Photographer: Qilai Shen/Bloomberg

Trump Agenda Could Be Good News for China Exports

  • Exports to U.S. surge 8.1%, snapping seven-month losing streak
  • Economist: ‘Trade frictions will increase across the board’

Donald Trump vowed to get tough with China over trade. The U.S. President-elect’s own economic agenda may add to frustrations as it helps lift the dollar.

A stronger greenback, rallying in anticipation of Trump’s plans to boost fiscal and infrastructure spending, already is helping buoy China’s exports to U.S. shores. Shipments surged 8.1 percent last month from a year earlier, snapping seven months of declines.

Trump’s policy goals are spurring speculation U.S. interest rates and the dollar will rise faster, putting more pressure on the yuan and enhancing China’s export competitiveness. Stronger overseas shipments would also give Asia’s largest economy greater flexibility to ease off domestic stimulus, which would undercut imports and risk widening of the huge trade surplus with the U.S. that’s often been the subject of the incoming president’s ire.

“Trump’s economic policies seem likely only to widen America’s trade deficit with China,” said Andrew Polk, Beijing-based head of China research at Medley Global Advisors, which advises institutional investors. “If the dollar simply maintains its strength, that should lead to an increased U.S. trade deficit and China’s exporters would be a major beneficiary.”

China’s total overseas shipments, which have declined in 19 of the past 23 months, increased 0.1 percent last month from a year earlier as a weaker yuan aided foreign buyers. The currency has fallen 10 percent against the dollar since an August 2015 devaluation.

The base case is that China’s exports will grow next year on yuan weakness and stronger U.S. demand, Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a report Thursday. He estimates exports will expand 5 percent in 2017 in dollar terms, reversing a 7 percent contraction this year.

Meanwhile, China’s spending to underpin the economic expansion this year has helped boost purchases from abroad. Imports jumped 6.7 percent percent last month, the most in two years, on strong demand for raw materials from copper to iron ore. That left the U.S. trade surplus at $23.2 billion and the overall trade surplus at $44.6 billion.

Now policy makers are starting to ease off the stimulus pedal as they move to curb runaway housing prices in major cities. The central bank also is selectively tightening liquidity to curb financial risks after debt surged to almost 250 percent of gross domestic product.

Read more: China monetary policy has quietly tightened

The potential for China exports to strengthen as imports weaken would put Trump on even more of a collision course with the Asian nation in 2017 over its rising trade surplus. That would be further compounded by the kind of stimulus the president-elect has endorsed, according to Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong.

“More infrastructure expenditure and more growth should increase the U.S. current account deficit, and not only with China,” she said. “Trade frictions will increase across the board.”

A world away, Mexico is another candidate for Trump ire after his election upset sent the peso plunging in one of the year’s worst performances among major currencies. That makes its goods even cheaper in the dominant destination for its exports, where Trump campaigned on ending or renegotiating the North American Free Trade Agreement and making Mexico help pay for the construction of a border wall.

Trump renewed criticism of China at a rally Thursday in Des Moines, Iowa, calling it responsible for almost half of America’s trade deficit. "China is not a market economy," he said. "They haven’t played by the rules, and they know it’s time that they’re going to start."

The Federal Reserve may fuel additional dollar strength. Investors see a near 100 percent probability U.S. policy makers will raise the benchmark rate at their Dec. 13-14 meeting.

Still, the prospect of a more buoyant global economy next year underpinned by expansive U.S. fiscal policy may disappoint, curbing dollar strength and delaying rate hikes. Risks include tighter financial conditions as the greenback and U.S. rates rise, as well as international tensions such as trade wars, Citigroup Inc. Chief Economist Willem Buiter, a former Bank of England policy maker, wrote in a report on his 2017 outlook.

Trump’s populist campaign included plans to slap punitive tariffs on imports from China and label it a currency manipulator, though it’s unclear how much of that rhetoric will translate into administration policy after he takes office Jan. 20.

"Trump’s planned tax cut, coming this late in the cycle, is likely to appreciate the dollar and widen the fiscal and trade deficits," said David Dollar, a senior fellow at the Brookings Institution in Washington and former U.S. Treasury attache to Beijing. "Some of the benefits of his stimulus will spill over to China, probably inflaming trade tensions."

— With assistance by Kevin Hamlin

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