Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Print Print Cite Cite
Style: MLA APA Chicago Close


Ut-oh …. exports are starting to fall fast

by Brad Setser
November 13, 2008

For the US trade deficit to fall (setting the effect of falling oil prices aside), exports have to grow faster than imports — or imports have to fall faster than exports.

If exports fall faster than imports, the deficit will stay large.

In September, the headline deficit fell because the petrol deficit fell. The petrol deficit has gone from $43 billion In July to $35.6b in August and $32.1b in September as the average price of imported oil fell from $125 a barrel to $108 a barrel. That alone generated a $10 billion improvement in the trade balance — and there is more good news to come. Especially if the US continues to import 5% less oil even after the prices come down.

But the non-petrol goods deficit is now moving in the wrong direction. It increased from $29.3b in June to $35.6b in August. Non-petrol exports fell by $9.9b over the last two months, while non-petrol imports fell by “only” $3.7 billion. The sharp fall in exports shows up clearly in a chart showing “real” non-petrol goods exports and imports. Real data tries to show what is happening if changes in price are taken out of the equation — it is meant to measure the actual quantity of stuff that is traded.

The fall in real goods exports has been steep enough to push the real non-petrol trade deficit back up.

And remember this is the September data. Since then the global outlook has deteriorated — and the dollar has strengthened substantially. That isn’t going to help US exports. The main reason why the US should support more emergency lending to the worlds’ emerging economies is pure self-interest: if their currencies continue to fall, the US isn’t going to be able to rely on exports to help it get out its own domestic troubles.

There is one small bit of hope. The monthly data jumps around a lot. Two months do not a trend make — though in this case, the falloff in exports is almost certainly directionally right. But the pace of the fall could reflect some month-to-month noise. Civil aircraft exports fell from $5.5b in August to $2.2b in September (Boeing strike?). So long as the Gulf and India and China don’t cancel their Boeing orders, civil aircraft exports shouldn’t fall by quite that much. Average monthly aircraft exports this year have been around $4b.

Two other things to watch:

One, will US exports to Latin America hold up. Y/y growth for the first three quarters of 2008 was 37% …

Two, what will happen to the US deficit with China. Y/y exports are up $17% while imports are only up 7%. But given the gap between what the US imports from China and what it exports to China, that works out to $16b in new imports and a little over $8b in new exports, so the bilateral deficit is still growing. However, if both import and export growth turn down, the fact that the US doesn’t sell much to China (absolutely) would start to work in the United States favor.

Or to put it differently, a fall in US demand hurts China more than a fall in Chinese demand hurts the US.

At least directly. Watch out for the rebound. Falling Chinese demand for Brazilian iron ore and soybeans could mean less Brazilian demand for US manufactured goods …

Thanks to Arpana Pandey for help on the graphs.


  • Posted by ReformerRay

    sinomania –

    I have been arguing for a law to be passed by Congress that would stem imports from 5 countries, including China, but PLEASE – no law which singles out only China for restriction. Other nations are doing their best to increase their trade surplus with U.S. and the most successful ones, including China, should be restrained. Last time I looked, 70% of the U.S. goods trade deficit would still exist, even if China is removed from the picture.

    We must act enhandedly, on the basis of a general rule that applies to all countries similarly situation.

    China is too powerful and too prickly to be treated as the only problem. China is doing what other countries are doing.

  • Posted by Twofish

    ReformerRay: . That did nothing for the fundamental problem – the willingness of the U.S. to continue to import goods without requiring our trading partners to import from us.

    It’s not clear to most people today that this is the fundamental problem or a problem at all. If you ask a chip designer in Silicon Valley or an investment banker on Wall Street, if their lives would get better or worse if you moved manufacturing back to the United States, the answer is that it would clearly get worse.

    You might get all populist and rail against the small minority of people that are destroying standards of living for the majority, but the numbers work against you. General Motors employs 270,000. Citigroup employs 300,000. Chrysler employs 80,000. AIG employs 116,000. There are about 250,000 people employed in the auto industry. There are about 220,000 people employed by investment banks.

    And then there is Walmart that employs 2.1 million people.

    ReformerRay: The financial system will continue to shrink. Paulson’s efforts to support it in its current form will not succeed because the amount owed to each other is too large.

    Barring an economic collapse this is unlikely. People imagine investment banks to be this small tiny group of bankers in smoke filled rooms. However, Goldman-Sachs employs 32,000 people. Morgan-Stanley employs 56,000 people, and Lehman Brothers had 25,000 people.

