The US October trade data
Today's trade data release wasn't that inspiring — it wasn't exactly front-page news on a day when the world's central banks indicated that they would jointly intervene to try to unfreeze the world's credit markets (see Felix Salmon, Steve Waldman, and Naked Capitalism — including the comments).
But like China's November trade data, the US October data did confirm recent trends. The non-oil deficit is falling. The oil deficit is starting to head back up. That is to be expected. Oil prices rose significantly this fall. The average import price in October was only $72.5 a barrel. It still has further to rise. The November import price data makes that clear (the FT reports petrol import prices jumped another 10%).
Indeed, the petrol deficit is only now starting to rise on a rolling 12m basis –
The standard narrative explaining the improvement in the United States non-oil trade balance (an improvement that started about 12 months ago) emphasizes the strength of US exports. And no doubt they are strong — y/y export growth in October was almost 14% (the pace of growth may fall back bit in November and December, as a rise in exports at the end of last year makes the "base" a bit less favorable — but it should still be around 12% for the year). But export growth has been strong since late 2003.
The improvement in the trade deficit recently stems much more from a slowdown in non-oil import growth than an major acceleration in export growth.
Export growth has basically fluctuated between 10% and 15% ever since the dolla's depreciation against the euro started to influence the trade data.
Of course, the US isn't the only country to benefit from the dollar's slide v the euro. China benefited even more, as the RMB followed the dollar down. Chinese goods exports are now far larger than US goods exports. They are also growing more rapidly — as the following chart comparing US and Chinese goods exports shows.
Reporting on US trade with China often points out that in percentage terms, US exports to China have grown faster than US imports from China. That is true, but it is also irrelevant. The US exports only about 1/5 as much to China as it imports from China, so US exports to China have to grow five times faster than US imports just to keep the deficit with China constant. Moreover, to an extent, US exports to China have traded off with US exports to the rest of Asia, as China has become the epicenter for final assembly of most electronics goods.
To me the real story is that US imports from China are still growing far faster than US non-oil imports (15%, comparing Jan-Oct 2007 v Jan-Oct 2006 v 5% or so). The increase in imports from China is clearly coming at the expense of the imports from the rest of Asia. US imports from the Pacific-rim ex China are actually down 1.1% y/y.
That implies that Asia is getting squeezed. Until 2004, the rise in China's surplus with the US and Europe was offset in large part by a rising Chinese deficit with the rest of Asia. From 2004 on though China's surplus with the US and especially Europe has kept on growing while China's deficit with the rest of Asia has fallen. Chinese import growth hasn't kept pace with Chinese export growth — in large part because expanded domestic Chinese production has displaced imported components.
The weak RMB isn't just an issue for the US.
And then there is Europe. US exports to Europe (Jan-Oct 07 v Jan-Oct 06) are rising faster than US exports to Asia (16.4% v 9.5%) — and indeed, slightly faster than US exports to booming China (16.4% v 16.2%). Please explain to me again why exchange rates have no impact on trade! US (and Chinese) exports to Europe aren't growing fast because Europe is enjoying an economic boom like no other the world has ever seen.
US exports to Europe are also growing faster than US imports from Europe (16.4% v 7.4%, comparing Jan-Oct 07 to Jan-Oct 06). But something interesting is going on. In the last two months (September and October), US imports from Europe are growing about as fast (13.0%) as US exports to Europe (13.4%).
Why? Well, the US is probably paying more for some European-made goods. The strong euro and all. A big exchange rate move initially pushes up the price of existing imports, and only starts to reduce the total volume of imports with a lag (the so called J-curve). But that may not be all — I think I remember that the US also now imports refined petroleum from Europe …
China is trying to lower labor-intensive export to the US. Yue Yuan Industry, the largest sporting shoe manufacturer in the world (doing contract manufacturing for Nike, Addidas, Roebok, etc.), received not-so-subtle message to move their Donguan, China operation, either to deep inland (Jiangxi province, for “Opening-up the west”) or go abroad.
My friend in high management for Yue Yuan is having a headache. He already checked up a lot options (India, for instance, tough luck, cost will be too high for infrastructure and bureaucratic reasons). Part Vietnam, part Jiangxi looked to be his best reluctant choice.
EU-AU summit ended in a failure a few days ago - funy, EU was beaten to the ground by the shadow of China who wasn’t even there - the nasty argument was about processing trade, EU wasn’t ready to give easy market access to AU. Maybe the news is already out. The processing traders are looking for a new home.
Eventualy, China’s trade surplus will shrink - China is working on it. The US trade deficit? I am not so sure. Well, what deficit?
