In a note Monday, Eurizon strategists Stephen Jen and Joana Freire said there’s little evidence of de-globalization, even as US-China trade relations have deteriorated amid tariffs and geopolitical strains.
Other countries such as Vietnam and Mexico — the latter which surpassed China as the US’s top trade buddy in 2023 — have spearheaded a reordering of global trade flows.
To that point, China’s market share of total US imports has cratered, but Eurizon said the countries that have exported more to the US in China’s place are themselves importing more than ever from China.
“[I]n this trade spat, the US may have ‘won’ but China has not ‘lost,'” Jen and Freire said.
China’s shifting trade focus
Chinese exports’ market share in the US has tumbled from 22% to 14% since 2017, and the Trump administration’s policies have indeed had the intended effect of discouraging direct imports from China.
Still, China remains the biggest exporter in the world, with a global market share of about 15%, according to Eurizon.
Excluding distorted pandemic levels, that marks an all-time high.
Beijing has engineered the “surprisingly successful” outcome, Jen and Freire said, despite tariffs and domestic headwinds by making heavy investments in third countries that the US prefers to import from, such as Mexico and Vietnam.
China in turn has moved to export components to these countries for final assembly, allowing them to skirt US tariffs on Chinese-assembled products.
“Indeed, China has invested and exported more in recent years to precisely the friend-shoring destinations to which the US has shifted its sourcing of imports,” the Eurizon strategists said.
China has also been able to ramp up exports to Europe, helping compensate for the loss in direct goods to the US.
The ‘next China’ is China
Eurizon strategists remain doubtful that another country could supplant China’s role as the dominant world manufacturer.
Not only does China’s capacity far outpace its rivals, but export prices have been climbing in Mexico and Vietnam by 30% and 31%, respectively, over the last three years.
“We believe the fact that export prices have risen more rapidly than general inflation – a remarkable fact in a period of a strengthening dollar – indicates stresses and pressures on the manufacturing capacity in these countries, including shortages of appropriate workers, infrastructure, and transport,” Eurizon strategists said.
One figure illustrates the point: China has a manufacturing labor force of about 212 million, more than the combined economies of the US, the EU, Japan, Canada, Korea, India, Mexico, and Vietnam.
It may be possible the world slowly reorients away from China, but smaller countries wouldn’t be able to handle a rapid change that forces them to become manufacturing hubs on par with China.
“In sum, we wonder if the ‘next China’ could actually be China: no other country has the manufacturing capacity to supplant China,” Jen and Freire said.
China may not be in danger of losing its trade status, but its economy continues to trend in the wrong direction.
“The post-pandemic recovery has been anemic on the back of weak sentiment, and the country is digesting a prolonged period of property overinvestment,” UBS strategists wrote in a note Monday, adding that China saw its first-ever deficit in foreign direct investment in 3Q23.
In Eurizon’s view, that loss of foreign direct investment may have been fueled by Beijing’s policy mistakes of the last several years. Its faltering property market has pulled household wealth lower, hurt consumer confidence, and crimped demand and spending.
All that manifested in the latest CPI report, which showed the country’s deflation problem is still getting worse.
Meanwhile, Chinese stocks have severely underperformed global equities, reflecting the world’s bearish view on China.
“Overall investor sentiment toward China remains depressed today,” UBS strategists said. “Foreign fund allocations in Chinese assets have been consistently declining, all of which has pushed Chinese stock valuation to very cheap territory.”
Jen and Freire said Beijing can still use supportive, pragmatic policy to entice foreign investors back into China to eventually help it grow into the world’s largest economy.
“The world’s attitude toward China has changed by as much as China’s own domestic policies,” they said. “By and large, China has so far managed to retain their dominant position as the world’s pre-eminent manufacturing base.”