First trade war, now Russia's real war. Why US exports to China continue to suffer.

The recent history of US-China trade ties has been almost as fraught as their security relationship, which plummeted when Beijing escalated tensions in response to House Speaker Nancy Pelosi's trip to Taiwan. US exports to China took a beating during the Trump administration, as China retaliated against US tariffs. Any hopes that sales of goods to China might recover have now been dashed by the hardening geopolitical fallout, including the energy crisis compounded by Russia's invasion of Ukraine.

These and other factors have strangled US export growth to China this year. In isolation, bilateral exports are often not a particularly useful metric, but in this case their struggles raise concerns that US–China decoupling may go too fast or too far. Less engagement reduces the sorts of mutually beneficial diversification that are increasingly important in a world beset by droughts, floods, pandemics, and other unforeseen emergencies. Minimizing economic interdependence could also lead to more extremist policies.

Energy is the most recent casualty in US-China trade. Once burgeoning US exports of gas, oil, and coal to China have largely ground to a halt in response to Russia's war. The United States is diverting more energy sales to European allies, and China has shifted to buying more from Russia, accepting Moscow's rationale for the invasion.

Energy trade is hardly the only alarming indicator. There are no signs that US manufacturing sales to China will ever rebound from the devastation inflicted by President Donald Trump's trade war. Even once thriving semiconductor sector exports seem to have peaked and may fall further, in part because of new and expanding US export controls stemming from heightened threats of military conflict. While agriculture overall remains a US export bright spot in 2022, products like pork, wheat, and corn face new worries. Moreover, a high value of export sales can be deceiving if it is the result of higher prices associated with global shortages and not higher shipments.

There is also little imminent hope that the slowdown in US sales to China will be reversed by policy or offset by improving macroeconomic conditions. The high US and Chinese tariffs implemented in 2018–19 as part of their trade war have become the new normal. China's ongoing zero-COVID policy has slowed its economic growth and crimped import demand. In the United States, inflation is triggering higher interest rates, with the resulting stronger US dollar making American exports less competitive.

The world needs more, not less, risk-sharing. But this year may have marked an inflection point at which, even without any major trade policy changes by Washington or Beijing, US-China trade relations and economic ties got a whole lot worse.

US goods exports to China in 2022 are unchanged from 2021

Although they have expired, the infamous purchase commitments China agreed to in the Trump administration's phase one trade deal provide a useful lens through which to evaluate current US export performance to China.¹ US exports increased in 2020–21 relative to the nadir of the 2018–19 trade war, but in the end, China bought none of the additional $200 billion of US goods and services it committed to purchase under Trump's agreement. Of all US products, farm exports recovered the most in 2020–21. US energy sales were also higher than pre-trade war levels, even though they ended up the farthest from their (unrealistic) legal commitments. US manufacturing exports suffered the most throughout 2018–21, falling substantially during the trade war and never fully recovering under the agreement.

Overall trade flows have not improved this year, with US goods exports to China remaining only at their 2021 levels (figure 1). To see how bad things continue to be, suppose that, because of the pandemic, the United States and China subsequently agreed to give Trump's deal a "pass" in 2020 and evaluated the purchase commitments based on the two years of 2021 and 2022 instead of 2020 and 2021. Even then, China remains on pace to buy only 65 percent of the goods it committed to purchase in the second year of the deal.²

Beneath those headline numbers lies a more complex story.³ Compared with 2021, US exports of energy products are down 13 percent and manufacturing is roughly unchanged this year (figure 1, panel b). Only agriculture is up, by 16 percent. The promise of Trump's trade war and agreement was that things should have been much better for US exporters by now. ⁴

The decline in bilateral trade reflects more than just a weaker macroeconomy

Worsening macroeconomic conditions have not helped US-China trade. China's COVID-19 lockdowns in 2022 and its weakening economic growth have slowed its demand for imports. Escalating US inflation led the Federal Reserve to begin to raise interest rates in March. Since then, the US dollar has appreciated relative to the RMB by 10 percent, making US exports in China more expensive. (The dollar appreciated 12 percent relative to the euro, making US exports even less competitive in Europe.)

