“The sky won’t fall,” the spokesman of China’s customs authority said this week, referring to President Trump’s trade war in China, just as the authority reported an over 12% jump in exports for March. China is preparing to respond to the tariffs—by going gray in trade.
The New York Times reported this week that there is a growing fear in Europe that China may start redirecting its cheap, subsidized products to European markets in response to U.S. tariffs. Examples included electric cars, steel—which Europe needs right now—and consumer electronics. The NYT said this would undermine European producers of the same goods as one of the adverse consequences of the tariff war.
Caixin Global, meanwhile, reported that China’s approach to responding to the tariffs could take the shape of a “new boom in so-called gray trade chains as exporters seek to circumvent tariffs by routing their goods through third countries.” While the boom’s in the making, China keeps responding to every additional tariff announcement with one of its own, the latest figure at 125% on U.S. goods and fresh restrictions on rare earth exports from the world’s biggest processor of those materials. President Trump responded by threatening tariffs on smartphones a day after exempting them from additional levies.
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“The sky won’t fall” for Chinese exports,” Lyu Daliang from the Chinese customs agency said, as quoted by Xinhua on Monday. “These efforts have not only supported our partners’ development but also enhanced our own resilience,” he added, noting China had a “vast” domestic market that it would turn into a buffer against global volatility—while utilizing its well-diversified export market to reroute exports to avoid tariffs.
The March export numbers could be a glimpse into what’s coming, but not immediately. In fact, some analysts expect a slowdown in Chinese exports in the coming months while the dust from the tariffs settles. “Exports will likely weaken in coming months as the U.S. tariffs [have] skyrocketed,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, told CNBC. He added that “in the short term, I expect chaos in supply chains and potential shortage in the U.S. that may drive up inflation.”
Once the chaos is over, however, some expect Chinese goods to start flowing across the world again, possibly through Europe—and Europe might not mind. The European Union recently signaled it was open to negotiating a trade deal with China in light of Trump’s global tariff offensive, notably including electric vehicles. The European Union has EV sales targets. European carmakers can’t deliver on price (and quality). Chinese carmakers can. But the EU is trying to make sure that Chinese electric car imports don’t hurt local manufacturers. To that end, it is negotiating what it calls “a minimum price” for imported electric cars.
There may well be minimum prices for other Chinese goods going into Europe, too. And then, once in Europe, these goods could flow to other parts of the world. Indeed, Europe is not the only destination for Chinese exports that can turn into a link in that gray trade chain that Caixin Global referred to in its report. The process will not be painless, as suggested by some analysts. Yet it will unfold.
“We think it could be years before Chinese exports regain current levels,” Julian Evans-Pritchard, chief China economist at Capital Economics, told the Financial Times, adding that there were “already signs of shipments being rerouted via third countries”. Tariffs, it appears, are quite similar to sanctions in one respect: there is always a way around them.
By Irina Slav for Oilprice.com
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