A bit of good news …
The US goods trade deficit with China — on a rolling four quarter basis — is now stable.
The slowdown in US imports from China over the past year is over-determined. The RMB started to appreciate in real terms against the dollar and the US economy slowed. I’ll leave it to the econometricians to sort out the relative impact of a stronger RMB and the US slowdown.
Interestingly, the current account deficit is still trending up (or down — the deficit is getting bigger). The US is paying more interest on all the debt that China has bought.
Two important caveats:
One: China’s overall trade surplus remains stable at a high level. So far the rapid increase in China’s total exports has offset China’s rising oil import bill. The slowdown in Chinese exports to the US has been offset by strong growth in Chinese exports to Europe (the exchange rate … the RMB is way down v the euro) and to other emerging economies. The RMB has appreciated far more in real terms against the dollar than against most other currencies.
Two: Chinese financing to the US likely has increased even as Chinese exports to the US have slowed and the US trade deficit with China has stabilized. China’s reserve growth has picked up and all those reserves have to be invested somewhere.
Trends in US goods trade with Europe are also worth examining. There are rather clearly two periods when US exports to Europe don’t grow — the early 1980s, and the period from say 1998 to 2003. It isn’t an accident that both were periods when the dollar was quite strong.
A few years back it was fashionable to argue that exchange rates have no impact on trade. The dollar’s 2003 fall didn’t produce an immediate improvement in the US trade balance. In part that reflects the rise in the price of oil. That is unquestionably a problem, particularly as the same forces that have helped push the dollar down also have helped push oil up. But the absence of immediately improvement also likely reflects the lags in the adjustment process.
in 2004, the dollar’s strength in 2001 and 2002 still was having an impact on the data. Now the dollar’s post-2003 weakness is having the expected effect — even for goods exports.
Brad,
Does the US overal trade deficit include goods and services produced by US firms abroad and then re-exported to US? Someone once told me that the real US trade deficit is not so remarkable once we take this issue into account. Thanks.
A good made by a US firm abroad — correctly — is counted as an import. The US is sending money abroad to pay for the good no matter whether it is made by a US firm or a foreign firm.
Any components in the good that were bought in the US and then used in the external assembly would show up as an export, offsetting the rise in the uS import bill associated with importing the good.
The profits the US firm earns abroad though also enter into the US data — but not the trade data. They are part of the income balance. The large profits US firms earn abroad (relative to the smaller profits foreign firms earn in the US) currently offse the US interest bill on its foreign debt.
the US statisticians have produced a trade data series that reallocates the income firms earn abroad to the trade account. The result is a smaller trade deficit — but a much larger income deficit and an unchanged current account deficit.
Bottom line: in my view, the data is accurate. the real trade deficit is big. And a good made abroad by US firms is still an import.
I guess the much stronger change in US/EU(?) CA than trade balance is mostly due to the sharp decline in Dollar and therefore lousy returns of EU investment in the US/ great returns of US investment in the EU !?
The fall in US rates/ fall in returns on European FDI in the US during the US slump are a big driver …
lex sez: “There are further signals that the frenetic pace of growth at Chinese exporters is being reined in: orders at this year’s Canton fair, one of the biggest events in the trade calendar, were up just 6 per cent compared with last year.”
Here’s a thought:
If Taiwan’s population is 22 million and their reserves are $287 billion, then for China to have the same per capita reserves, they would have to expand reserves to about $13 trillion.
Keeping up with the neighbors?
bsetser: “The dollar’s 2003 fall didn’t produce an immediate improvement in the US trade balance. ”
I remember this being discussed in a meeting of European fund managers at the time. One particularly pro-European manager put forth an argument that no-one had a good answer to: when the dollar was strong (99-03), the last of the EU trade barriers were eliminated and European consumers who were used to buying a given American product found a native substitute. When the dollar fell, these same consumers realised that they liked the native good better. As a European who bought his first German car and Italian kitchen in that period, I think there may be something to his point…
glory — there isn’t yet much evidence chinese exports to the world (excluding the US) have slowed. Some of the forward looking indicators suggest a forthcoming slowdown. I am not yet sure how much i trust them. A lot of the data series seem new.
MMcC. Perhaps. But even Europeans love a bargain. Here in New York it sure seems like a lot of Europeans have been lured away from the undeniable charm of a week in Paris or Rome for a little rest, relaxation and shopping in the US ….
I would put more emphasis on the fact that the lead time on a lot of capital goods orders is fairly long, and through most of 2002 the dollar was either very strong (first part of the year) or fairly strong (later part of the year). The big dollar fall came in 03. And my 04/05 there was a noticeable pickup in exports (from an admittedly low base — in 04 US exports where i think lower relative to US GDP than in 97 …). The lack of improvement in the trade balance before 06 and really 07 had more to do with ongoing strong import growth tied one suspects to the housing boom.
Brad –
Your graph seems to show exactly what one would expect from the dollar depreciation. The effect on dollar-denominated exports is unambiguous: The foreign demand for U.S. exports shifts out, so both P and Q increase. The effect on dollar-denominated imports is ambiguous: The foreign supply shifts up (back), so P goes up but Q declines. Over time, the effect on Q should grow as U.S. import demand becomes more elastic, so the import curve should flatten out, or even show an import decline.