Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Posts by Category

Showing posts for "U.S. trade deficit and external debt"

Inflows from Private Bond Investors Into the U.S.

by Brad Setser

The global capital flows story these days is complex. I wanted to build on Landon Thomas’ article with a set of charts drawing out how I think large surpluses in Asia and Europe are now influencing the TIC data. Obviously, this is a more technical post.

Asia’s surplus is big. In dollar terms, the combined current account surplus of China, Japan, and the NIEs (South Korea, Taiwan, Hong Kong, and Singapore) is back at its pre-crisis levels. China’s surplus is a bit smaller in 2007, but Korea and Taiwan are clearly running bigger surpluses. Yet unlike in the past, very little of Asia’s surplus is going into a reserve buildup. China is obviously selling, and its selling overwhelms intermittent purchases by Korea (Korea sold in q1 2016, but bought in q3) and Taiwan. The outflow of savings from Asia is currently overwhelmingly a private flow.

That is a change. And frankly it makes the impact of Asia’s surplus on global markets harder to trace. The Bank for International Settlement (BIS) data shows that much (I would say most) of the “capital outflow” from China over the last four quarters has actually gone to paying down China’s external bank debt, not to build up assets. It thus just becomes a new source of liquidity for the global banking system (once a dollar loan is repaid, the bank is left with a dollar—which has to be parked somewhere else).

And of course the eurozone and northern Europe also run substantial surpluses. Negative rates and ECB asset purchases in effect work to push investors out of super low-yielding assets in Europe, and into somewhat higher yielding assets outside the eurozone.*


The combined surplus of China, Japan, the NIEs, the eurozone, Sweden, Denmark, and Switzerland was close to $1.2 trillion in 2015. That is a big sum; one that has to leave traces in the global flow data. The U.S. current account deficit isn’t as big as it was prior to the crisis (and it is smaller than the UK’s current account deficit), but it is still financed, in part, by inflows from abroad into the U.S. bond market.

Total inflows from private purchases of U.S. bonds by foreign investors—together with the inflow from American investors selling their existing stock of bonds abroad and bringing the funds home—actually look to be at a record high in the TIC data (in dollar terms, not when scaled to U.S. GDP). $500 billion in inflows from foreign purchases of Treasuries, Agencies, and corporate bonds by private investors abroad, and $250 billion in financing from Americans bringing funds previously invested in foreign bonds home.

Read more »

Soybean-Adjusted U.S. Export Growth

by Brad Setser

I have argued that China’s current account surplus may paint a misleading picture of China’s trade position, as it isn’t clear that tourism imports have really increased from a bit over $100 billion to a bit over $300 billion in 10 quarters (the number of tourists travelling abroad has likely grown by about 25 percent over the same period, with rapid growth in the the number of tourists visiting Japan and Thailand offsetting the fall in tourists visiting Hong Kong). I can easily imagine how China is running a bigger goods and services trade surplus than now appears in the official data, as some of the reported increase in tourism could be a hidden capital outflow.

And now the U.S. trade data may need to be adjusted too. The headline deficit likely understates the underlying deficit just a bit right now.

The issue in the U.S. is quite different than the issue in China.

The surge in U.S. soybean exports is real. Very real. Soybeans are easy to count and measure. There has been a big jump in exports.

U.S. soybean exports typically peak in q4 and q1, after the U.S. harvest (Brazil and Argentina in turn supply the global market in April and May after their harvest). The seasonal adjustment smooths out a true seasonal spike in U.S. exports.

So when a weak harvest in South America (due in part to a drought in Brazil) leads to large out-of-season U.S. exports in July and August—well, it has a big impact on the seasonally adjusted data. Seasonally adjusted agricultural export volumes (seasonally adjusted) reached an average of $13 billion a month in July and August. $9 billion (in 2010 dollars) has been the recent norm.

Read more »

The ECB on the Slowdown in Global Trade

by Brad Setser

I really liked the ECB’s recent report on the slowdown in global trade (summarized here), for five reasons.

1) It doesn’t assume that trade should always grow faster than output. A liberalization of trade (or a fall in transportation costs—or less attractively, new opportunities to take advantage of transfer pricing) should lead to expansion of trade, but only until a new equilibrium level is reached. In the long-run, an elasticity of around 1 (e.g. trade grows with demand for traded goods) makes some sense.

2) It (implicitly) casts a somewhat skeptical eye on the expansion of trade from 2001 to 2007, and doesn’t assume that the growth in trade over this period was completely sustainable. The 2001-07 expansion of trade was associated with an exceptionally fast pace of growth in Chinese exports, one, I would add, not matched by comparable growth in China’s imports (especially of manufactures); it thus was sustainable only so long as the rest of the world ran large external deficits to balance China’s large surplus.

“In 2001- 07, China’s exports rose faster by about 15 percentage points than import demand in its main markets; by 2008-13, this differential had fallen to 6 percentage points (see Chart A). Waning competitiveness over that period may have played a role: China’s real effective exchange rate (based on relative producer prices) has appreciated by about one-quarter since 2005. At the same time, China’s exports had to slow eventually – they cannot outstrip the expansion of export markets in the long term.”

