US trade, and the surplus may narrow noticeably. First, export value will decline. As can be seen from the attached table, a large proportion of the products subject to additional tariffs are low- and medium-value-added labor-intensive products, such as furniture, footwear, hats, and mechanical and electrical products. Among these, products such as furniture, footwear and hats have relatively short industrial chains and are highly price-sensitive. When the tariff increase is small, the impact may not be too great, but if it is raised to 25%, the impact on prices will become significant and export volumes may decline notably.
Second, the decline in import value will be relatively small. As a surplus country, our countermeasures are asymmetric. The higher the tariffs and the more product categories involved, the more obvious this difference will be. Therefore, the decline in China's import value is likely to be far smaller than the decline in export value. These two factors together lead to a narrowing of the trade surplus.
2. China's export sector employs a large number of people, and tariff increases may cause small and medium-sized enterprises to reduce their workforce. Employment is not merely an economic issue; it is also a social and political issue. Premier Li Keqiang made important instructions at the national teleconference on employment and entrepreneurship and on the employment and entrepreneurship of college graduates, emphasizing that employment pressure remains high this year, especially as the number of college graduates reaches a new record high, and there are many factors affecting stable employment. All regions and departments must attach great importance to this. Therefore, the implementation of policy measures will take into overall consideration the changes they bring to employment and give employment priority;
Economic policies such as fiscal, taxation, financial, industrial, investment, and trade policies will focus on coordination and compatibility with employment. If conflicts are found, employment will be given priority.
Among China's exports to the United States, mid- and low-value-added manufactured goods account for a large share. Although technological progress in recent years has brought efficiency gains, these industries remain relatively labor-intensive and in fact provide a large amount of employment in China. If these sectors are hit, with their product sales blocked and factories closed, leading to workforce reductions, the impact on China would be relatively large. We are currently facing an unfavorable situation of rising unemployment and increasing employment pressure. If workforce reductions in the export sector are added on top, this may bring economic problems, and stabilizing consumption and expanding domestic demand will be affected. Economic problems may even lead to social problems. In contrast, the U.S. labor market is quite tight, and its trade sectors are agriculture and high-value-added manufacturing, both of which have relatively high productivity. Even if they are hit, the number of unemployed may not be too large, and the unemployment problem will not be particularly serious.
3. The more important issue arising from tariff increases may be confidence. As mentioned above, since the tariff increases in 2018, entrepreneur confidence has been severely impacted. A typical manifestation of declining confidence is the decline in investment. In the first quarter of this year, the contribution of investment to GDP growth declined markedly, even lower than the contribution of net exports to economic growth. If tariffs are imposed, the economic implications of their adverse effects are themselves of secondary importance; what is more far-reaching may be the damage of uncertainty to the business environment and the impact on the confidence of business operators. Since last year, the central economic meetings have repeatedly mentioned the importance of stabilizing expectations. Confidence is more important than gold. Of course, in this regard, if the United States imposes tariffs again, it will not only hit the confidence of Chinese entrepreneurs, but also hit the confidence of entrepreneurs in the United States and even other countries around the world, which will have an adverse impact on global economic development.
4. China will launch more counter-cyclical adjustment policies to cope with the impact of trade frictions. In the first quarter, China introduced a number of counter-cyclical adjustment policies to address downward pressure on the economy, including monetary policy, fiscal policy, and some structural policies. In April and May, it also introduced policies to lower value-added tax rates and social insurance contribution rates. It can be said that these policies are already relatively strong, and their effects on the economy are gradually emerging. In addition, China still has conditions to introduce some policies, such as policies to promote consumption and expand domestic demand, and policies to regulate employment promotion and improve vocational skills. Even aggregate policies such as cutting the reserve requirement ratio and reducing interest rates still have room for introduction. Therefore, if the escalation of China-U.S. trade frictions causes a relatively large shock to China's economy, policy has full capacity to launch more policies to offset such an impact.