Slowing trade with the US and other key trade partners is adding to China’s growing list of economic woes.

Weak domestic demand has contributed to falling imports into China, with the value of goods sent by major trading partners sliding year over year by double-digit percentages for most of 2023. The downturn in trade comes as China is struggling to meet its growth targets amid sagging consumer demand and weakness in real estate.

Recent concerns among Chinese officials about rising debt levels leave stimulus measures unlikely, making the path to stable economic growth in the world's second-largest economy uncertain. This will likely further curtail international trade.

A prolonged downturn in Chinese trade could slow industrial expansion in the region and negatively impact commodity prices, according to a Sept. 6 analysis published by Oxford Economics.

Contracting Chinese imports

Weaker consumer spending and economic headwinds in China have rippled through the balance sheets of its major trading partners. Chinese demand for goods exported from Taiwan, the US, South Korea and Japan has decreased noticeably in 2023. The value of goods exported from those areas to China declined 12.8% year over year in June, narrowing from the 34.1% year-over-year drop in January, according to data compiled by China Customs.

China's consumer price index dropped to 1% in February, decreasing in each successive month before moving into deflation at a negative 0.3% in July. Though the index exited deflationary territory in August, according to data from the National Bureau of Statistics of China, consumer confidence is not yet reflective of a sustainably growing economy.

"Trying to increase the role of consumption in the [Chinese] economy has been a long-standing goal," said Robert Carnell, head of research and chief economist Asia-Pacific at ING. "And it has to be said, it hasn't made all that much progress."

Trade with US

China was the US' largest trading partner by value between 2015 and 2018 and again in 2020, with trade for goods climbing above $557.1 billion in 2020. It ceded that title in 2021 as Canada and Mexico each overtook China's combined import and export activity with the US. China appears unlikely to regain it anytime soon.

The country's economic struggles have already impacted monthly trade totals with the US. Compared to the same month in 2022, the total value of goods traded between the US and China in July was down more than 20%.

At the same time, US imports as a whole have also continued to decline since the beginning of the year. Fewer consumer goods shipments was a primary reason for the downturn, according to Chris Rogers, head of supply chain research at S&P Global Market Intelligence.

The US trade deficit with China has also grown since 2020, reaching $382.3 billion in 2022.

Possible benefits for US inflation fight

Although the prospect of weak Chinese demand may be alarming for economic growth, inflation levels above central banks' targets could serve to soften the blow of a slowing Chinese economy for key trading partners.

"In several ways, I don't think China could export disinflation. But if domestic demand is weak in an economy with a large, competitive manufacturing sector, manufacturing firms increase efforts to find foreign clients for their products," said Louis Kuijs, chief Asia economist at S&P Global Ratings. "In this sense, the weaker China's economy is in the coming years, the more that Chinese exports will put pressure on goods prices in other countries."

Pressure on the Chinese renminbi could lead to deflationary pressure on goods prices, but US inflation would not be significantly impacted, said Logan Wright, a partner and director of China markets research at research firm Rhodium Group.

In the US, the Federal Reserve has repeatedly emphasized the need for below-trend growth in real GDP and softer labor market conditions to sustainably attain its 2% inflation goal.

Lower import prices from China could play a supportive role in helping rein in inflation and would therefore likely be seen as a boon, not a threat to the Fed and other countries' goals in tackling inflation over the near term.

"It does help to keep goods prices anchored at relatively low levels and probably prevents any resurgence of goods prices in the rest of the world," Wright said.