The Economist (2022-02-26) Riva

68 Finance & economics The Economist February 26th 2022

bite immediately, causing a funding

crunchandimpedingfinancialflowsin

andoutofthecountry.Russiahassought

toinsulateitseconomyfromprecisely

this:theshareofitsinvoicesdenominated

indollarshasslumpedsinceitsinvasionof

Crimeain2014,andithasbuiltupforeign-

exchangereserves.Still,itwillhurt.Russia

willturntoChinaforitsfinancialneeds.

Alreadytradebetweenthetwocountries

hasbeeninsulatedfromWesternsanc-

tions,withonly33%ofpaymentsfrom

ChinatoRussianowtakingplaceindol-

lars,downfrom97%in2014.

Westernbanksappeartohavefairlylow

exposuretoRussia.Nonetheless,sincethe

moderneraofglobalisationbeganinthe

1990snomajoreconomyhasbeencutoff

fromtheglobalfinancialsystem,andthe

riskofbroadercontagionacrossmarkets,

whileapparentlylow,cannotberuledout.

Whatdoesallthismeanfortheglobal

economy?Russia facesaseriousbutnotfa-

taleconomicshockasitsfinancialsystem

isisolated.Fortheglobaleconomythe

prospectisofhigherinflationasnatural-

resourcepricesrise,intensifyingthedi-

lemmathatcentralbanksface,andapossi-

blemutingofcorporateinvestmentasjit-

terymarketsdampenconfidence.

Thelonger-termimpactwillbetoaccel-

eratethedivisionoftheworldintoeco-

nomicblocs.Russiawillbeforcedtotilt

east,relyingmoreontradeandfinancial

linkswithChina.IntheWestmorepoliti-

ciansandfirmswillaskifakeytenetofglo-

balisation—that youshould tradewith

everyone,notjustyourgeopoliticalal-

lies—isstillvalid,notjustforRussiabut

otherautocracies.ChinawilllookatWest-

ernsanctionsonRussiaandconcludethat

itneedstointensifyitscampaignofself-

sufficiency.TheinvasionofUkrainemight

notcauseaglobaleconomiccrisistoday

butitwillchangehowtheworldeconomy

operatesfordecadestocome.

Chinese-Americantrade

Artful dodging

“A

n easy wayto avoid Tariffs? Make or

produce your goods and products in

the good old usa. It’s very simple!” In the

days when Twitter was the main medium

for presidential proclamations, that was

what Donald Trump recommended to

companies using China as a manufactur-

ing base. He was half right: avoiding tariffs

has proved to be quite simple. What he

failed to see, though, was that avoidance is

an eminently viable strategy for compa-

nies staying put in China.

The scale of avoidance is, to use a non-

technical term, huge. A giant discrepancy

that has opened up between Chinese and

American trade data provides a window

onto the tariff-dodging that has occurred

over the past three years since America

slapped duties on Chinese products. Much

of it involves importers taking advantage

of legal loopholes; some of it appears to be

outright evasion, with companies lying to

customs inspectors.

The numbers add up quickly: the total

value of made-in-China goods entering

America and dodging tariffs may have sur-

passed $100bn in 2021, according to calcu-

lations by The Economist. Taken alone,

these goods would be equivalent to Ameri-

ca’s fourth-largest source of imports, even

outstripping its purchases from Japan and

Germany. Moreover, if all these goods were

counted properly, America’s bilateral

goods-trade deficit with China would have

smashed its annual record in 2021—a

damning indictment of the use of tariffs as

a way to narrow the trade gap with China.

To understand the discrepancy, start

with the official American trade data. Ac-

cording to figures released on February

8th, America bought $506bn of goods from

China last year. That was up by 16% from

2020 (a reflection of America’s booming

consumption) but still below its import

peak reached in 2018. The Chinese trade da-

ta are starkly different. They show that

America bought $576bn of goods from Chi-

na last year, up by nearly 30% from 2020,

far and away the most on record.

This gap is particularly striking because

the historical pattern is for China to sys-

tematically underestimate its exports to

America by roughly 18%. (One reason for

the historical underestimate is that China

classifies many products shipped via Hong

Kong as exports to Hong Kong, whereas

America counts them as imports from Chi-

na.) If the 18% underestimate rule of

thumb still applies, China’s exports to

America may have reached as much as

$680bn last year, $174bn more than report-

ed by America.

The obvious question to ask is why any-

one should privilege China’s data, with its

reputation for manipulation, over Ameri-

can data. In other words, perhaps America

has counted its purchases from China cor-

rectly, while China has overstated its sales

to America. Last year two economists then

with the Federal Reserve, Hunter Clark and

Anna Wong, explored this possibility, try-

ing to account for the data discrepancy.

Part of the problem, they found, did in-

deed stem from the Chinese side. To blunt

the impact of the trade war with America,

China dramatically increased tax rebates

for its exports, which in turn encouraged

exporters to declare more overseas ship-

ments. But in working through the trade

data for 2020, their conclusion was that the

tax changes explained just about 14% of the

discrepancy, while tariff avoidance ex-

plained 62% (it was hard to pin down a spe-

cific reason for the remainder). If the same

proportions applied to the trade data for

2021, tariff avoidance would have reached

$108bn, nearly double the amount in 2020.

And there is reason to think it may be even

higher: in 2021 China actually decreased

some of its tax rebates for exporters,

WASHINGTON, DC

America’s tariff wall on Chinese imports looks increasingly like Swiss cheese

Boxes of tricks