A Closer Look at GDP -- Exports and Imports, Pt II

There are two other charts that stand out from a look at US exports and imports.


Above is a chart of exported goods less imported goods. Notice how this number came in about $200 billion from the end of 2006 to the end of $2008. Now


Notice the exported goods continued to increase in the latter half of the latest expansion -- especially when imported goods started to drop.

These charts tell us that while the US is still a net importer, we also have the ability to export

1.) if the rest of the world is growing, and

2.) the dollar is weaker

Trade Deficit Improves -- Exports Hit Record

From the AP

The Commerce Department reported that the trade deficit declined to $57.6 billion in August, down 2.4 percent from the July imbalance. It was the lowest gap between exports and imports since January and a much better showing than had been expected.

The improvement reflected a 0.4 percent rise in exports, which climbed to a record $138.3 billion, as the decline in the value of the dollar against many other foreign currencies boosted sales of American farm products, industrial supplies and consumer goods to all-time highs.

This is good news and demonstrates one good side effect of the falling dollars.

The Mixed Blessing of a Falling Dollar

From the WSJ:

Mr. Bence is one of the people benefiting from one of the few bright spots in a slowing U.S. economy. While a weaker dollar hurts consumers by raising the price of imported goods, it also is helping the economy stave off a deeper slowdown, by making U.S. exports more competitive and influencing more foreigners to visit Disney World or the Statue of Liberty.

First, here is a graph of exports for this year. Notice they are clearly in an uptrend.



Also note the size of exports could be enough to sway the country away from a recession. At the end of 2006, total US GDP was $13.392 trillion and total exports were $1.446 trillion, or 10.79% of GDP.

If the dollar falls too far and too fast, it could spur a run-up in interest rates and shake the stock market -- which would be bad for the economy. A rapidly falling dollar would raise the price of imports, stoking inflation, and in an extreme case could prompt foreign investors to dump U.S. bonds, pushing their yields higher.

...


But as long as the dollar's decline is gradual, most economists see it as a modest plus overall. Joshua Feinman, chief economist at Deutsche Asset Management, wrote in a recent note to investors that the export upswing is one of the factors "poised to help cushion the impact of the housing correction." Real exports have grown faster than real imports for nearly two years, notes Mr. Feinman, and he expects this trend to continue. U.S. exports rose 2.7% to a record $137.68 billion in July, according to the Commerce Department. Mr. Feinman estimates stronger exports have contributed a half percentage point of added growth to gross domestic product since 2005.

Notice the dollar chart indicates the dollar is falling gradually and has been for the better part of the last year and a half. That is good news for the economy because the devaluation is controlled. The problem with the current situation is the dollar is vulnerable to a random economic shock or event that could send it tumbling lower which would have very negative implications for the economy.

In addition, most of the world's commodities are priced in dollars. This means a falling dollar implies an upward bias in commodity prices which fuels inflation.

Trade Deficit Narrows Slightly; Exports Jump

From Marketwatch:

Exports increased 2.7% in nominal terms to $137.7 billion, while imports increased 1.8% to $196.9 billion. Much of the increase in imports was due to higher prices, especially for petroleum and food. The average price of imported crude petroleum was the second highest on record at $65.56 per barrel.

In inflation-adjusted terms, imports of goods rose 0.8%. Inflation-adjusted exports of goods rose 3.7%.

U.S. producers exported record values of capital goods, consumer goods, autos and foods. U.S. consumers imported record values of foods and feeds.

Here's a graph of US exports from the beginning of the year. This is a nice graph. It shows where some of the strength in the underlying economy is.



I would love to see some analysis about the impact of the declining dollar on this number. Here's the weekly chart from stockcharts of the US dollar index.

Trade Deficit Widens

From the BEA:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $132.0 billion and imports of $192.1 billion resulted in a goods and services deficit of $60.0 billion, compared with $58.7 billion in April, revised. May exports were $2.9 billion more than April exports of $129.2 billion. May imports were $4.2 billion more than April imports of $187.8 billion.

An increase in the price of oil was the primary reason for the increase.

This is one of the underlying reasons for the decrease in the dollar's value.

Trade Deficit Narrows

From the BEA:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total April exports of $129.5 billion and imports of $188.0 billion resulted in a goods and services deficit of $58.5 billion, $3.9 billion less than the $62.4 billion in March, revised. April exports were $0.2 billion more than March exports of $129.2 billion. April imports were $3.6 billion less than March imports of $191.6 billion.

