China and Germany have been subject to criticism over their trade practices, albeit for different reasons. Both reported smaller than expected trade surpluses today. The optics are good, but will not stand in the way of a tougher US stance.The risk is that trade frictions increase in the coming months. The US is still weighing action on steel and aluminum on national security grounds, which gives it potential for broad application. The intellectual property right concerns are more directly focused on China.  

News that China’s trade surplus was more than halved from $54.7 bln in December to $20.3 bln in January needs to be taken with a grain of salt. The main driver of the drop was the reported surge in imports of near 37% year-over-year. It was likely skewed by the Lunar New Year, which last year was in the tail end of January and the celebration spilled over into February.  

It is not uncommon for the Chinese trade balance to deteriorate in January and February. For the past 15 years, including this year, the Chinese trade surplus fell in 10 of Januaries. Of the past 14 Februaries, China’s trade surplus fell in 12 years.  

A 12-month moving average of China’s trade surplus peaked in in late 2015 near $49.5 bln. It stood at $35.2 bln at the end of last year and $42. 5 bln at the end of 2016. The Lunar New Year celebration begins a week from now. Last February, China surprised by reported a $11 bln trade deficit. That was the first monthly deficit since February 2014 when a $22.6 bln deficit was reported.  

The takeaway is that China’s trade surplus may be falling, but the January trade report exaggerated the decline, and February may also be distorted. The trade tensions with the US and EU are likely to intensify regardless of the high frequency data points.   

Germany’s December trade surplus was smaller than expected. The surplus fell to 18.2 bln euros from 23.7 bln.The change owed more to a rise in imports (1.4% month-over-month) than a fall in exports (+0.4%).What this means is that for the first time since 2009, Germany reported a reduction in its annual trade surplus. The reduction was small (245 bln euros vs. 249 bln), but the direction is important.