US-China trade is shifting – but is the rate closer to a torrent or a trickle?

By the Numbers. In the year 2022 a curious thing happened. Mexico passed China as the United States’ 2nd largest trade partner. Canada was first at $1.2 trillion, Mexico was second posting $779.3 billion, and China was third at $690 billion in two-way trade with the US.

Of course, when the numbers are broken out by exports to the US, the order is somewhat different – China’s exports to the US hit $536.3 billion, Mexico’s $454.8 billion and Canada’s $436.6 billion.

Still even retaining the top export spot in trade to the US the question remains is China’s trade with the US slipping? Certainly the political relationship has deteriorated to its lowest point in decades and the tariff-war between the two rivals is still in place. Yet the imports (in dollar terms) from China remain close to the sum of the entire 27 member European Union ($553.3 billion). So, really just how big a shift have US importers made away from China to alternative sources? And from the US exporter perspective, how badly have American exports to China been impacted?

US-China Trade

The US Office of Technology Evaluation under the Department of Commerce in their release of the 2022 “U.S. Trade with China” surprisingly reported “In 2022, both U.S. exports to China and imports from China continued to grow for a third year in a row. [editor’s italics] U.S. exports totaled $153.8 billion, an increase of 1.6% ($2.4 billion) from 2021; U.S. imports from China totaled $536.8 billion, an increase of 6.3% ($31.8 billion); and the trade deficit with China was $382.9 billion, an increase of 8.3% ($29.4 billion).”

The report also highlighted that in 2022 China accounted for 7.5% of the $2.1 trillion in the country’s global exports. Further 16.5% of the US total global exports or $3.2 trillion were imported from China and 32.4% of the trade deficit was attributable to the China trade.

Given the tension and rhetoric between the two superpowers, the fact that trade has grown for three straight years is surprising. In fact, China’s $536.8 billion in exports is only slightly smaller than the 2018 export mark of $538.5 billion. And US exports at $153.8 billion is the highest in years. According to data compiled by the Foreign Agricultural Service (FAS) under the US Department of Agriculture, it was a record year in FY 2022. The FAS report said “U.S. agricultural exports to China in fiscal year (FY) 2022 were $36.4 billion and surpassed the previous year’s record with China as the largest export market for the second consecutive year. Significantly higher agricultural prices and resilient demand helped drive exports above the previous year’s record despite lower volumes for most products.”

FAS added that “Robust shipments followed a precipitous drop in U.S. exports to China and the conclusion of the Phase One Agreement. U.S. exports have returned to trend growth experienced since the People’s Republic of China’s (PRC) accession to the World Trade Organization (WTO) and in the last 2 years, the United States has witnessed record export values to China for soybeans, corn, beef, chicken meat, tree nuts, and sorghum. Cotton exports to China have also rebounded, propelled by strong demand.”

So, it would superficially appear that business with China is still very good. But there are other factors that are thorns to the rosy outlook the numbers present.

A Deeper Dive

According to Uber Freight’s 2023 Q3 Market update and outlook in 2023, trade with the US has fallen 24% year-on-year as has the share of US imports (15.1%). There are a number of factors at play contributing to the trend. China’s own economy has weakened and the country’s exports have faltered. The World Trade Organization (WTO) pegged China’s share of global trade at 14.4% in 2022 up from 13% in 2021 and 11% in 2020. By comparison, the US accounted for 8.3% of global exports.

The very size of China’s global trade footprint impacts virtually every market in the world and thus the weakening of the PRC’s exports is a big deal. So much so, that it’s importance was conveyed in a July 13, 2023 headline in the Wall Street Journal “China’s Drop in Exports Signals Deepening Slowdown in Global Trade” followed by a subhead, “Campaigns by central banks to fight inflation are taking an increasing toll on spending in the West.”

But the question of how much of the US-China trade has actually been lost or shifted to other nations because of geo-political issues or other factors is still relatively small to the scale of business being conducted.

A Closer Look at Sourcing Shifts

Another factor impacting US trade with China is US companies seeking manufacturing diversification outside of China — China + 1 or China + 2 or China plus Asia sourcing strategies.

In June Descartes released an in-depth report of sourcing shifts entitled “Descartes Global Shipping: China—US Trade Shift: Where Did the Market Share Go Or Did It? The report was a detailed analysis of a 7-year window of China–US trade shifts in commodities. The author, Chris Jones, is the Executive VP of Industry and Services for the Descartes Systems Group and frequent commentator on global trade trends. Unlike most analysis done on US-China trade the Descartes report is expressed in TEUs which better reflects actual commodity movements. The report in framing the analysis notes that “A twenty-year view of U.S. container imports shows China’s share peaked in 2010 at 44.5% and, when including Hong Kong, that number rose to 50.1%. China’s share was relatively stable from 2011 to 2017 and then peaked again in 2018. The 2018 peak, however, was heavily influenced by the previous U.S. administration’s imposition of duties on select goods, which caused importers to accelerate shipments into the country to avoid paying the incremental import fees.”

However, since 2019 China’s share of import TEUs has steadily been falling and is now at 35.8%. The report concentrates on the top 10 commodity categories [under their HS number category] and country of origin (CoO) in their analysis. One of the interesting conclusions of the analysis was “Despite the rise of other countries, China remained the dominant CoO in eight of the top 10 goods categories.” But that “Across the top 10 goods categories, South and Southeast Asian countries (i.e., India, Bangladesh, Vietnam, Thailand, and Indonesia) grew significantly faster than the overall market and China and took import share from China.”

A good example supporting Descartes’ analysis is the chart on [HS-94] Furniture, Bedding, etc.

During the 2016-2022 period the overall volume of goods in TEUs grew 42.8%. China’s volume growth was small at 4.7% but it’s share in 2016 was 64.9% and in 2022 had fallen to 47.6% (this tally excludes Hong Kong). Over the same period Vietnams share went from 12.3% to 24.7%.

In TEU terms, China in 2022 posted 1,834,055 TEUs compared to Vietnam’s 950,796 TEUs. Vietnam grew by 186.3% but still remains far behind China in exporting furniture to the US.

So, from a sourcing perspective “Or Did It” seems to be more of an answer at this moment as to the question of China’s lost imports. When asked by the AJOT about the possibility of Vietnam overtaking China as a source for clothing and apparel and if Vietnam is likely to overtake China as the dominant source for clothing in the near future? Descartes wrote, “It is unlikely that Vietnam will take over China’s top spot for two reasons.

First, China’s market share is almost 3X Vietnam. Second, Vietnam’s population is 100 million while China’s is over 1 billion. Given all the other commodities that are growing quickly in Vietnam, it will be a battle for increasingly scarce resources.”

The China trade may be shifting but as the numbers point out, it is more a trickle than a torrent.