In April, the goods deficit decreased $3.7 billion from March to $67.1 billion, and the services surplus increased $0.2 billion to $8.6 billion. Exports of goods were virtually unchanged at $91.1 billion, and imports of goods decreased $3.6 billion to $158.2 billion. Exports of services increased $0.2 billion to $38.4 billion, and imports of services were virtually unchanged at $29.8 billion.

In April, the goods and services deficit was down $3.8 billion from April 2006. Exports were up $12.8 billion, or 10.9 percent, and imports were up $8.9 billion, or 5.0 percent.

The cumulative year to date trade deficit total for 2007 is 6.6% less than the year to date totals in 2006.

A few points.

Since January 2005, exports have increased 26.68% while imports have increased 19%. At this pace, it will take a long time for exports to catch-up to imports. This means it's pretty doubtful we can simply export our way out of the trade deficit.

Here's a chart of the difference between imports and exports going back to January 2005. Notice there really isn't a meaningful difference between the numbers for the past 2.5 years.

Would a Yuan Devaluation Really Help the Trade Deficit?

From IBD:

But most economists say a big yuan revaluation wouldn't have a major impact on trade.

As long as Americans spend more than they save and the Chinese continue to save at high rates, the trade deficit will endure.

"To achieve any meaningful change in trade flows, you need a reduction in (spending) by countries that spend more than their income and expenditure increases in countries that spend less than their income," said Nouriel Roubini of Roubini Global Economics. "Changes in relative prices are not by themselves sufficient."

America's trade gap with China hit $235 billion last year.

I've seen various opinions on this matter, but I tend to agree with the above statement. The real issue is the US consumes more than it produces. That is what the trade deficit really represents. I wrote an article dealing with outsourcing that came to the same conclusion: so long as the US buys cheap stuff, we're going to outsource manufacturing to places where it's cheaper to make stuff.

However, I think it's important to realize where this might lead. To quote Paul Volcker from an article he wrote two years ago (and which is still very relevant):

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

Trade Deficit Expands; May Drag 1Q Growth Down

From CBS MarketWatch:

The U.S. trade deficit widened sharply in March after having improved somewhat over the past six months, a government report showed Thursday.

The report shows that trade will be a bigger drag on first-quarter growth than previously estimated.

The nation's trade deficit widened by 10.4% in March to $63.9 billion, its highest level since last September, the Commerce Department said. It marked the largest increase in the deficit since September 2005.

.....

Economists said that after accounting for the March trade and inventory data, first-quarter growth would be cut to a slim 0.5%-to-0.8% range. This would be the weakest since the fourth quarter of 2002.

Just what the economy needs right now -- a reason to lower the 1.3% growth rate in the first quarter.

On the issue of oil imports, the San Francisco Federal Reserve did a study of the relationship between oil imports and the trade deficit. Here is their conclusion:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

I've highlighted this report several times because its conclusion is really important: so long as the US is an oil importer, the trade deficit probably won't go away.

China's Trade Surplus Doubles in First Quarter

From Bloomberg:

China's trade surplus almost doubled in the first quarter, adding to friction as the U.S. takes complaints against its second-largest trading partner to the World Trade Organization.

The surplus widened to $46.4 billion from $23.3 billion a year earlier, the customs bureau said on its Web site today. The March gap was $6.87 billion, smaller than economists expected.

.....

Chinese businesses rushed to sell products overseas in January and February in anticipation of government measures to slow exports and because of protectionist sentiment abroad, said Wang Qing, an economist at Bank of America Corp. in Hong Kong.

WOW -- just, wow.

That is one powerful headline. This will do an awful lot to increase protectionist sentiment in the US. Some of this is warranted, especially in light of China's $1 trillion in dollar reserves held by its central bank. That is a pretty good indication the yuan is a touch undervalued in the marketplace.

Trade Deficit Improves

This report came out a few days ago. But I've been a bit preoccupied with the markets so I'm getting to it now.

From the BEA

A drop in oil prices and strong U.S. exports shrank the fourth-quarter deficit to $195.8 billion -- or about 5.8% of gross domestic product -- its smallest in more than a year. That compared with a third-quarter deficit of $229.4 billion.

So we have some good news and bad news. The bad news is the trade deficit set another record last year, but the good news is it may be decreasing a bit.

OK - let's look at some specifics.

The goods and services press release stated:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total January exports of $126.7 billion and imports of $185.8 billion resulted in a goods and services deficit of $59.1 billion, compared with $61.5 billion in December, revised. January exports were $1.4 billion more than December exports of $125.3 billion. January imports were $1.0 billion less than December imports of $186.7 billion.

