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Too early to talk of decoupling? Macro Macchiato 09/12/19

On Friday China announced that it would waive import tariffs for some soybeans and pork shipments from the US. It was promoted as a goodwill gesture but is clearly self-interested. China’s swine herd has been devastated by African Swine Fever, so China needs to import protein. Already in the first nine months of this year, US exports of hogs to China and Hong Kong were up 47% despite higher costs (data from China customs). China is buying soybeans from Latin American traders who in some cases are reselling American soybeans and taking a profit off the top, leaving the Chinese government embarrassed.

The Chinese gesture comes in addition to a number of short-term waivers to US soybean export tariffs which have just about kept US farmers interested while the overarching trade discussions continue. This week will be a vital period as the next tranche of US tariffs on USD 156 Bn of imports from China is due to be enforced this coming Sunday 15th December. Mr Trump has already indicated that he might delay any agreement until his second term, which is another way of saying that he can’t come to a conclusion he likes and is kicking this into the long grass.

Meanwhile, in an apparent effort to decouple China from the US, the Chinese government has ordered all government entities to dispose of any foreign-supplied computer hardware and software by the end of 2022, going so far as to order that the disposals should be 30% completed in 2020, 50% in 2021 and 20% in 2022. The policy is in part about cyber security, in part about Party control and in part a rebuke to those countries that have outlawed Chinese technology on grounds of national security. But there is an implicit link to the trade discussions with the Americans. US companies, according to Analysts at Jeffries quoted in the London Financial Times, sell around USD 150 Bn of equipment and software in China each year – a very similar number to the Chinese exports to the US that will be hit with tariffs from 15th December.

Elsewhere, German foreign Minister Heiko Maas has opined that German companies might reconsider their investments in Xinjiang province in China where local Muslims are reported to be subject to extrajudicial internment in ‘re-education camps’ along with other human rights abuses. Mr Maas is bolting the stable door after the horse has not only bolted but has signed up with the horse rustlers from over the border. China is now Germany’s biggest trade partner. If Mr Maas is serious about linking trade and investment policy with human rights, he will have to stand up to China’s strident defence of its ‘internal affairs’ and expect to lose business. In a year in which German Chancellor Merkel admitted that China is Europe’s strategic competitor, perhaps her compatriots are waking up to what is riling the Americans so much.

The European Commission has encouraged EU member states to engage with China via itself but this hasn’t worked as Estonia, Greece, Italy, Latvia, Luxembourg, Poland, Portugal, and have all previously signed Belt and Road Initiative agreements with China (I apologise for any I have missed) while most other EU countries have significant trade with China and receive foreign direct investment from China. If the EU wants to push back against Chinese influence in Europe, it will get push back against its push back from its own member states. Nonetheless, according to UNCTAD’s annual FDI reports, FDI outflows from China fell in 2018 to USD 129 Bn from USD 158 Bn in 2017 and our sense is that there could be another fall in 2019. While it’s early to start talking about decoupling China and its sphere of influence from the US/EU and their spheres of influence, it is perhaps not too early to start talking about growing barriers to trade between the two sides.

THE TAKE AWAY

What does it all mean for shipping? In the week in which Prime Minster Abe of Japan has announced another round of QE and stimulus, and in which the main parties in the UK are bribing voters with rubber cheques made out to infrastructure, health and education spending, there is an increasingly nationalist mood everywhere about economic growth and prosperity. No doubt Mr Abe would be delighted if Chinese shipyard export sales were hit with some kind of tariff; the South Koreans presumably would not object either. After US sanctions on Chinese ship operating companies, nothing is unthinkable. All the politicking just makes it harder for independent ship owners to plan their current and future investments. Of course, with the so called IMO2020 rules no more than one voyage away for most ships, most ship owners have more pressing matters to consider. But as 2019 fades in our future rear-view mirror, we just might see it as the year in which China’s belt and road hit its first major pothole.

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