The 2006 trade data
It seems to me that there are at least three big stories in the US trade data, maybe four or five …
The first is that US exports grew quite strongly in 2006. And goods exports outperformed services (and Boeing outperformed everyone). Total exports were up 12.75%, goods exports were up 14.4% and Boeing (civil aviation) exports were up 38.8%. On y/y basis, q4 exports were right in line with those trends.
The second is that the pace of non-oil import growth slowed. Non-oil goods import growth (y/y) was around 9%, but the pace of growth slowed to around 7% in the fourth quarter. The slowdown was apparent in the y/y data on US import growth from pretty much every source of goods imports other than China. US imports from China are still growing 18%, but imports from both the rest of Asia (the rest of the Pacific Rim in the trade data) and Europe were up a bit over 7%. The stunner — at least for me — was that total US goods imports from Canada were up only 4.5% y/y, and that total includes a lot of energy (Rachel Ziemba of RGE has more; Canadian exports to the US have been very weak recently).
The third is that higher oil prices do lead even the US to cut back on its use of oil. Petroleum import volumes fell 2.3% in 2006.
The fourth big story — one that is somewhat controversial for reasons that elude me — is that exchange rate adjustment works. US exports to China were up by about $13.3b (32% — though the december increase was 21-22%, suggesting a slowdown in the pace of growth), but US imports from China were up by $44.3b. The bilateral deficit with China continued to grow. That is true of the Asian Pacific region writ large as well — US exports to the rest of the Pacific Rim increased by $20.5b, but imports were up by $22.8b. The overall goods balance with the Pacific Rim deteriorated by about $33.3b.
Both the yuan and the yen are fairly weak — and certainly haven't moved as much against the dollar as the euro and the pound over the past few years. So it is worth comparing the evolution of the US trade balance with the Pacific Rim to the evolution of the US trade balance with Europe. US exports to the EU increased by $27.5b in 2006 (14.8%), while US imports only increased by $21.8b (7.05%), so the US trade deficit with Europe actually fell.
The fact that the US deficit with Europe has turned a corner while the US deficit with China and Asia writ large hasn't is something that I thought Peter Goodman and Nell Henderson's story on the recent surge in US exports missed. The y/y growth rates in US exports to China are impressive, but aren't coming anywhere close to offsetting the increase in US imports from China. With Europe, by contrast, the deficit is heading down (and Europe, by the way did well in 2006 — adjustment need not be painful …)
The relatively slow growth in US imports from Canada is another example where the exchange rate may be having an impact, though the troubles of the US auto sector (with lots of plants in Canada) and the US housing sector (which uses some Canadian timber) may have also played a role.
The fifth big story is that the US trade deficit arguably has turned the corner. The overall goods and services trade deficit widened by about $46.9b in 2006, to $763.6b. But $41.7b of that deterioration came from the deterioration in the net oil balance. As Menzie Chinn has long pointed out, the non-oil balance has been stable in nominal terms and falling in real terms.
And if you project out stable oil prices (the average q4 price for imported oil was $53.8 a barrel — a level well below the $58 a barrel average for the year), 7% growth in non-oil goods imports and 14% growth in goods exports and current trends in service exports (8-9% growth) and imports (8-9% growth), the trade balance should fall in 2007. Both Bloomberg and the New York Times quote Nigel Gault on this.
“In the long run, I expect the deficit to gradually shrink,'' said Nigel Gault, director of U.S. research at Global Insight Inc. in Lexington, Massachusetts. “We expect growth in exports combined with slower import growth. The 2007 annual deficit should be substantially below the 2006 figure.''
I suspect Gault embodies the current conventional wisdom on the street. Stephen Jen has also called a turn, in both the current account and trade deficit.
Here though I am a bit of a holdout. I am not convinced that it makes sense to project out current trends — at least not the current y/y growth rates.
The monthly trends seem to me to suggest a slowdown in the pace of export growth (look at the first graph in the BEA data release). Conversely, there are some tenative signs that non-oil import growth is picking up a bit (December imports were $134b, up from $131-132b in October/ November). My personal view is that the trade deficit is more likely to stabilize at roughly its current level than to shrink.