    These numbers are likely to grow because of technology. In 1950, you went to a bank and talked to a teller and got a stack of money. Today you have ATM’s and then internet banking at the consumer level, and a whole bunch of computers and networks that manage money at the corporate level. That’s not going to go away as technology improves and the world gets more complex.

    Technology changes banking in some subtle ways. In 1950, you couldn’t open a branch on every street corner because you needed big vaults and armed guards to keep the bank from being robbed. Today, you can keep minimal amounts of cash in a bank and deliver it as needed, and this means that you can open up a bank at every street corner. Once you open a branch at every street corner, then you end up hiring lots of tellers and programmers.

    If you have google go down for five minutes, that is an annoyance. If you have a banks computers go down for thirty seconds, that is a full scale global disaster, and a typical mega-bank employs more programmers than Microsoft to make sure that this does not happen.

    This creates a lot of highly paid jobs that frankly are more fun than working on an assembly line.

  • Posted by ReformerRay

    Twofish – Thanks for keeping open the lines of communication. I am going to go look up some data before I respond to you. I’ll be back.

  • Posted by Twofish

    Sinomania: What do you think the danger is that a Democratic Party controlled Congress and Executive would try to stem Chinese imports? I’d say it was high.

    I think so too, but part of the negotiations involved give and take so that China ended up with the US able to protect critical industries in the US without hurting China industry that much and vice versa.

    There is no doubt that the US will try to use every clause and anti-dumping provision that they can to reduce Chinese imports, but people thought about that when these agreements were negotiated. I really don’t see how any governmental restrictions will make that much more of a difference than a general slowdown in consumer spending.

    Industry tariffs are useful because the allow political exchanges that prevent the system from fundamentally breaking. China voluntarily restricts exports of textiles, in exchange the US reduces pressure on China to open up wheat markets.

    You use industry specific tariffs to appease certain groups so that the stop supporting any anti-trade measures beyond their specific industry. Once textile workers in North Carolina get what they want, the are no longer interested in things like import certificates, and are in fact can be opposed to them because any effort to renegotiate trade agreements means that the agreements that already exist can get torn up.

  • Posted by ReformerRay

    Manufacturing employment in August, 2008 was 13.4 million while Financial Activities employed 8.2 million (Bur of Labor Statistics)

    Gross Output (raw sales) was 4.9 billion for maanufacturing in 2006 but the Value Added by manufacturing was only 1.6 billion (cost of inputs subtracted)

    Gross Output for Finance and Insurance was 1.9 billion and Value Added was 1.1 billion.

    Conclusion. Manufacturing is much more important than the finance and Insurance business for two reasons: More dollar sales and the large amount of inputs needed to produce manufacturing product. Manufacturing is the hope of the future for the U.S.

  • Posted by ReformerRay

    The aboove numbers can be supplemented by looking at the contribution each industry makes to Corporate Profits in the U.S.

    Manufacturing contributed over 45% of corporate profits before 1980, but only 19% in 2006. Finance filled the gap. As manufacturing declined, Finance grew. From aroune 5% of corporate profits in 1980 to 26% in 2006.

    The problem we are having today is that the finance system is no longer contributing to corporate profits as it was in 2006.

  • Posted by ReformerRay

    Industry specific tariffs will be outlawed when the U.S. adopts my scheme. Twofish’s discussion above provides part of the reason. The are irrational – depend upon political influence. Exactly want Adam Smith wanted to abolish by insisting on Free Trade. Free trade was his way of eliminating tariffs on specific goods or industries. A much better way has been developed and described above.

  • Posted by Sinomania!

    Twofish, ReformerRay – thanks for your responses. I agree on a product specific basis restraints on China trade won’t jeopardize the whole apple cart. The potential is there to damage emerging businesses expected in the next investment cycle. I’m thinking specifically of two areas: solar and wind power. The infamous financial rescue package includes tax rebate credits for solar and wind installed by individual households, a niche market now but with giant potential. For an installed wind turbine a family can deduct $4,000 starting next year. The price of the wind turbine alone has retarded the growth of this business for years (along with zoning restrictions). But I know I can import wind turbines from China that qualify California and New York state certifications for far less than $4K leaving money left over for a installation, DC convertor, battery bank, etc. Chinese production of solar and wind products is expected to ramp up significantly next year and into 2010 bring costs (and prices) down further. However, Congress is mulling new certification provisions for these products and domestic manufacturers (I won’t name names here) are lobbying for a type of “buy America” provision. That would hurt both the consumer and the development of new businesses around household solar and wind as fewer people are going to install them unless the prices for solar cells and turbines fall enough to break the psychological expense barrier. I don’t see that happening without Chinese imports so both sides could lose. Buy America is already costing the Federal government and local cities a fortune for rolling stock. It costs close to a million dollars for one new articulated “bus rapid transit” bus that could be imported from China (with greater fuel efficiency and more comfort) for less. That is just one example of the types of restraints that I fear a Democratic Congress and Obama Presidency will employ in the short term.

