Spotlight - China-Russia trade complicates US-China relationship

Global merchandise trade slowed materially in Q4-2022, with the CPB’s World Trade index, measuring goods trade in volume terms, dropping by 2.1% qoq and 0.2% yoy. This reflects the combination of 1) a slowdown in many advanced economies, impacted by the surge in inflation and unprecedented sharp monetary tightening, and 2) renewed disturbances in China stemming from pandemic outbreaks and a broadening of lockdowns, followed by an abrupt and messy Zero-Covid exit starting in December. Going forward, we expect annual growth in global trade to be subdued this year, more or less halving compared to the pace of 3.2% reached in 2022. The outlook is mixed, as the expected further slowdown in developed economies will be offset by the impact of China’s reopening. Meanwhile, global supply bottlenecks and supply-demand imbalances for goods have faded, partly driven by the demand side (see our recent global trade update for more).

Shifting patterns: Trade ties between Russia and West shrink, but Russian ties with other BRICs strengthen

Due to the stepping up of sanctions and the reduction of energy flows, bilateral trade between Russia and the US/eurozone clearly came down during 2022, and a further reduction is likely. The West’s withdrawal from Russia has gone hand in hand with a stepping up of bilateral trade between Russia and the other BRIC countries. Although this partly reflects the impact of higher energy prices, this suggests that energy flows between Russia and these other large EMs have held up well. While this helped to contain the upward pressure on global energy prices, it also poses new risks, particularly to the (trade) relationship between China and the US (see below). China stands out among the BRICs given the size of its trade with Russia (which is quite natural between two large, neighbouring countries), but also reflecting its importance for Russia as a key buyer of energy and an important seller of so-called ‘dual-use’ technologies such as semiconductors and drones.

…and this complicates the already tense relationship between the US and China

China’s intense trade ties with Russia complicates the already tense relationship with the US/West. The US has made clear that it will not accept China selling lethal military equipment to Russia, and has threatened with unspecified consequences if it does. Apart from this ‘red line’, a related question is how the US will react if China’s role as Russia’s key off-taker and supplier keeps expanding, with president Xi just having visited Moscow to discuss China’s peace plan amongst other things. This issue comes on top of tensions over recent balloon incidents, Taiwan and technology, with the US having broadened its alliance to restrict the exports of advanced semiconductors and related machines to China with countries such as the Netherlands and Japan. Notwithstanding these tensions, trade between the US and China has clearly picked up from the trough seen after the bilateral trade war and the pandemic, while the annualised US bilateral trade deficit versus China has moved back towards the record levels seen in 2018.

This article is part of the Global Monthly of 27 March 2023