The US and China recoveries are tied at the hip. Both countries responded to the pandemic in ways that suited them, with the consequence the global trade imbalance is now essentially a bilateral one between the US and China.  The plunge in global trade has reduced trade imbalances for many countries. A 10% negative shock to both exports and imports mathematically reduces trade surpluses and deficits.


Charts Source: Bloomberg, Macrobond and Variant Perception

This has not been true for China and the US. Their trade balances have become more extreme during the pandemic meaning that world trade balances are now essentially a bilateral analysis of US-China trade.


Charts Source: Bloomberg, Macrobond and Variant Perception

The contrast in policy responses in China and the US has been the key driver of these trends. China’s policies have been targeted at supporting businesses and investment – ie boosting the export sector – leaving the consumer behind.


Charts Source: Bloomberg, Macrobond and Variant Perception

US policymakers on the other hand have boosted personal incomes and therefore have buoyed consumption.  US consumers are making up the shortfall in Chinese consumption, and in so doing have caused trade imbalances to rise.


Charts Source: Bloomberg, Macrobond and Variant Perception

Temporary factors have contributed to this, eg China has stepped up production of medical equipment and electronic hardware. However, these trade imbalances are unlikely to reverse quickly.  The US consumer will need further support to maintain spending. More fiscal stimulus is looking uncertain, in which case the Fed would be likely to enhance its support to consumers to prevent the economy from relapsing into a weaker state.

Consumers are also facing headwinds from weakening credit conditions. Stimulus cheques and enhanced unemployment benefits have helped to suppress consumer delinquency rates so far. However, support is running out and consumers are less able to finance consumption from banks. With over 25 million Americans receiving enhanced unemployment benefits, a failure to agree on a stimulus bill or find funding to support another extension, would result in a hefty income shock that would undermine the US’s fragile recovery.


Charts Source: Bloomberg, Macrobond and Variant Perception

In this scenario, bank lending to households would dry up and lending rates would tighten, necessitating further Fed intervention to bolster credit lending to the economy.  The US-China trade imbalance is growing, not shrinking, and Fed policy may end up supporting this trend, especially if a renewed fiscal stimulus package underwhelms. With China and the US more reliant on each other, this means a greater mutual advantage to both sides agreeing to a trade deal.