“…HSBC has invested more than $5 billion in China. Coca-Cola… has put in $1.25 billion since entering the country in 1979, while Siemens… has invested the equivalent of $2 billion… Paulson… said there’s “clearly” demand from companies doing business in China to be able to finance investments there in local currency. The move may run counter to Paulson’s goal of persuading China to let its currency appreciate faster. Allowing foreign companies to sell shares and bonds in China reduces the need for them to bring in funds from overseas, potentially alleviating pressure on the yuan to strengthen…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aSxt.x36r5XE&refer=home
Peter,
I recently spoke to an American family friend who works in Zhuhai China for the Foxcomm corporation, a Chinese contract manufacturer. Largely he interfaces with engineers from American electronics corporations outsourcing production. Foxcomm manufacturers wireless phones under contract from Motorola, internet routers for Cisco, notebook computers for HP, etc. In the Pearl River Delta region, Foxcomm employs over 75,000 workers in factories. Our American family friend at Foxcomm is now scouting manufacturing locations in Vietnam where assembly labor costs average only $70 per month. In China, the current $200 per month labor assembly cost is considered too expensive for producing the $50 cell phones and $400 notebook computers.
Brad Setser has it completely wrong about corporate-led globalization. There is always someone in the world today willing to work for less, and US multinationals will quickly shift production to lower labor cost locations around the world. A more rapid Chinese yuan revaluation would be reckless, endangering China’s political stability.
P.S. Our American family friend in Zhuhai does alright, earning 10 times the $500-600 monthly salary that his Chinese engineer counterparts earn. But their are few American or Chinese electrical engineers that can speak both English and Chinese fluently. Better teach your kids Chinese, not Spanish, if they expect to have any future in the global economy.
“…Gazprom has been investing in Europe for decades… Recently, it has stepped up its efforts to penetrate European markets… In their pursuit of markets, the Russians… are echoing the behaviour of the old European colonial companies… There is an important difference, however… Whereas the latter sold textiles and weapons in exchange for raw materials, the Russians are claiming markets in raw materials…” http://www.globeinvestor.com/servlet/story/RTGAM.20071213.wibeurope13/GIStory/
The news on Chinese website is that about 1000 shoe factories in Donguan have been closed or relocated. For the rest of them, more than 50% are said to plan to go to Vietnam, some will go to inland China.
DC -
The story you get from your friend at Foxcomm is only partially correct. Going to Vietnam, for Foxcomm, is a decision made by its parent company Hon Hai. Hon Hai, being #1 in electronic contract manufacturing business, is also #1 exporter from China several years in a row. It doesn’t need to find a lower cost, it is competing against itself. The real reason for the decision to go to Vietnam can be described as the China+1 strategy. This gets into sensitive political-economic area, so we just stop here. Anyway, Hon Hai is also expanding in China also, and at this point, with higher Chinese wages, for electronics, southern China is still the lowest cost area in the world, because of related supply-chain & Taiwanese engineering interactions.
Jin,
Vietnam has a huge comparative advantage over inland China for labor intensive production. Labor costs are significantly lower in Vietnam compared with the Shanghai or Pearl River Delta regions. And Vietnam has a well educated and disciplined population relative to its per capita income. Vietnam’s deepwater port facilities built originally by the US Navy are closeby and rapidly being modernized for intermodal container transport by Hong Kong investors.
Logistics transport is a big problem within interior China. Upwards of 30-40 percent of potential freight business is actually turned away due to lack of capacity problems. The Chinese railway network is running overcapacity to handle intermodal freight traffic. The China PLA military always has first priority on Chinese railways, followed by passenger train traffic, with freight traffic given the last priority. Recently, the ports of Shenzhen were piled high with scrap steel imports due to lack of railway transport to interior Steel mills.
A few Chinese Steel mills are building their own private railways to carry coal from mines.
http://www.nytimes.com/2007/12/13/business/worldbusiness/13trades.html?_r=1&ref=asia&oref=slogin
In a sign of the discord apparently going on in the meetings, a Chinese official said at a news conference that calls from outsiders for China to engage in “excessive” appreciation of the yuan were irresponsible.
“We are not in favor of excessively fast appreciation of Chinese currency,” said Chen Deming, vice minister of commerce, who is scheduled to become the minister next year. “I don’t think it will serve all of us any good.”
China is worried that raising interest rates, slowing the economy and allowing the value of its currency to rise will shrink the economy and throw people out of work, leading to instability.
Ms. Wu, a focus of much discussion among American officials, is an energetic and blunt alumna of China’s bureaucracy, with a reputation as a problem solver but also as someone who pushes back. On Wednesday morning she lectured the Americans about not blaming China for their problems at home.
Earlier this week, she asserted that the American news media had “hyped” the problem of food safety and damaged China’s image. An American official said that she was susceptible to equally tough talk in return.
DC: Hey but you need to speak Spanish to have a gardner or a house maid in the US West. Chinese aren’t available for that kind of work.
