AsiaThis week, we focus on the immediate impacts of the recent US-China trade escalation. As we discuss below these are already being exhibited in the data. While still within historical ranges, high-frequency estimates of US and China cargo trade volumes have begun to deteriorate (chart 1). In tandem with these volume declines, freight rates on certain Shanghai-to-US routes have fallen (chart 2), suggesting reduced shipping demand. This has been further corroborated by widespread reports of large-scale shipment cancellations from China to the US. A potentially clearer signal comes from South Korea’s trade data for the first 20 days of the month, often viewed as a bellwether for global trade. The figures point to a notable slump compared with a year ago (chart 3). More complete April data are expected later this week.
Turning to broader developments in China, we observe that the dominant shifts in the country's financial balances over the past decade have occurred between the general government and the private sector. In contrast, China’s foreign sector balance—essentially its current account—has remained relatively stable (chart 4). As we further discuss financial balances and the underlying causes of the US’ persistent current account deficit (chart 5) have been a recurring topic in recent conversations with clients in Asia. It is argued that the US dollar’s role as a global reserve currency effectively necessitates the US running a current account deficit. Consequently, attempts to narrow the deficit through tariffs may address symptoms rather than root causes. Finally, we revisit the China Plus One strategy adopted by firms since the initial US-China trade fallout in 2018. This approach has contributed to ballooning trade deficits between the US and some of its other major trading partners (chart 6), prompting renewed scrutiny under President Trump’s early “Liberation Day” trade actions.
US and China cargo trade Financial markets have recently found some reason for relief, as both the US and China appear to be lowering the temperature on further trade tariff actions. Recent messaging has leaned more toward a de-escalation of trade tensions, though concrete details remain sparse, and it is unclear how or when formal negotiations might begin. That said, the substantial and mutually imposed tariffs between the US and China remain firmly in place, and a significant rollback does not seem likely in the near term. In the meantime the economic impact of these tariffs is beginning to surface in the data, as shown in charts 1 to 3. Chart 1, based on IMF estimates, shows a sharp decline in daily activity at several key ports involved in US-China trade. However, while the drop is notable, port activity still remains within historical ranges, so a more fundamental shift is not yet evident.