During this period Chinese export growth filtered throughout Asia. Rising Chinese exports to Europe, the United States, and commodity exporters (who could afford to buy more manufactures because the price of commodities rose) led to an increase in Chinese imports of components (global value chains), though after 2004, as I will argue below, component imports started to lag export growth.

3) It notes that the recent slowdown in trade has been marked by a very large shift in China’s import elasticity. For the past several years Chinese import growth has significantly lagged Chinese GDP growth.

“The recent decline in China’s income elasticity of imports has been striking and has made a marked contribution to the fall in the world trade elasticity. China’s trade elasticity dropped from 1.8 in 1980- 2007 to 0.8 in 2012-15. The fall in imports in 2015 was particularly stark, with imports expanding by just 2%, despite robust economic activity”

Read more »

Still Struggling to Make Sense of the 2016 U.S. Trade Data

by Brad Setser

U.S. nominal goods exports, excluding petrol, fell by around 6 percent in the first half of 2016, relative to the first half of 2016 (source).

U.S. nominal goods imports, excluding petrol, fell by just under 3 percent in the first half of 2016, relative to the first half of 2015.

(Nominal petrol imports were down a lot in the first half of 2016, as the price of imported oil averaged $32-a-barrel in the first six months of 2016 relative to about $50-a-barrel in the first six months of 2015)

Some of the fall in goods trade stems from price changes. The fall in actual volumes shipped around the world is smaller.

Real goods exports are down between 2.5 and 3 percent year-over-year. This makes sense. The dollar is strong, and that has an impact. And it maps, roughly, to the port data.

Real goods imports, excluding petrol, though are also flat. Technically they are down around 0.25 percent year-over-year.

And that is much harder to explain.

U.S. demand growth is slow; total demand increased by about 1.5 percent year-over-year. But that should still generate some increase in import volumes. Historically, about 20 percent of the increase in demand shows up in imports—so one might expect a 30 basis point of GDP increase in real imports and growth in non-petrol imports volume of 2-3 percent, rather than nothing.

Read more »

There Are a Couple of Reason To Think the U.S. Trade Deficit Will Continue to Rise This Year

by Brad Setser

The May trade data is out, and, the trade deficit widened.

Imports jumped. Real non-petrol goods imports rose by $2 billion from April. That makes some sense. They had been a bit too soft in the first part of the year for an economy that continues to grow, with both March and April on the weak side.

Exports continue to stall. May’s real non-petrol exports were down about $2 billion from April, but I would not focus on the month to month fall. The underlying trend remains pretty clear: year-over-year non-petrol export volumes are down two to three percent. Weak global growth and the lagged impact of the dollar’s rise in 2014 and all. This is unlikely to change in an real way over the course of the year: the fall in exports to commodity exporters should slow, but Brexit uncertainty will weigh on Europe and the renminbi’s slide will make China a bit more competitive.

And going forward there will be an additional dynamic at play: the improvement in the oil balance is going to (partially) reverse.

The following chart shows all of the trade data as a trailing 3 month sums (see Calculated Risk for the monthly data), and it uses the nominal rather than the real data. March offsets May, so the non-petrol deficit looks to be heading down. As the March and April data points drop out, that is likely to change. But what really stands out—apart from the 2013 to 2015 rise in the non-petrol deficit, is the spectacular fall in the petrol deficit. In the first few quarters the U.S. oil deficit was tiny.


It is safe to project that this will change. The oil import bill is price times quantity. Prices are going to be higher than the $30 a barrel the United States paid on average for imported crude in the first five months of the year. And with U.S. crude production now trending down, import volumes will start inching up. The monthly data actually already shows a rise in June.

Read more »

The Semi-Surprising Weakness of U.S. Imports

by Brad Setser

I suspect the big jobs report meant that last Friday’s trade release got a bit less attention than normal.

The dollar’s strength continues to have the expected impact on real exports, more or less. Excluding petrol, real goods exports are down 2.5 percent in the first four months of the year (relative to the same period in 2016).

And real exports are falling as a share of U.S. GDP. This is pretty common when the real dollar is strong. It also happened in the early part of the 2000s. The real dollar, looking at the BIS data, is about between 10 and 15 percent points higher than it was in early 2014.


I am surprised though at how flat imports continue to be.

Real goods imports are about half a point lower in the first four months of 2016 than in the first four months of 2015 (import prices are down, so the headline fall is over 3 percent). Real goods imports haven’t really changed at all for say the last 15 or so months. They have averaged about $165 billion chained 2009 dollars a month (a bit higher in q2 of last year).

While real GDP growth hasn’t been spectacular, demand has continued to grow. Over the last 3 quarters goods imports added marginally to U.S. growth (meaning imports fell), while final demand increased by about 2 percentage points (at an annualized rate). Looking at the last four quarters, goods imports have subtracted somewhere between 5 and 10 basis points on growth even with final domestic demand increasing by close to 2.5 percentage points of GDP.


