Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Global trade is shrinking, fast

by Brad Setser
December 10, 2008

It is hard to put lipstick on a pig.

China’s November trade data (a 2.2% year over year fall in exports; a 17.9% year over year fall in imports — see Andrew Batson of the Wall Street Journal) suggests that global trade is contracting quite rapidly. And since trade accounts for a rising share of global activity, it suggests that the global economy has stalled — and perhaps is contracting.

The fall in China’s exports suggests global demand is falling. And the fall in China’s imports on first blush seems larger than can be explained just by the fall in demand for imported components for China’s exports and sliding commodity prices: it suggests that Chinese domestic demand is quite weak …

The November data from Korea and Taiwan tells a similar story. All experienced far larger falls in year over year falls in their exports than China did.

Sometimes the y/y change for China paints a misleading picture — as the timing of China’s New Year can have a big impact on the data. Not in this case. The 3 month moving average is heading down too — and it almost certainly has further to fall.

Up until now the widely reported difficulties in China’s traditional, labor-intensive export sectors (textiles, shoes) have been offset by strength in China’s more capital-intensive export sectors (electronics, machinery). See the World Bank Quarterly. But not anymore. November’s exports plunged well below China’s trend growth (using a linear trend, with monthly exports running roughly $20b over their level the previous year … ).

There isn’t much of a case for China to allow the yuan to depreciate against the dollar to help exports though. Not when Chinese exports are falling less than other countries exports, and China is gaining global market share. These are going to be hard times for everyone.

And China — with its large external surplus and strong fiscal position — should have more room to stimulate domestic demand than most. It certainly needs to do so.

China’s imports fell significantly faster than its exports in November, pushing China’s monthly trade surplus up to a record $40 billion. That is a lot of cash. Let’s see how large the US deficit is in November — it might not be all that much larger than China’s surplus.

China’s 2008 trade surplus looks set to exceed China’s 2007 trade surplus. Given that oil is going to average close to $100 a barrel in 2008 — more than $30 a barrel more than in 2007 — that is rather stunning. And right now there isn’t any much reason to think that China’s trade surplus will shrink in 2009. Exports will fall. But so will imports. And the fall in commodity prices implies that the terms of trade have shifted in China’s favor.

Watch how this chart evolves over the next few months …

The global flow of funds right now is actually quite simple: China runs a large surplus and the US runs a fairly large deficit — and, assuming hot money flows are (still) modest, China’s large surplus leads to rapid growth in China’s reserves and large Chinese purchases of US Treasuries. That is the dominant global flow right now — together with the “deleveraging” of the private sector.

One last point. China has released its November data before the US has released its October data. And I rather suspect China’s export data has already established the likely trajectory for US exports.

The seasonal dip in China’s exports (the data isn’t seasonally adjusted) usually comes after the US and European holidays — not before. The US trade data for the next two months is unlikely to paint a pretty picture of the health of the US or the global economy.

UPDATE: Nice analysis from the Economist.

58 Comments

  • Posted by Howard Richman

    Twofish responds to my question about why the Treasury would release a report whose conclusion did not match its text. The conclusion said that no country was manipulating its currency. The text documented how China was doing it. Twofish’s theories:

    1. Nobody in the US cares. — I don’t agree. The Democrats have been winning seat after seat by giving lip service to the trade issue.

    2. The US is going to do the same thing as China, so it doesn’t want to complain. — I don’t agree. There is no indication, whatsoever, that the US government plans to do anything even though balancing trade would immediately get the U.S. out of the depression.

    It is difficult to avoid the interpretation that the top levels of the US Treasury in the Bush Administration want Chinese loans for the US banking sector and are willing to sacrifice the rest of the U.S. economy to get them.

    Howard Richman
    http://www.tradeandtaxes.blogspot.com

  • Posted by Bob_in_MA

    Dr. Setser,

    According to Diane Lin, a fund manager,
    interviewed at Bloomberg, import VOLUME was down 9% YoY, in so less than half of the fall was prices.

    I’m having a hard time getting my head around the idea that China can be maintaining any positive growth, at least MoM everything seems to be negative.

  • Posted by bsetser

    DOR — fair points. Directionally though China could spend more (or hand out cash ….) or scrap remaining fees for schools and health care and run up a fiscal deficit, even if we won’t know its share of GDP.

