How Inflation is Distorting Global Trade Flows

How Inflation is Distorting Global Trade Flows

China reported robust trade flows for July 2022. Overall, shipments from the world’s second-largest economy and top exporter rose 18% year-on-year to $333 billion. That was the fastest pace of the year, and beat analysts’ predictions of around 15%, but it’s largely due to rising prices for commodities from coal to soybeans, according to an analysis by Trade Data Monitor, the world’s premier source of trade statistics.

That is sure to heave repercussions throughout the global trading system, from countries reducing their reliance on costlier foreign supply chains, boosting domestic industries, to reduced demand as consumers struggle to maintain purchasing levels.

The higher prices are everywhere, they manifest themselves clearly in trade statistics. Coal imports, for example, dropped 21.8% to 23.5 million tons, but rose 28.2% by value to $3.8 billion. Soybean imports dropped 9.1% to 7.9 million tons. By value, however, they increased 16.1% to $5.8 billion. Overall, imports of agricultural products rose 8.8% to $20.9 billion.

Perhaps most alarming is China’s rapid increase in imports of fertilizers. The country’s purchases of the key ingredient for planting crops rose 11.1% to 751,458 tons, but by value increased 114.6% to $456 million. Higher prices for fertilizers signal possible food shortage and a scramble for agricultural resources.

Inflation means that companies are more likely to look for suppliers closer to their headquarters instead of looking on international trade markets. Chinese imports from the U.S. dropped 4.8% to $13.5 billion. From the European Union, they fell 7.3% to $24 billion. However, imports from the ASEAN countries in China’s immediate geographical area jumped 9.4% to $33.8 billion.

Overall imports rose only 2.3% to $231.7 billion. The Chinese trade surplus with the rest of the world reached a record $101.3 billion in 2022, topping the old record set in June.

Another sign of inflation is that the International Monetary Fund has been a bit bearish about the prospects of the Chinese economy in 2022. The IMF expects Chinese gross domestic product to grow by 3.3% this year. The Chinese government predicts that number will be 5.5%.

To be sure, Chinese officials are optimistic about the resurrection of their trade machine after suffering through lockdowns and general slowdowns related to the Covid-19 pandemic. And trading partners have restrained their protectionism. The recent Chips bill in the U.S. did not, as Beijing feared, impose heave new tariffs on China. High-tech exports, a key yardstick for the country’s trading system, rose 2.6% to $82.1 billion.

And there were some exceptions to the inflation curse. Imports of copper rose 0.6% to 1.9 million tons by quantity but fell 4.1% to $4.5 billion by value. The weak market for copper, a key ingredient for pipes and wiring, signals a lack of manufacturing confidence.

However, China continues to lose market share for some segments to manufacturing competitors such as Vietnam. Shipments of mobile phones dropped 10.2% by value to $9 billion, and by quantity 15.2% to 64.3 million. Overall, exports to Vietnam rose 7.2% to $12.6 billion. Imports increased 6.6% to $6.7 billion.

It’s important to note that China’s export manufacturing base is starting to fragment among sectors. Exports of furniture, for example, dropped 1.9% to $5.9 billion, but shipments of footwear rose 37.5% to $6 billion, and exports of toys increased 28.2% to $5.2 billion.

Impressively, exports of automobiles rose 64.1% to $4.8 billion. That’s one sector that was not colored by inflation. The number of automobiles exported increased 60.4% to 274,736.

One other reason that Chinese trade has been doing better than expected: Russia. Exports to the conflicted nation rose 22.4% to $6.8 billion, while, imports, mostly gas and oil, rose 47.3% to $10 billion.