The story here is simple. Current strong US export growth reflects the lagged impact of dollar weakness in 2003 and 2004 and early 2005. But compared to say 2004, the dollar hasn't weakened much. Not v. the euro. It has actually strengthened v. the yen. And while the RMB has appreciated in nominal terms, it hasn't appreciated by enough to offset inflation differentials and higher Chinese productivity growth. The global economy should remain strong, but probably not quite as strong as it has been … as the lagged impact of the dollar's past fall wears off, export growth will slow a bit.
Conversely, if the US economy avoids a housing-induced slowdown, as most now think, well, non-oil imports are likely to grow in line with nominal GDP, and perhaps a bit faster. China will continue to make market share from both US producers and others selling to the US market.
Plus, as I like to point out, Boeing simply cannot export many more planes until it steps up production (likely in 2008, when the 787 line opens). Pretty much every 777 Boeing now makes is being exported. Boeing's exports won't grow by another 40% ($10b) in 2007. So one source of export growth will go away, temporarily.
And on the import side, well, the US looks set to import a lot more cars from Japan and elsewhere as GM and Ford cut back. Toyota doesn't have the capacity to supply the US market from its US plants alone — the ratio between Toyota's US sales and its US production is slipping. I know Toyota plans to scale up its US production, but I would bet it would scale up its production by more and faster if the yen were a bit stronger …
Finally, a $764b goods and services traded deficit, a $84b transfers deficit and a $13b income deficit (personally, I suspect it will be higher, but I was conservative here) adds up to a $861b current account deficit. And even if the trade deficit stabilizes, I expect that to rise substantially in 2007. Watch the income line. More later.
Brad:
When you state exchange rate adjustments work by looking at US and China trade, does this mean that (implicitly) you believe the Chinese market to be free and market based? Where do you then stand on the US charges that Chinese market is closed to competition and certain industries (such as auto) are subsidzed?
I don’t think domestic Chinese markets are free — consider the industry I know best, banking. i think foreign firms investing in the auto business in China face a host of local content restrictions/ are required to use local partners and the like.
I base my argument that exchange rates matter on two things:
a) on the Chinese side, Chinese export growth to Europe picked up strongly after the RMB depreciated v. the euro/ pound and the like. China now exports as much to europe as the US, and that is a change. The pickup in Chinese exports to europe is why most careful models (see the Goldman sachs work) show Chinese exports do respond to moves in the broad value of the RMB.
b) the US side, the US trade balance with Europe is improving while the US trade balance with Asia broadly speaking is not … again, the reason isn’t hard to figure out. It isn’t because Asia is growing more slowly than Europe …
As Jumpin’ Jack Flash might’ve said, the trade deficit is ’bout gas, gas, gas.
Plus, there’s good stuff on Econbrowser regarding the RMB.
Also, get a load of this latest missive from Speaker Pelosi and the Dems against the ‘Big 3′ trade miscreants known as China, Japan, and the EU. From the Reuters article:
Congressional Democrats called on Tuesday for the Bush administration to develop a comprehensive plan to bring down the record U.S. trade deficit, starting with what they called numerous trade barriers and unfair trade practices in China, Japan and the European Union.
“We ask you again to join us and develop a meaningful action plan that addresses the burgeoning deficit,” House of Representatives Speaker Nancy Pelosi and other senior Democrats said in a letter to President George W. Bush.
The call followed a Commerce Department report showing the U.S. trade deficit widened 6.5 percent in 2006 to a record $764 billion. That included bilateral gaps of $233 billion with China, $117 billion with the EU and $88 billion with Japan.
“To begin with, therefore, we call upon the administration to present Congress within 90 days a comprehensive plan to eliminate the surging trade deficits with these ‘Big 3′ economies,” the Democrats said.
Poor, poor Bushy. What does he have to do to get his fast-track authority renewed? To get permission to promote free trade, he must first, er, prosecute America’s largest trading partners.