These macroeconomic forces cannot entirely explain the deteriorating trade between the two countries, however, because US-China trade growth has done worse than each country's commerce with other countries (figure 2). Even after controlling for those broad, economy-wide trends, China's import growth from the United States so far this year is 9 percentage points lower than its import growth from the rest of the world, and US export growth to China is 21 percentage points lower than its export growth to the rest of the world. These declines follow the two years of the phase one agreement, during which—because China had a lot of catching up to do after the 2018–19 trade war—bilateral trade growth exceeded growth with the rest of the world. Something else is now going on.

Trade in energy is a big part of the 2022 story. After two solid years, year-to-date growth of China's energy imports from the United States is 45 percentage points lower than its import growth from the rest of the world (figure 2, panel b). The difference on the US export side is even more extreme: US energy exports to China are down by 13 percent, while US exports to other countries are up by 89 percent.

The fallout from the war in Ukraine has hurt trade in energy

The global turmoil in energy markets in 2022, driven largely by the Russia–Ukraine war, is showing up in lower US-China trade for products such as liquefied natural gas (LNG), crude oil, and coal (figure 3). US exports to China of each of these goods had grown considerably in 2020–21. Some speculated that new Chinese LNG contracts might propel major capital investment in costly US liquefaction terminals, making trade with China a source of long-run export growth for the industry. (Others worried that continued high levels of trade policy uncertainty between the two countries would dampen such investment). In 2022, US exports to China have fallen off, amid the global clamor for energy supplies. Trade patterns for both US exporters and Chinese importers have reoriented in ways supportive of their political allies' digging in over Russia and Ukraine.

The United States has substantially increased export shipments of LNG, oil, and coal to the European Union and United Kingdom, two allies desperately in need of new sources of energy. Following Russia's invasion of Ukraine in February 2022, the United States, the European Union, and the United Kingdom began to impose  a series of new sanctions on Russia, including phased in import restrictions on Russian coal, oil, and natural gas. In advance of sanctions taking effect, Russia also limited exports of oil (through the Druzhba pipeline) and natural gas (through Nord Stream 1), to inflict pain on European economies in an attempt to reduce popular and military support for Ukraine.

China has helped fill Russia's need for new export destinations for its energy products in the face of Moscow's deteriorating relationship with Europe (figure 3, panel b). Its imports of oil and LNG from Russia increased this year, alongside its declining imports from the United States. Russia provided 30 percent of Chinese imports of coal in 2021; the volume of imports from Russia is mostly unchanged in 2022, despite the price of coal having nearly doubled.

Energy markets have been so disrupted this year that Chinese state-owned energy firms are reportedly taking shipments of LNG purchased from the United States—at a relatively low price (contracted earlier)—and reselling them at a higher spot market price to customers abroad, including in the European Union.⁵ According to Chinese Customs data, China exported $152 million of LNG to the European Union and another $210 million to Japan and South Korea in the first seven months of 2022. (In all of 2021, China exported only $7 million of LNG to the world.) Overall, China runs a huge global trade deficit in energy products: In 2021, imports were over $350 billion and exports were less than $4 billion.

The United States has been able to shift some energy sales to Europe, but Europe needs more energy and the US government would prefer to be exporting less. (US shipments to other military allies, like Japan [LNG] and South Korea [LNG, oil], are down.) Exacerbated by the war, high US energy prices have contributed to a spike in US inflation, angering the American electorate in the run-up to the November midterm elections. The increase has caused the Federal Reserve to raise interest rates to slow the economy.