Total exports were $114,405 billion in January 2006 and $126,672 in January 2007. Over the same period, total imports were $180,875 and $186,745. Another way to look at this is total exports are about 63% of imports in January 2006 and 68% of total imports in January 2007. That means that exports still have a long way to go before they are at parity with imports. In other words, the decrease is good news, but let's not get too excited.

Here is a report from the San Francisco Federal Reserve from late last summer. The report studied the effects of oil imports on the trade deficit. The reports conclusion was very important:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

I think this report was incredibly important because it showed why oil imports are such a big deal from a trade perspective. Without oil imports, the trade deficit would be less by a considerable amount. This is another reason oil prices are so incredibly important to monitor.

So, what do we know now?

1.) The trade deficit is decreasing, although at a slow rate.

2.) Oil prices are a really big factor of the trade deficit.

Trade Deficit Expands and Sets Another Record

From Bloomberg:

he U.S. trade deficit increased more than forecast in December as the price of imported petroleum rose and purchases of foreign cars and consumer goods reached records.

The gap between imports and exports widened 5.3 percent to $61.2 billion in December, from a 16-month low of $58.1 billion in November, the Commerce Department said today in Washington. For all of 2006, the trade imbalance expanded to a record $763.6 billion.

Higher petroleum prices in December increased the value of oil and gas imports into the U.S. Prices have since receded, and economists expect economic growth overseas, combined with the continued weakness in the dollar, will boost demand for U.S. products and keep the trade gap in check.

``The big picture is exports are growing, but in '06, imports grew faster, particularly consumer goods from China,'' said Chris Low, chief economist at FTN Financial in New York. ``We are looking for a small downward revision'' in fourth- quarter economic growth based on today's figures, he said.

Now we understand why the dollar chart for the last 4-years is in a big downtrend.

The Long View: Where Is the Trade Deficit?

BruceMcF

A long time ago, I looked at the current account blowout in The Long View: Current Account, which ended with a promise to have a look at the make-up of the blow out in terms of both geography and industry.

What I am looking at now is the broad outline of the geographic break down.

How broad? I am breaking the whole world down into The Americas, Europe, Asia & Oceania, and Africa. So the answer is, just about as broad as possible.

The Story So Far

Where I left off, before the long haitus, was the stark reality of the current account blowout:

• It is massively bigger than anything we have experience in living memory


• The problem is not income or unrequited transfers: it is trade

The trade account is made up trade in goods and trade in services. What I am going to be looking at today is trade in goods.

And before I put this information up, I will add a note that you should not shoot the messenger. After careful contemplation, I have come to the firm conclusion that messenger-shooting is counter-productive.

The source of this information is the same BEA site that provided the info for the first in this series. The only difference is that instead of working with table 1, I am working with Table 2b: Trade in Goods, Additional Historical Historical Data.

Where In The World Is the Trade Taking Place?

First, lets look at Exports to these four regions as a share of total exports. In all three of these graphs:

• the Americas are the "dash" line,
• Europe is the "dot" line,
• Asia and Oceania is the "dash dot" line, and
• Africa is the "dash dot dot" line.

The trends here are simple. Europe is losing ground as an export market, with most of that share being taken up by the Americas, and some being taken up by Asia and Oceania. Africa is a very small market, both because of the small size of so many African economies as export markets, and because of the dominance of European firms in those markets.

Now, lets look at Imports from these four regions, as a share of total imports.

Here we have the Americas as the dominant source of imports, with a loss in market share in the 80-85 period that is regained with something to spare. The second spot, however, trades place, Europe holding a slight lead over Asia in 80-85, while by 01-05, Asia and Oceania is on a path toward taking over as the primary source of imports.

Don't Forget the Blowout

A word of caution is in order here. It is important to bear in mind that the two diagrams are showing shares of totals that are sliding rapidly apart. That is, 45% (about) of our goods exports go to the Americas, and 35% of our goods imports. But that is 45% of a smaller number, and 35% of a bigger number.

The way I have set this up is to take the average of imports and exports as "average trade", and look at the Balance of Payments with each global region as a percentage of "average trade". And here ... as in the earlier diary that focused on the current account overall ... things are moving "south" at a very rapid pace.


Bear in mind here that what you are looking at is trade in goods, not goods and services overall. The US tends to have a stronger position in services than in goods. As you will see when I look at trade in services, a "small" negative balance in goods trade is good news for the overall trade account.

