China and the U.S. have adopted distinctly different strategies to deal with the coronavirus pandemic since its outbreak. While China has made every effort to ensure the stability of the supply chain and focused on the supply side, the U.S. has practiced policies guided by modern monetary theory to strongly stimulate demand, and supply recovery has trailed demand. As a result, the U.S. became highly dependent on Chinese manufacturing after the pandemic, and Chinese exports to the U.S continued to grow rapidly, completely reversing the decline during the Trump trade war period (2018-2019).
Looking ahead to 2022, as it is difficult to reduce the supply and demand gap in the shortterm, not to mention high inflation and other factors, U.S. demand for Chinese goods will remain strong and China’s exports to the U.S will continue to grow rapidly. In the long run, the competition between China and the U.S. will be enduring and complicated, but economic and trade relations will always be the ballast of China-U.S. relations, and China’s core strategy will still lie in following the trend of globalization, continuously deepening reforms internally, and expanding market access and strengthening cooperation externally.
U.S. dependence on Chinese manufacturing
After the pandemic, the U.S. and other developed economies have adopted policies based on modern monetary theory. Consequently, the supply recovery has been significantly slower than the demand recovery. The Biden administration’s large-scale monetization of fiscal deficits, relying on “helicopter money” to strongly stimulate demand, has played a positive role in the economic recovery, albeit highly uneven, with the supply recovery lagging far behind. U.S. retail sales in 2021 were higher than expected, reaching 131.3% of the November 2017 level as of November 2021, significantly stronger than that before the pandemic.
China’s response to Covid-19 has been quite different, focusing more on the supply side, and the overall recovery has been characterized by oversupply. Compared with the U.S.
approach of directly subsidizing households and stimulating the demand side, China’s post-pandemic policy of “six guarantees” has supported corporates, such as reducing taxes and fees for SMEs, providing fiscal subsidies for special loans, granting targeted subsidies, and subsidizing local governments in the expenditures on new infrastructure, new urbanization initiatives, major projects and pandemic-related work. This has significantly propped up the stability of the supply chain and the economic recovery after the pandemic.
Differences in supply and demand fundamentals between China and the U.S. due to different strategies have become the main reason for the high growth of China’s exports to the U.S. after the pandemic. Thanks to a stable supply chain, China has become the main source to meet the U.S. demand for goods. Customs data show that China’s exports to the U.S. grew 7.9% in 2020 against the odds, and 28.3% year-on-year in the first 11 months of 2021, making the U.S. China’s top export destination again, in contrast to the continuous decline in China’s exports to the U.S. during the trade war.
U.S.’ demand for Chinese goods to remain strong
Looking ahead to 2022, supply and demand will continue to dominate the China-U.S. economic and trade relations. U.S. demand for Chinese goods is likely to remain strong thanks to the persistence of economic uncertainty in the U.S. given new waves of infections, the short-term difficulty in reducing the supply and demand gap, and high inflation.
1. It is difficult to reduce the U.S. supply and demand gap in the short term, so Chinese manufacturing is still indispensable
First, labor shortage is still severe. On the one hand, there is a serious structural imbalance in the U.S. labor market. According to the latest data, total job vacancies in the U.S. private sector are still 2.11 times the pre-pandemic level (March 2020). The job vacancies in the manufacturing, leisure and hospitality, retail, and wholesale industries are 2.77, 2.65, 2.48 and 2.19 times the pre-pandemic level, respectively. On the other hand, the impact of “permanent unemployment” as a result of the pandemic can’t be ignored. Labor shortage pushed the U.S. unemployment rate further down to 4.2% in November, a drop of 0.4% from October. Since August last year, the U.S. labor force participation rate has recovered slowly, almost stable in the 61-62% range, still nearly 1.5 percentage points below the pre-pandemic level.
Second, the production recovery is still lagging behind. In Dec. 2021, the U.S. manufacturing capacity utilization rate almost approached the pre-pandemic level, but the recent new strain of omicron has caused another wave of infections. Combined with labor shortage, the resumption of production has again become uncertain. Raw material price increases are continuing to compress profits in downstream industries. The U.S. stock market data for the third quarter of 2021 show that energy, metals and other commodity prices rose sharply, and consequently, the return on equity (ROE) of raw materials, utilities (electricity, etc.) and other industries was much higher than before the pandemic, while profit margins of downstream industries such as industrial and consumer goods were significantly compressed.
Third, it will take time to resolve transportation bottlenecks. In terms of international transportation, the Port of Long Beach and the Port of Los Angeles together account for about 40% of the U.S. container throughput, but since the pandemic, the above two ports have suffered from operational inefficiencies. In November, the ratio of empty container exports at the Port of Los Angeles was as high as 77% and the average time cargo ships were stuck at anchor was still more than 10 days. As a result, the China Containerized Freight Index (CCFI) for the U.S. West Coast and East Coast remained high. In terms of domestic transportation, according to the American Trucking Associations’ forecast in November, the current shortage of U.S. truck drivers has increased 30% over the pre-pandemic level, which amounts to 80,000 drivers. The shortage of drivers has made it more difficult to find a solution to transportation bottlenecks.
2.With high inflation in the U.S., price pressure will increase demand for Chinese goods
The increasing supply and demand gap under the unbalanced recovery is the direct cause of this round of global inflation, and the flood of liquidity under the extremely loose monetary policy is also an important driver. Since 2021, inflation in more than 80 countries and regions around the world has hit a new five-year high. The CPI in the U.S. rose 6.8% year-on-year in November, the highest since June 1982.
Increasing imports from China helps the U.S. curb inflation. The U.S. import price index of manufactured goods from top trading partners shows that prices of Chinese goods rose significantly less than those from Canada, Latin America, Mexico, and Europe despite the U.S. tariff hike. This means that increasing imports from China will contribute to U.S. efforts to check domestic inflation.
Shen Jianguang is a vice president at JD.com and the chief economist of JD Technology Group. The article has been edited for length and clarity.
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