Read more »

It Has Been a Long Time

by Brad Setser

I stopped blogging almost seven years ago.

My interests have not really changed too much since then. There was a time when I was far more focused on Europe than China. But right now, the uncertainty around China is more compelling to me than the questions that emerge from the euro area’s still-incomplete union.

Some of the crucial issues have not changed. The old imbalances are starting to reappear, at least on the manufacturing side. China’s trade surplus is big once again—even if the recent rise in the goods surplus (from less than $300 billion a couple years back to around $600 billion in 2015) has not been matched by a parallel rise in China’s current account surplus. The U.S. non-petrol deficit is also big, and rising quite fast.

But some big things have also changed.

The United States imports a lot less oil, and pays a lot less for the oil it does import. That has held down the overall U.S. trade deficit.

Oil exporters have been facing a gigantic shock over the last year and a half, one that is putting their (sometimes) considerable fiscal buffers to the test. Even if oil has rebounded a bit, at $50 a barrel the commodity exporting world is hurting.

Looking back to 2006, 2007, and 2008, one of the most surprising things is that Asia’s large surplus coincided with rising oil prices and a large surplus in the major oil exporters. High oil prices, all other things equal, should correlate with a small not a large surplus in Asia.

The global challenge now comes from the combination of large savings surpluses in both Asia and Europe rather than the combination of an Asian surplus and an oil surplus.

Read more »

Bonus graph

by Brad Setser

A quick chart showing how my estimates (from work I have done with Arpana Pandey of the CFR) for official holdings of Treasuries and Agencies compares with the FRBNY custodial holdings and the data that the US reports on the TIC website.


My estimates match those of the TIC in June of every year — when the data is revised. That is by design. All I am doing is using data on flows through the UK and Hong Kong to smooth out the revisions over the course of the year, and thus to avoid the sudden jumps in the official data.


China, new financial superpower …

by Brad Setser

One of the biggest economic and political stories of this decade has been China’s emergence as the world’s biggest creditor country. At least in a ‘flow” sense. China’s current account surplus is now the world’s largest – and its government easily tops a “reserve and sovereign wealth fund” growth league table. The growth in China’s foreign assets at the peak of the oil boom – back when oil was well above $100 a barrel – topped the growth in the foreign assets of all the oil-exporting governments. Things have tamed down a bit – but China still is adding more to its reserves than anyone else.

Yet China is in a lot of ways an unusual creditor, for three reasons:

One, China is still a very poor country. It isn’t obvious why it makes sense for China to be financing other countries’ development rather than its own. That I suspect is part of the reason why China’s government seems so concerned about the risk of losses on its foreign assets.

Two, almost all outflows from China come from China’s government. Private investors generally have wanted to move money into China at China’s current exchange rate. The large role of the state in managing China’s capital outflows differentiates China from many leading creditor countries, and especially the US and the UK. Of course, the US government organized large loans to help Europe reconstruct in the 1940s and early 1950s, and thus the US government played a key role recycling the United States current account surplus during this period. But later in the 1950s and in the 1960s, the capital outflows that offset the United States current account surplus (and reserve-related inflows) largely came from private US individuals and firms. And back in the nineteenth century, private British investors were the main financiers of places like Argentina, Australia and the United States. We now live in a market-based global financial system where the biggest single actor is a state.

Three, unlike many past creditors, China doesn’t lend to the world in its own currency. It rather lends in the currencies of the “borrowing” countries – whether the US dollar, the euro, the British pound or the Australian dollar. That too is a change from historical norms. Many creditor countries have wanted debtors to borrow in the currency of the creditor country. To be sure, that didn’t always work out: it makes outright default more likely (ask those who lent to Latin American countries back in the twentieth century … ). But it did offer creditors a measure of protection against depreciation of the debtor’s currency.

This system was basically stable for the past few years – though not with out its tensions. Now though there are growing voices calling for change.

Read more »

Still growing …

by Brad Setser

The Fed’s custodial holdings of Treasuries just topped $2 trillion. Custodial holdings of Treasuries rose by $25 billion in July. The overall pace of growth in the Fed’s custodial holdings did slow a bit in July, as some of the rise in Treasuries was offset by a fall in Agency holdings. But in a world where the US trade deficit is running at about $30 billion a month, a $15 billion monthly increase in the Fed’s custodial holdings is significant.

I understand why the Treasury market is so focused on Chinese demand — China is a the largest player in the market, and a major shift in Chinese demand would almost certainly have an impact. Right now, the market is obsessing over the low level of indirect bids in last week’s 2 year auction. At the same time, concern that central banks are abandoning Treasuries should be muted so long as the rise in the Fed’s custodial holdings of Treasuries is running far above the US trade deficit. Barring a huge increase in the trade deficit after May, that is certainly will be case over the last three months of data.


It is also true on a 12m basis.


The Fed’s custodial holdings may exaggerate central bank purchases a bit, as central banks sought safety in the crisis and moved funds out of private accounts. But so long as the custodial holdings of Treasuries are rising so rapidly, it is a little hard to argue that central bank reserve managers aren’t willing to hold dollars.

Read more »