Could one argue that there is more overlap in production structures in the US and Europe than the US and China? This might imply that exchange rates have a stronger effect on the US/Europe trade balance than US/China?
pgmf –
true. but there is a bit of overlap with Japan (weak yen). and the RMB/ $ influences how much China can buy from both the US and Europe — i.e. it impacts total demand for the products that the US/ europe and Japan all make.
finally, i would note that China’s production structure is evolving rapidly (note growth in auto parts and auto production, as well as electronic components) so, over time, the overlap is likely to increase.
but the biggest impact of RMB appreciation will be that it slows the pace of growth in Chinese exports … not that it increases massively China’s purchases of US/ Euroepan goods. Tho any increase is certainly welcome.
China set to pick new reserves chief
“Hank Paulson will on Tuesday announce the appointment of Alan Holmer to run the US-China strategic economic dialogue… Mr Holmer, a former pharmaceutical industry lobbyist and deputy US trade representative, will be charged with achieving specific “deliverables” by the time the two sides meet in Washington on May 23… In an interview, the US Treasury secretary said he chose Mr Holmer, who is not a China expert, to manage the dialogue with Beijing because of his record as a negotiator…” http://www.ft.com/cms/s/73b11eb2-baea-11db-bbf3-0000779e2340.html
“…Congress granted China permanent normal trade status in 2001 as part of China’s membership that year in the World Trade Organization. The three senators said revoking the permanent trade status would give the United States more leverage to force China to abide by global trade rules…” http://www.theglobeandmail.com/servlet/story/LAC.20070214.IBTRADE14/TPStory/Business
wondering why China’s pharma exports are rarely mentioned.
From the Washington Times, Record Trade deficit was primarily driven by record oil imports. The US government needs to sharply increase the CAFE mileage requirements. There is no reason vehicle mileage cannot be improved with composite materials and hybrid engine technology.
http://washingtontimes.com/business/20070213-100906-2439r.htm
” It was a banner year for U.S. exports,” said Joseph Quinlan, but the export gains were overwhelmed by America’s unrelenting thirst for oil, with the cost of imported energy jumping 20 percent to $291.3 billion during the year. ”
P.S. I drive a Toyota Prius hybrid. Great car with excellent reliability but getting 50 mpg depends on how you drive. The key to getting great mileage is to accelerate slow and stop slowly.
Brad - great post. I agree with you 100%. Export growth will slow dramatically and imports (excluding oil) will grow faster than GDP.
One aspect of slowing export growth, in addition to slowing yoy global growth is that investment in China and other EM’s means they are climbing up the technology ladder and will be in a better position to meet their needs internally rather than via imports. And of course Japan will be an eager supplier since their economy is now dependent on rising exports to offset declining household consumption.
Brad, when you say that our exports won’t grow because Boeing won’t increase sales, while our imports will grow, because we’ll probably buy more toyotas, you’re hitting the exact issue which no one else will touch. Kudos for you for looking at actual facts, rather than numbers. Of course our trade deficit is dependent on what we actually buy and sell. Of course we have no real strategy, and current trends don’t give much reason for hope. I applaud your ability to look at real facts, (even though I’m sometimes ruprised at how relaxed you are about it, even when hitting a home run
). See you.
Steve M. Much as i agree with you, tis important to remember the US is a really big economy with lots of parts. boeing’s $10b increase in 2006 exports was only around 10% of the total increase in goods exports … and the US imports many things other than cars. Generalizing even from high profile examples is risky. I for example forgot that the US imports lumber from canada, and thus missed the obvious for the fall in imports of industrial supplies in q4.
“…The US on Wednesday expressed concern that ever more sophisticated drug-trafficking cartels were using China’s inadequately controlled financial system to launder their proceeds, possibly even getting tax breaks in the process… precursor chemicals used to produce cheap synthetic drugs flow from China and India to laboratories in the Netherlands, Canada and Poland from where they take circuitous routes to penetrate the US…” http://www.ft.com/cms/s/4a07eda0-a94f-11da-b2b8-0000779e2340.html
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