And for the global regions, the balance of trade compared to average trade breaks down into two stories. For the Americas, Europe, and Africa, the story by and large is improvements up through to 90-95, and then a rising deficit through to 00-05 (and, if we sneaked at table 2a, on to the present).

For Asia and Oceania, the "improvement" in the trade deficit is there, but it is very small ... from about -11% to about -9% ... and the slide since then is the single largest source of the trade deficit.

And remember: this last figure is compared to the average amount of all trade in goods. The deficit in goods trade with Asia and Oceania is more than 20% of the average trade in all goods.

The Path Ahead

Of course, whenever you find Economic bad news, you can find a pollyana that will explain that its just the market in operation, and in the end its all for the best. The main hope for the pollyanas are that "in the long run", the deficits in the goods trade will be balanced by surpluses in services trade.

And so, in the third installment in this series, I will see what the long term view of the balance of trade in services has to tell us. ... to be continued ...

The Long View: Current Account [BruceMcF]

This post could be seen as following up on a number of good posts connected to the state of play with the most recent current accounts numbers and events in US$ foreign exchange markets. However, that would be an illusion ... indeed, as you can see above, "2006" is not even in view here. The focus here is on the long term.

This is what a trade deficit blow-out looks like. Just in case someone asks you for an example, you can send them that graph. And just to be clear -- these are 5 year sequential averages, for five year intervals 61-65, 66-70 and so on. The actual values in current US$:

• 2001, -$389b current (-$363b trade)
• 2002, -$472b current (-$421b trade)
• 2003, -$528b current (-$495b trade)
• 2004, -$665b current (-$611b trade)
• 2005, -$792b current (-$717b trade)

So it is both very bad, and getting worse at a rapid rate.

And there is far more that I want to say on this than fits the print ... so the main post is now sitting down in the Saturday archives, which means that you can reach it by clicking here to get under the fold.

Traveling Again to China, Paulson Forgets to Pack Workers’ Rights

Tula Connell is with the AFL-CIO. I have asked her to contribute to this blog to help enlarge the conversation about unions, international trade and, well, anything else that pops into her fertile mind. - Bonddad

Treasury Secretary Henry Paulson needs a new appointment scheduler.

Someone on his staff failed to notice that as the former Goldman Sachs honcho heads to China this week, the U.S. Trade Representative was slated to released the 2006 Report to Congress on China's WTO Compliance. The report, issued today, is highly critical of the Chinese government's failure to meet their obligations. It places a “particular emphasis on reducing IPR [intellectual property rights] infringement levels in China” and on pressing China to make greater efforts to institutionalize market mechanisms and make its trade regime more predictable and transparent.

The timing couldn’t be worse for Paulson.

When Bush and the Republican Congress rammed through China’s membership in 2001, they assured us that making China a full partner would ease the path for that nation to lower its trade barriers and bring its laws and regulations into compliance with international standards. In fact, the opposite occurred: Since China joined the World Trade Organization (WTO) in 2001, the U.S. deficit has grown to more than $200 billion. In 2005, the trade deficit with China grew by 25 percent to $202 billion—the largest bilateral deficit in world history.

Behind this unsustainable trade deficit are two major factors: China’s policy to devalue its currency and its abysmal workers’ rights record. In fact, the Treasury Department once again is delaying the release of its semi-annual report on currency—so as not to embarrass Paulson while in China. Although the undervaluation of China's currency has become accepted fact, every Treasury report to date has failed to suggest taking any action.

While Paulson will chat with China’s leaders about the China’s currency devaluation, he has no intention of bringing up workers’ rights.

He should—if not because ethical principles call for providing fellow humans with decent working conditions and living wages, then for our own self-interest as a nation. Because addressing China’s human rights violations is one important step toward reversing the declining U.S. trade balance with China.

The deterioration of working conditions in China continues every year, with nearly non-existent enforcement of wage, overtime, safety and health and environmental laws. Oppressing Chinese workers is the functional equivalent of devaluing currency. In failing to address the systematic abuse of its workers, the Chinese government further displaces U.S. jobs.

American companies like Wal-Mart rack up billions of dollars in profits by taking advantage of the artificially low wages made possible by the Chinese government’s repression of democracy, political dissent and fundamental human and workers’ rights.

Application of an International Trade Commission model shows that up to 973,000 manufacturing jobs and 1,235,000 total jobs are displaced by China's repression of labor rights. The nonprofit Economic Policy Institute (EPI) estimates 410,000 manufacturing jobs were lost to China between 2002 and 2004. U.S.-China Economic and Security Review Commission studies conclude that between 70,000 and 100,000 jobs are moved annually to China, and those numbers accelerated after 2001.

