The Phaserl


This Is How Out-Of-Whack US Trade Relationships Really Are

by Wolf Richter, Wolf Street:

After 25 years of apathy.

2016 marked another banner year for US trade, a banner year largely for other countries that at the initiative of Corporate America, whose supply chains weave all over the world, managed to load the US up with their merchandise. According to the Commerce Department’s report today, the US trade deficit in goods and services rose to $502.3 billion in 2016, the highest in four years.

Exports of goods and services fell $52 billion in 2016 year-over-year to $2.21 trillion, and imports fell $50 billion to $2.71 trillion. That both exports and imports fell is a sign of weakening world trade, lackluster demand globally, and lousy economic growth in the US, where GDP in 2016 inched up by a miserable 1.6%, matching the growth rate of 2011, both having been the lowest growth rates since 2009.

Exports add to the economy and to GDP; imports subtract from GDP. And it’s a big number: the trade deficit in 2016 amounted to 2.7% of GDP. In overly simplified, scribbled-on-a-napkin-after-the-third-beer math: had trade been balanced, with imports about equal to exports, GDP growth would have been 2.7 percentage points higher in 2016. So 4.3%! OK, we’re dreaming. But that’s how a massive trade deficit whacks the economy.

The overall trade balance is composed of trade in goods and services. It used to be years ago when the trade deficit in goods began to balloon that it was no big deal because America was exporting innovative services, such as complex financial services, and they would make up for the deficit in old-fashioned goods.

They did lessen the pain for a little while, and then they didn’t. And soon, even the overall US trade deficit ballooned, but it was no big deal because soaring imports showed that the US economy was healthy and brimming with consumer demand. Year after year, we heard this from economists and politicians.

Beyond that, apathy was palpable. No one cared. It’s just the way it is. Dreaming of balanced trade was like so 1980s or whatever.

Meanwhile, Corporate America was fine-tuning its game of offshoring production and importing from cheaper countries. The entire business model of Wal-Mart depends on it. US supply chains wind all over the globe, in search of the lowest production costs, whether it’s consumer gadgets or automotive components. It never was a big deal because growing imports were portrayed as healthy demand in the US. The world loved it.

But the fact holds: exports add to the economy; imports subtract from the economy. And the new White House figured that out. Shipping jobs overseas hasn’t been helpful either. The new White House has figured this out too. And suddenly there’s a huge ruckus about something that should have caused a huge ruckus 25 years ago – before it got this far out of whack.

And so this is where we are today.

Here are the countries with which the US has the largest trade imbalances in goods (services not included). The US has a trade deficit of $347 billion with China but a trade surplus of $27.5 billion with tiny Hong Kong. Since a lot of merchandise is transshipped via Hong Kong, I netted China’s and Hong Kong’s numbers in one line:

There are other quirks due to the opaque nature of some of the trade dealings, including transshipments, trade invoicing, tax issues, etc. For example, the US has a trade surplus of $24 billion with the Netherlands, not because the end-users of US products are in the Netherlands but because Rotterdam is a huge port for the US-EU shipping route, including commodities. Ireland, with which the US has a trade deficit of $36 billion, and where many US companies shelter much of their profits from US taxes, is also a quirk in the trade data.

Drilling down into exports and imports separately, we see the imbalances more clearly: There are two categories of countries with which the US has a large trade deficit: Those that import from the US relatively little compared to their exports to the US, primarily China, Japan, and Germany; and those with which the US has a booming bilateral trade, primarily Canada and Mexico.

This chart shows US imports (red) and exports (black), in order of the trade deficit (imports minus exports). Note that China exports to the US 3.1 times as much as it imports from the US; Germany 2.3 times; and Japan 2.1 times. By contrast, Mexico exports to the US only 1.3 times as much as it imports from the US. And trade with Canada is practically in balance:

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