  • Posted by ReformerRay

    Sinomania has an excellent post, providing a specific example of the folly of classic Protectionism. Here I am ain agreement with mainstream international trade economists. Product specific restrictions on imports are undesirable.

    But restrictions on imports that are general, apply to all imports, do not create the same problems.

    If these restrictions are applied only to 5 countries, China, Japan, Germany, Canada and Mexico, the U.S. trade deficit could be reduced and finally brought under control.

    The only way the large trade deficit will be reduced is by import restrictions of some kind and the scheme I proposed in above posts is the most reasonable.

  • Posted by ReformerRay

    Thanks for Sinomania’ contribution. The only thing missing in these exchanges is the opinions of other people.

  • Posted by RebelEconomist

    Reformer Ray, Sinomania,

    You know my opinion already. Having witnessed the failure of trade barriers to save the British-owned car industry, I am generally against trade barriers, but since China’s exchange rate policy involves its own restriction (ie a closed capital account), China could hardly complain if the US imposed retaliatory restrictions (reserves control).

    I suspect you have seen off Twofish with your facts on the relative importance of manufacturing and finance though!

  • Posted by thomas

    The USA is a high wage Nation?

    According to the Mercer Report we are ranked 2oth in Pay to our workers and that does not include other benefits that many “Social” countries give their people such as Universal healthcare, Free Tuition, Free Vocational/Technical training, 50 days a year off including holidays,extensive welfare safety nets ,etc.

    The Mercer Survey was from 2006 and indicated that the workers pay was figured with inflation in mind in each country and after-tax income.

    Switzerland and Germany had the highest wages in the world.

    Norway, Germany,Switzerland,Spain,Denmark,Sweden,Findland,Japan,Canada,Ireland,Australia,Hong Kong were amoung the countries with higher wages and benefits.

    The US life expectency is ranked 48th and falling in the world. US Citizens rank 70th in Healthy living or living without health problems when ranked against the rest of the world.

    Parts of the US have third world standards when one looks at the following.

    -Life Expectency and health standards
    -Debt levels on Federal, state, consumers, US corporations,trade deficits,etc which total over 60 Trillion and climbing rapidly!
    -Affordability of College Tuition, we are now losing big-time because of College Expenses.
    -Vocational/Technical Training System such as in Germany which produces a high wage and high skill workforce is very weak in the USA.
    -The US Infrastructure is falling apart including Roads, Bridges, Dams, Water Systems,Ports,Power supply,etc.
    -US healthcare system is substandard
    -Us poverty rates are high and in cetain regions of the country the approach third world standards.
    IN the richest parts of the country the average life expectency is 90 while in the poorer regions the average life expectency is around 50 and falling!
    -Alot to do with the Rich/Poor Gap
    -Lack of US manufacturing and now trade deficits even in High Tech products.
    -Decreasing Farmland and Trade deficits in Farm Products.
    -lack of oil and oil deficits
    -lack of renewable energy plan to replace oil and other fossil fuels.
    -9 times per capita person population compared to other western nations and also the highest Correctional Population in the world approaching 8 million)Parole, Prison,House arrest,probation,etc)
    -A primary Education systen which is substandard and ranks near the bottom of the industrial world.
    -World biggest debtor nation with countries like Germany and Japan buying up our assets making us into a colony of sorts.
    -lack of safety nets for population including welfare, training, compensation insurance, unemployment insurance,healthcare,college and technical training,etc which are all weak or non-existing.

    Much to do if America is to survive without breaking up into different countries!

  • Posted by keyless entry remote

    We offer a wide selection of original manufacturer keyless entry remotes (RKE, key fobs, transmitters) at discount prices. We can also offer you a replacement battery for your keyless entry remote or the programming instructions if you already have a remote.