Despite obvious domestic political pressures, US policymakers have not imposed limits on exports to Europe to reduce domestic price pressures. (Other countries have succumbed to the recent lure of export restrictions. China responded to higher energy prices in 2021 by limiting exports of fertilizer, alleviating domestic price pressures at the expense of the rest of the world.) To date, the farthest US policymakers have gone is to reportedly discourage further export increases of refined energy products, encouraging US companies to increase their relatively low reserves in advance of winter. Even so, US exports of refined products to the European Union and the United Kingdom are up considerably so far this year.⁶

The semiconductor rush may be over

US exports of manufactured products are also suffering. US exports were low in 2021 and have fallen since then, both in absolute terms (figure 1, panel b) and relative to US exports to other countries (figure 2, panel b). Historically, manufacturing has accounted for the largest share of US exports to China. Those exports were devastated by the events of 2018–19 and have struggled since to return to pre–trade war levels.

US exports of semiconductors as well as the equipment that Chinese companies require to make their own chips may have crested (figure 4). Such products were some of the few export stars for US manufacturing in 2020–21, thanks to a combination of factors that drove higher Chinese import demand. One was the pandemic, which caused demand for laptops, video game consoles, and data servers to surge. Another was the fear that the United States would tighten export controls, which led Chinese firms that needed chips or equipment to hoard and frontload their purchases.

These exports may have peaked. Global demand for chips has slowed. And in August, the US Department of Commerce rolled out additional export limits on semiconductor EDA (electronic design automation) software from companies like Cadence and Synopsys and reportedly on advanced chips from the likes of Nvidia and Advanced Micro Devices.

Within the rest of US manufacturing, medical products needed to treat COVID-19 remain one of the few areas of growth. Aircraft and automobiles—the sectors with the largest US exports to China before the trade war—continue to underperform. Boeing is especially worried, given that China remains the largest growth market for aircraft sales over the near term and Beijing is increasingly concerned about the reliance of its state-owned airlines on American technology. (In response to Russia's invasion, the United States and the European Union exposed Russian air fleet vulnerabilities by imposing controls on exports of aircraft technology [parts] and services [maintenance] to Russia.)

Trade rose in some agricultural products and fell in others

US farm exports to China remain the most positive performer so far this year, with the value of sales 16 percent above its 2021 pace (see figure 1, panel b). It is still early in the harvest season, however, and certain products face new challenges.

Soybeans, for example, have traditionally been the leading US agriculture export, making up 58 percent of farm products covered by the purchase commitments in the phase one deal (measured in pre–trade war levels). Year-to-date exports are 52 percent higher than 2021 levels (figure 5). However, much of the increase derives from higher prices (volumes are up only 22 percent), and it is also still too early in the season to judge, as roughly 70 percent of soybean exports are shipped in October-December, according to US Census data. (As of July, the US Department of Agriculture expected lower Chinese soybean import demand in 2022, partly because of higher Chinese soybean production subsidies.)

Cotton and sorghum are the other main US farm products for which 2022 exports are above their 2021 pace. Like soybeans, their export values have expanded also because of sharply higher commodity prices, not simply larger volumes.

Pork, corn, and wheat have performed poorly this year. In 2020–21, exports for all three products met or exceeded expectations. Pork exports have declined since leveling off in 2021, as the Chinese herd finally recovered from a devastating outbreak of African swine fever. After spiking in 2021, US exports of corn have fallen 12 percent so far in 2022. Wheat exports to China have fallen from $750 million in 2021 to virtually zero.

The future of US–China trade in farm products is uncertain. In a recent interview with Inside US Trade, US Trade Representative Katherine Tai noted that "one of the things we've been really thoughtful about—whether it's in ag or also in industrial trade—is the degree to which we are vulnerable to China…. In ag it's probably as an export market." This dependence gives Beijing the ability "to play us… against each other," Tai added, referring to the fact that during Trump's trade war, US agriculture was one of the first sets of products that China chose to retaliate over. (Beijing also then placed advertisements in Iowa's local newspaper that the Trump administration called out as "propaganda.")