Brad,
You amaze me with your sharp instincts. You picked all super-critical issues of our time - China, USD, Crude oil, etc. You even tracked to the “dark matters” on both sides of the Pacific and recognized the significance (though not 100%) of the Citi-ADIA deal.
When you are able to see so clearly what is coming, it must be painful for you to maintain your poise. I was wandering why no one told you when you were so close - you worked under Rubin and now associated with Council on Foreign Relations - “Dark Matters” aren’t dark for people involved. Maybe one day your time will come.
Anyway, reflecting on my own wanderful graduate school days long, long ago in the US, I had this question: -
Why is it that such a god-blessed country is in such a sagging debt weight? Where did it all go wrong?
My own answer is, 1971. When the good luck of a credit card with no credit limit is there, the die is cast. Other than a super strong military and lousy financial disciplines, what else can we expect? And then China came along ….
Is it really the “end of history” or some kind of god-scripted end game for civilization? Or must we endure always the show “The USD is our currency but your problem, the RMB is your currency but our problem?”
“…Recent law enforcement reporting indicates that Chinese traffickers who have connections to Northern California are supplying the Las Vegas area with large quantities of MDMA…” http://www.usdoj.gov/ndic/pubs23/23909/drugover.htm
“…Apple’s $15.4 billion stash is indeed the biggest of the group, putting the iPod maker in the elite ranks of well-heeled Fortune 500 tech companies. (Only Microsoft (MSFT) and Cisco Systems (CSCO) stockpile more.)…” http://bigtech.blogs.fortune.cnn.com/2007/12/07/apples-15-billion-cash-hoard/
Guest 10:50:38 -
Chinese involved in MDMA shouldn’t be a surprise. True to the title “World Factory”, Chinese enjoy a huge cost advantage for all the chemical components used to produce MDMA and accounted for about 80% global market share for the chemical components (legally available globally but commercially a red line), thus linked to the drug under world from Mexico to Hollnd.
Morgan Stanley issues full US recession alert
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2007/12/11/cnusa111.xml
By Ambrose Evans-Pritchard 13/12/2007
Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a “perfect storm” for consumers as the housing slump spreads.
In a report “Recession Coming” released today, the bank’s US team said the credit crunch had started to inflict serious damage on US companies.
“Slipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles,” it said.
“Three-month dollar Libor spreads have jumped by 60 to 80 basis points over the last month. High yield spreads have widened even more significantly. The absolute cost of borrowing is higher than in June.”
“As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers,” said the report, written by the bank’s chief US economist Dick Berner. He said the foreclosure rate on residential mortgages had reached a 19-year high of 5.59pc in the third quarter while the glut of unsold properties would lead to a 40pc crash in housing construction.
“We think overall housing starts will run below one million units in each of the next two years — a level not seen in the history of the modern data since 1959,” he said.
Although the US job market has apparently held up well, an average monthly fall of 138,000 in the number of self-employed workers over the last quarter suggests it may now be buckling. “Consumers face what could be a perfect storm,” said Mr Berner.
The partial freeze on subprime mortgage rates announced last week by US treasury secretary Hank Paulson may help cushion the blow for some banks, but it could equally backfire by adding a “risk premium” that drives even more lenders out of the mortgage market.
Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia and Europe will come to the rescue as America slows.
It has slashed its 2008 growth forecast for Japan from 1.9pc to 0.9pc, and warned that credit stress will weigh heavily on the eurozone.
Mr Berner said US demand is likely to contract by 1pc each quarter for the first nine months of 2008, but the picture could be far worse if the Federal Reserve fails to slash rates fast enough. It is betting on a quarter point cut this week, with three more cuts by the middle of next year. “We expect the Fed to insure against the worst outcome,” he said.
Morgan Stanley is the first major Wall Street bank to warn that it is may now be too late to stop a recession, though most have shifted to an ultra-cautious stance in recent weeks.
Sovereign funds scoop up credit crisis victims America faces day of reckoning with debt
The bank at first treated the August crunch as a “mid-cycle correction”, much like the financial storm after Russia’s default in 1998. But the collapse of the US commercial paper market has now continued for seventeen weeks, suggesting a “fundamental deleveraging of the banking system.”
Mr Berner - known at Morgan Stanley as the “resident bull”- is one of the most closely watched analysts on Wall Street. While he began to turn bearish last April as the credit markets turned nasty, the latest report is written in tones that may is rattle the fast-diminishing band of optimists.
Good report as usual.
Isn’t the table on “monthly exports” a bit misleading in that it’s US goods exports only and not total (goods plus services) exports being plotted?
Newer readers might come along and make the inference that China has already surpassed the USA in total exports, which it of course hasn’t (yet).
yes, it is goods only. tho on current trends, chinese goods exports will top us goods and service exports fairly soon. i usually use that chart in a china context and you are right, i should have changed the label.