    And you are right that Chinese policy makers haven’t experienced this before. Then again some of us warned China a long time ago that relying on exports so heavily meant that you risked importing economic volatility from the rest of the world —

  • Posted by RebelEconomist

    Howard,

    Since China held the renminbi at a fixed (ie the opposite of manipulated) dollar exchange rate from 1994 to 2005, after which it appreciated almost monotonically against the dollar, it would be hard to argue that China has manipulated its currency (at least, not by engineering depreciation).

    I do agree though that China would be manipulating its currency, not to mention giving up the moral high ground, if it forced a depreciation of the renminbi in response to falling exports. Hopefully, they will resist this temptation.

  • Posted by Twofish

    Richman: Nobody in the US cares. — I don’t agree. The Democrats have been winning seat after seat by giving lip service to the trade issue.

    No they haven’t. I voted for Obama remember? The problem is that at some point they have to stop talking about “change” and answer the question “What change?”

    I made damn sure before I voted for Obama and friends that when they had to make a decision on this, that they’d make it in ways that I don’t object to, and to have plan B ready in case it turns out do something different than what I think say in their speeches.

    You can go seat by seat to see that this is the case. You might get a line in a speech about how bad the deficit is, but lines in a speech is all you are getting.

    Never make the mistake of trusting a politician to do what he says in a speech. This applies to any politician.

    Richman: It is difficult to avoid the interpretation that the top levels of the US Treasury in the Bush Administration want Chinese loans for the US banking sector and are willing to sacrifice the rest of the U.S. economy to get them

    It’s not just the Bush Administration, it’s the Obama Administration and most of the people in the United States. Also, if it the judgment of most voters, keeping a trade deficit is the best way of keeping their jobs and standard of living, then it’s really hard to argue that you really are “sacrificing the US economy.”

  • Posted by Twofish

    True. No one in the Chinese government has much experience with falling foreign demand, but no one in the Chinese government in 1990 had much experience in transitioning an economy away from central planning.

    The quality of leadership or lack thereof really shows through when people are faced with a new situation that they’ve never seen before.

  • Posted by flow5

    locococo:
    “any thoughts on Fed s “newest” proposal?”

    I don’t know. My guess is that the Fed’s introduction of the payment of interest on excess & required reserves has proven more difficult than expected.

    The Fed’s technical staff can’t quantify / calculate the correct remuneration rate on excess reserves.

    With the Fed issuing it’s own debt, its balance sheet expansion (lending/discount operations) could be “mopped up” on a dollar for dollar basis.

    However, the Fed cannot offset these advances on a very large scale – without destroying the Treasury’s capacity to manage the national debt.

  • Posted by gloomboom.com

    China is in control now and all we in the USA can do is borrow more and more. At some point this thing won’t work anymore!

  • Posted by stephen gowan

    Brad

    My company does a lot of importing of Ag Chemicals from China. As such we have a man on the ground so to speak over there. I don’t think anyone has a clue yet how bad things are over there. The sheer percentage of business closures in the last two months is astounding. We understand up to thirty percent of small businesses in certain areas shut down two weeks ago for the new year. Year end bonuses were paid and money paid to return workers home. All were told not to return unless contacted. They may have a lot of dollars but our situation pales in comparison. That economy is now very scary.

  • Posted by Howard Richman

    @Rebel Economist: “Since China held the renminbi at a fixed (ie the opposite of manipulated) dollar exchange rate from 1994 to 2005, after which it appreciated almost monotonically against the dollar, it would be hard to argue that China has manipulated its currency (at least, not by engineering depreciation).”

    Actually, China manipulated its currency by not letting it appreciate. Basic economics holds that trade imbalances correct themselves. The currency of the country with a trade surplus strengthens, the trade deficit country’s currency weakens. China did not let this happen.

    Howard

  • Posted by Howard Richman

    @Steven Govan

    I took the liberty of reprinting what you wrote just above on my blog as it matches what I have been predicting and saying.

    Howard Richman
    http://www.tradeandtaxes.blogspot.com

  • Posted by HZ

    Brad,
    Thanks for the reference on the Chinese net investment position. That was very helpful.

  • Posted by RebelEconomist

    Howard,

    Unfortunately, the basic economics you cite only applies in the long run. In the shorter term, capital flows can drive the exchange rate and through that, the current account – not all economists and textbooks have fully caught up with the development of the international capital market.

    Since in China, the government restricts private sector capital flows, you cannot be sure what the “unmanipulated” capital flow would be. It is possible, especially as China’s own economy deteriorates, that unrestricted private capital outflows might exceed the current flow of intervention, in which case a floated renminbi might depreciate.

  • Posted by SalElonia

    The good resource is informative and actual

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