Food trade may evolve like energy has, as policymakers base relationships on perceived vulnerabilities to national security. Yet food is different. A world with escalating climate- and public health–related shocks to its food supplies needs more global interdependence, not less. Resilience would ideally also be influenced by economic principles of diversified production, the ability to achieve economies of scale efficiencies, comparative advantage, and trade. Reorganizing food supplies and food trade along the lines of geopolitical blocs is likely to reduce food security globally.

The future looks grim

Neither the United States nor China has imposed any new duties since the truce in President Trump's trade war in early 2020. But neither has removed any trade war tariffs. High US inflation in 2022 created an opening for the Biden administration to offer at least a partial reset of US-China economic policy, but any political will to seize it was seemingly dashed by Beijing's aggressive response to Speaker Pelosi's Taiwan visit. If anything, trade conditions have gotten worse. In addition to tightening US export controls, in June, the United States finished implementing legislation to further restrict imports from China's Xinjiang region, out of concern that products there were still being made with forced labor. The Biden administration also chose not to renew many exclusions to the trade war tariffs imposed over 2018-19 that had previously been granted. The economic effect is essentially a tariff increase.

US exports to China this year are consistent with the broader pattern of global economic activity being affected by hardening geopolitics. Trade flows among the United States, China, Europe, and Russia of commodities like energy may be the easiest (and thus first) to reorient in ways reflective of the new world alignment. But China's continued diplomatic belligerence—accompanied by Russia's nakedly aggressive and brutal war on Europe's doorstep in Ukraine and its use of energy trade as a tool of economic warfare to fight back against sanctions—has only increased Western policymakers' resolve to hasten the transition toward less interdependence. The desire is to be less reliant not only on Chinese imports for critical products but also on China as an export market.

In times of war, such a policy response is understandable. Unless political relations between the United States and China improve—something neither side, especially China, shows any interest in—the energy sector may be a harbinger of things to come for agriculture and manufacturing. In a new world with commerce increasingly based on geopolitical blocs, countries like the United States and China may continue to trade—just a lot less with each other. Less economic interdependence and policy engagement will carry its own costs, risks, and unintended consequences. It will also require policymakers to make new efforts at contingency planning.

Notes

1. US exports to China follow the definition of the goods covered by the purchase commitments in the attachment to Annex 6.1 of the Economic and Trade Agreement between the United States of America and the People's Republic of China: Phase One, which made up 73 percent of US total goods exports to China in 2017. For product coverage definitions, see Chad P. Bown, China bought none of the extra $200 billion of US exports in Trump's trade deal,  PIIE Realtime Economic Issues Watch, February 8, 2022.

2. Through July, the pro-rated legal commitment for 2021 was $97.4 billion of US goods exports. In 2022, US exports to China of covered goods through July were still only $63.6 billion, 65 percent of that pro-rated commitment.

3. In addition to energy, agriculture, and manufacturing, the purchase commitments covered US services exports to China. Those data are not reported at high frequency at a sufficiently disaggregated level and are therefore not examined here.

4. With those formal purchase commitments having ended as of December 31, 2021, US-China trade continues to limp along under a cloud of policy uncertainty. Legally, Article 6.2.3 of the agreement states only that "the Parties project that the trajectory of increases in the amounts of manufactured goods, agricultural goods, energy products, and services purchased and imported into China from the United States will continue in calendar years 2022 through 2025." The agreement does not state what is supposed to happen over 2022–25 if the "trajectory of increases" never materialized in the first place in 2020–21.

5. Bloomberg, "China sells US LNG to Europe at a hefty profit," March 15, 2022; Nikkei Asia, "Sinopec resells LNG to Europe despite China's sanctions snub," April 29, 2022; Nikkei Asia, "China throws Europe an energy lifeline with LNG resales," August 24, 2022.

6. Here, "refined products" are defined by the US-China agreement of 2020. US exports to the EU and UK of those products in value terms have increased by 120 percent so far in 2022; they are also the one category of US energy exports to China that increased in 2022 (by 33 percent). Figure 3 does not report changes for refined products because different product varieties are measured in different volume units.