The 2006 annual report of the U.S.-China Economic and Security Review Commission (a bipartisan, congressionally appointed commission) also provides evidence that China has been seriously inconsistent in meeting its obligations as a member of the WTO. The report backs up conclusions in the AFL-CIO’s Bush administration report card on China and an AFL-CIO Solidarity Center study on workers’ rights in China.

In July, the AFL-CIO filed the second workers’ rights case against the Chinese government. The Bush administration rejected the petition, despite the lack of improvement for Chinese workers since we filed the first petition in 2004. As we filed the petition this year, workers from across the nation sent nearly 70,000 letters to President Bush and Congress urging them to take action to halt the abuse of China’s workers.

For instance:

• Chinese mines are the most dangerous in the world, with more than 10,000 Chinese miners dying in industrial accidents each year (some 80 percent of the worldwide total).
• Rates of illness and injury have never been higher in China’s manufacturing sector as officials of China’s own Work Safety Administration conceded as recently as February 2006.
• There are as many as 10 to 20 million child workers in China—from one-eighth to one-quarter the number of factory workers.
• China’s minimum working age standard is widely violated, and the Chinese government does little to enforce the standard. As the U.S. State Department stated in its 2005 Human Rights Report on China, “The government continued to maintain that the country did not have a widespread child labor problem.”
• The Chinese government implements an extensive system of forced labor camps. The precise number of forced prison laborers is unknown, but estimates range from 1.75 million to 6 million and higher.

The right to strike was removed from China's Constitution in 1982 because the political system had "eradicated problems between the proletariat and enterprise owners." But as aggregate unpaid wages have risen to record levels, along with increased child labor, Chinese workers are walking off the job in massive numbers, despite the illegality of their actions and the risks involved.

According to figures from China’s Ministry of Public Security, there was a sharp rise in officially registered public disturbances in 2005. Large-scale incidents of "mass gatherings to disturb social order" rose by 13 percent. In one report, "mass protests" or "mass incidents," including riots, demonstrations and collective petitions, rose from 58,000 in 2003 to 87,000 in 2004.

These abuses allow producers in China, including many multinational and U.S. corporations, to operate in an environment free of independent unions, to pay illegally low wages and to profit from the widespread violation of workers’ basic human rights.

The second factor behind China’s trade advantage, the nation’s deliberate undervaluing of its currency, the yuan, enables the Chinese government to export products at an artificially low price—running up the U.S. trade deficit and costing good American jobs. In fact, the yuan is estimated to be undervalued by as much as 40 percent.

An AFL-CIO report shows China’s fixed currency rate artificially lowers the price of its goods by 40 percent and subsidizes exports, putting U.S. companies and workers at a disadvantage. The lack of currency flexibility has been a major factor in U.S. job losses and a trade deficit with China that hit $202 billion last year.

In a letter to the Wall Street Journal earlier this year, AFL-CIO Secretary-Treasurer Richard Trumka said the Chinese government’s deliberate undervaluing of its currency is an anchor “that is dragging down American manufacturing and the middle class:”

Currency manipulation is one of the primary reasons for the massive bilateral trade imbalance between the United States and China, as well as for the flood of investments by U.S and other multinational companies. On top of the Chinese government’s record capital investments in manufacturing, foreign direct investment (FDI) in the country increased from $46.8 billion in 2000 to $60.3 billion in 2005. Seventy percent of China’s FDI is in manufacturing, with heavy concentration in export-oriented companies and advanced technology sectors. The dangers of this model of development are apparent: job and technical capacity loss in the U.S., growing inequality and political and financial instability in China, and the accumulation of nearly $1 trillion in U.S. dollar assets by the Chinese government. This is also a development model based upon the brutal repression of workers’ rights and human rights.

Last year, the Senate introduced legislation sponsored by Sens. Charles Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) that would have imposed a 27.5 percent tariff on all Chinese imports if that country did not raise the value of its currency within 12 months. The bill was never introduced in the House, and Senate leaders chose not to bring it up in the last session.

Paulson fears the next Congress will pass a tariff, and this is his last-gasp trip to convince China to voluntarily devalue its currency.

But unlike the 109th, the new Congress not only is more likely to take a firmer line on China’s currency devaluation, it will insist that the administration include workers’ rights as a key part of trade agreements and bilateral negotiations.

And the AFL-CIO will be working with Congress to ensure that going forward, trade deals aren’t just free but fair.