The Economist 14Dec2019

62 Finance & economics The EconomistDecember 14th 2019

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people who live elsewhere.

In theory, its donor governments could

do all this more cheaply and simply them-

selves. They could issue an equivalent

amount of low-yielding sovereign bonds,

buy higher-yielding emerging-market se-

curities and donate any profits to low-in-

come countries. But that is not what critics

of China’s lending are proposing.

Given the profits it can earn, the bank is

eager to keep lending to China. Harder to

explain is why China wants to keep bor-

rowing from the bank. The sums are small

(0.01% ofgdp) and the process can be cum-

bersome. China may value the bank’s ex-

pertise. But if so, why not buy it without a

loan attached?

There are examples of China doing just

that. It bought advice on how to improve in

the bank’s assessment of the ease of doing

business. But China may feel a loan gives

the bank more skin in the game. Consul-

tants paid only for advice can always blame

disappointments on poor implementation

of their sound prescriptions. A lender has a

greater stake in solving difficulties. Insti-

tutions like the bank and theimfstress the

importance of borrowers taking “owner-

ship” of reform programmes. China may

feel the same about the lenders it deigns to

borrow from. 7

A

year ago an economic forecasting

unit in the Chinese government pub-

lished an outlook for the coming year. The

big worry, it concluded, was the external

environment. Shipments to America, Chi-

na’s biggest customer, would suffer as the

trade war dragged on. China had maxed out

its exports to other big countries, and oth-

ers were too small to make a difference.

So China’s boffins are, like many others,

surprised by how things have gone. Exports

to America are indeed down, by nearly 15%

so far this year. But exports to the rest of the

world have been much stronger (see chart).

China, it turns out, had more to sell to its

big customers: exports to Europe are on

track to surpass exports to America this

year. Meanwhile exports to smaller mar-

kets in South-East Asia, such as Vietnam

and Malaysia, have boomed.

According to data from cpb World Trade

Monitor, China’s share of global exports

has reached 11.9%, slightly higher than in

July 2018, when the first American tariffs

hit. Sluggish imports—in part because of a

domestic slowdown—mean the trade sur-

plus is set to be about a quarter bigger in

2019 than in 2018.

One explanation for China’s resilient

exports is the yuan’s 6% depreciation

against the dollar since the trade war be-

gan. That has blunted the tariffs’ impact.

China’s currency has also weakened

against other major trading partners.

A second is goods routed through other

countries to avoid tariffs. Some sent to

South-East Asia have ended up in America.

Vietnamese customs officials have stepped

up checks of everything from seafood to

aluminium to ensure that they are not re-

labelled Chinese goods. Julian Evans-

Pritchard of Capital Economics, a research

firm, estimates that American tariffs have

cut Chinese gdp growth by about 0.6 per-

centage points, but that trans-shipments

through South-East Asia may have lifted it

back up by 0.3 percentage points.

There is also a third, more positive ex-

planation: Chinese companies are highly

competitive. Once an assembly centre, Chi-

na now makes more of the inputs that go

into final goods. Its efforts in high-tech

sectors such as semiconductors are well-

known. But it is making lower-tech pro-

gress more broadly. The Chinese light-in-

dustry council, representing toymakers,

food firms and the like, estimates that its

100 most technologically advanced mem-

bers invest 2.5% of revenues in research

and development, high by international

standards; it is pressing them to hit 3%.

The road ahead will not be easy for Chi-

nese exporters. The longer American tariffs

last, the more likely American buyers are to

find alternatives. The fall in Chinese sales

to America has accelerated recently.

On December 4th Chinese exporters of

machinery and electronics met for their

annual conference. The theme was “flour-

ishing together along One Belt, One Road”,

in line with the government’s policy of pro-

moting economic ties with Asia, Africa and

Europe. In previous years that might have

been politically astute positioning. Now it

looks like a survival strategy. 7

SHANGHAI

As America raises its walls, China’s

exporters find new terrain

China’s economy

Life after tariffs

When one door closes

Chinese exports*, % change on a year earlier

Source: Wind Info *12-month moving total

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2015 19181716

ASEAN

EU UnitedStates

U

nion leaders and Democratic law-

makers were cool at first towards the

usmca, a replacement for the 25-year-old

North American Free Trade Agreement

(nafta) which was signed by American,

Canadian and Mexican trade negotiators

over a year ago. But on December 10th, after

months of further talks, they swung be-

hind a reworked version. Richard Trumka,

the head of the afl-cio, America’s largest

trade-union group, proclaimed a “new

standard for future trade negotiations”.

Nancy Pelosi, the Democratic Speaker of

the House of Representatives, called it a

“victory for America’s workers”.

The reversal may seem surprising. The

afl-cio has not endorsed an American

trade deal in nearly two decades, and Ms

Pelosi is trying to get President Donald

Trump, whose deal this is, impeached. Ac-

cording to polling data provided to The

Economist by YouGov and published on De-

cember 11th, though 79% of Americans say

that “trade and globalisation” are impor-

tant to them, only 37% say the same of re-

placing nafta with the usmca.

But both the politics and the content of

the deal have led to unexpected alliances.

Supporting the usmca lets Democrats

claim that they are not obstructing Mr

Trump’s agenda for the sake of it. And on

trade, Mr Trump has more in common with

the left wing of the Democratic Party than

with his own Republicans. Many Demo-

crats agree that previous deals made trade

too free, with too few of the benefits going

to American workers. And several of the

changes secured by the Democrats are

meaningful. Some are sure to be to Mr

Trump’s taste, too.

Among the revisions are an end to intel-

lectual-property protections for biologics,

a specific class of drug, and weaker patents

for pharmaceuticals in general. Democrats

say such protections stifle competition

from generics and raise drug prices. Unsur-

prisingly, those changes went down badly

with the Pharmaceutical Research and

Manufacturers of America, an industry

lobby. Its president said they amounted to

an abandonment of protections for Ameri-

can companies.

Enforcement has been beefed up. Im-

provements to nafta’s dispute-settlement

system are “probably the most important

thing in the whole treaty”, says Jesús Seade,

Mexico’s chief negotiator. Under nafta,

countries could block the appointment of

WASHINGTON, DC

Where Democrats and Donald Trump

see eye-to-eye: on trade

The USMCA

Common ground