The Economist - USA (2022-02-26)

68 Finance & economics The Economist February 26th 2022

bite immediately, causing a funding

crunchandimpedingfinancial flowsin

andoutofthecountry.Russiahassought

to insulate its economy from precisely

this:theshareofitsinvoicesdenominated

indollarshasslumpedsinceitsinvasionof

Crimeain2014,andit hasbuiltupforeign­

exchangereserves.Still,it willhurt.Russia

willturntoChinaforitsfinancialneeds.

Alreadytradebetweenthetwocountries

has been insulated fromWestern sanc­

tions,withonly 33%of paymentsfrom

ChinatoRussianowtakingplaceindol­

lars,downfrom97%in2014.

Westernbanksappeartohavefairlylow

exposuretoRussia. Nonetheless,sincethe

moderneraofglobalisationbeganinthe

1990snomajoreconomyhasbeencutoff

fromtheglobalfinancialsystem,andthe

riskofbroadercontagionacrossmarkets,

whileapparentlylow,cannotberuledout.

Whatdoesallthismeanfortheglobal

economy?Russia facesa seriousbutnotfa­

taleconomicshockasitsfinancialsystem

is isolated. For the globaleconomy the

prospectisofhigherinflationasnatural­

resourcepricesrise,intensifyingthedi­

lemmathatcentralbanksface,anda possi­

blemutingofcorporateinvestmentasjit­

terymarketsdampenconfidence.

Thelonger­termimpactwillbetoaccel­

eratethedivisionoftheworldintoeco­

nomicblocs.Russiawillbeforcedtotilt

east,relyingmoreontradeandfinancial

linkswithChina.IntheWestmorepoliti­

ciansandfirmswillaskif a keytenetofglo­

balisation—that you should trade with

everyone, not just your geopolitical al­

lies—isstillvalid,notjustforRussiabut

otherautocracies. ChinawilllookatWest­

ernsanctionsonRussiaandconcludethat

itneedstointensifyitscampaignofself­

sufficiency.TheinvasionofUkrainemight

notcauseaglobaleconomiccrisistoday

butitwillchangehowtheworldeconomy

operatesfordecadestocome.n

Chinese-Americantrade

Artful dodging

“A

n easy wayto avoid Tariffs? 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 tariffs

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  made­in­China  goods  entering

America and dodging tariffs 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 fourth­largest source of imports, even

outstripping its purchases from Japan and

Germany. Moreover, if all these goods were

counted  properly,  America’s  bilateral

goods­trade deficit with China would have

smashed  its  annual  record  in  2021—a

damning indictment of the use of tariffs as

a way to narrow the trade gap with China.

To  understand  the  discrepancy,  start

with  the  official  American  trade  data.  Ac­

cording  to  figures  released  on  February

8th, America bought $506bn of goods from

China  last  year.  That  was  up  by  16%  from

2020  (a  reflection  of  America’s  booming

consumption)  but  still  below  its  import

peak reached in 2018. The Chinese trade da­

ta  are  starkly  different.  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

classifies 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

cific 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