China's vanishing trade
The desk's thesis is that China's export practices have evolved in response to U.S. tariffs, significantly impacting trade dynamics and possibly U.S. economic conditions. Per the full note from UBS, nearly half of China's exports to the U.S. are not directly reported as such, allowing importers to sidestep certain tariff costs. This adjustment not only suggests resilience in China's trade but also implicates lesser fiscal constraints for the U.S., which in turn could moderate inflationary pressures. Moving forward, the market should closely monitor currency pairs sensitive to trade flows and tariffs, particularly the potential effects on the USD/CNY exchange rate.
What the desk is arguing
The desk posits that the current state of China's disguised exports reveals an adaptation by U.S. importers to existing tariffs, facilitating trade while complicating economic measurements. UBS highlights that this change occurred following the imposition of tariffs during the Trump administration, indicating a strategic shift by traders to minimize costs.
By rerouting goods, U.S. importers may have borne higher logistical costs, but they simultaneously reduced tariff obligations. This paradigm may contribute to sustained trade volumes between the two nations, circumventing the traditional channels tracked by economists.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075 with a range from 1.04 to 1.12. Key firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This viewpoint aligns closely with jpmorgan, while bofa presents a more cautious outlook at the lower bound of our forecast spread. The desk's analysis leans towards the upper range, suggesting optimism in trade recovery.
How other firms see it
Several firms view the impact of tariffs similarly, indicating that trade dynamics are crucial to their outlooks. These include jpmorgan, which supports a stronger currency based on trade resilience, while bofa remains skeptical about the lasting effects of tariff manipulations.
Relatedly, USD/CNY may exhibit volatility as trade tensions evolve and as markets react to shifts originating from U.S.-China relations, making it a pair to watch closely as developments unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's exports to the U.S. increasingly involve rerouted goods to lessen tariffs, revealing significant market adaptations.
- 02U.S. inflation may be moderated due to these adaptations in trade practices, alleviating pressure on fiscal policy.
- 03Any reduction in trade tensions may offer limited economic benefits as costs are already constrained by current practices.
- 04Future positioning in FX markets may hinge on developments in U.S.-China tariffication strategies.
Market implications
Market participants should focus on shifts in the USD/CNY pair, as the nuanced trade dynamic could influence broader forex movements. A key level to watch is the 1.075 mark in EUR/USD, which reflects current consensus amid evolving trade narratives.
Risks to this view
A potential escalation in trade tensions or stricter enforcement of tariffs by the U.S. could invalidate the current thesis and prompt a reassessment of trade flows. Unexpected changes in U.S. fiscal policy could also lead to a reversal in market sentiment.
Roughly half China's exports to the US may arrive in disguise, reducing tariff costs for importers. This is not a costless process. View this email in a web browser China's vanishing trade UBS Weekly Blog by Paul Donovan The Chief Economist's comment published this week identified almost half of the exports leaving China for the US are not recorded as US imports from China.
Those that do arrive may transform on route, with the imports reported as being different goods to the exports. This pattern is specific to China-US trade. China's trade with other countries has no large-scale sleight of hand.
China's trade with the US used to be conventional. The changes occurred only after US President Trump's first term tariffs. This suggests that US importers have become adept at avoiding or minimizing the tariffs they pay.
That implies less US fiscal tightening (limiting damage to growth), less US inflation, and better exports for China than would otherwise occur. This is not costless for China. Rerouting goods may not exempt US imports from all tariffs.
Rerouting may raise exporters' or importers' costs. There may also be political fallout. The US administration is unhappy with tariff avoidance (ascribing blame between exporter and importer could be tricky).
Countries used as stop-off points in rerouting may experience a surge in "imports" from China, creating new trade tensions. Any future reduction in China-US trade tensions may bring only limited economic benefits if the costs are already constrained. Read more 〉 Read important disclaimer 〉 Recommended content Nobel Perspectives - Exploring the questions that shape our world 〉 Women in Economics – Explore the work of influential thinkers 〉 You have received this email because you registered at .
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