Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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

The U.S. Needs More Manufactured Exports

by Brad Setser

I previously have noted that—if you exclude processing imports—China’s imports of manufactures are low relative to its GDP. I suspect the interlinked “China, Inc” connections between Party and State (described well by Mark Wu) have something to do with this. Manufactured imports, net of processing imports (processing imports are re-exported), peaked as a share of China’s GDP back in 2003.

ae-manufacturing-imports

The other “trade” outlier among the world’s big economic blocks is the United States. U.S. imports of manufactures aren’t out of line with those of say the eurozone. Or for that matter with Japan, which imports a lot more manufactures now than it used too. The U.S. though does stand out for the low level of its manufactured exports.

ae-manufacturing-exports

I am using an imperfect proxy for U.S. manufactures here—the sum of capital goods, autos, and consumer goods in the end use data. That leaves out manufactured goods in industrial supplies (notably chemicals, which sort of blur the line between manufactures and commodities given that competitive advantage is often determined by proximity to a low cost supply of ethane and the like). Adding in chemicals and plastics though would not significantly alter the picture (and would make the data harder to replicate). I confess that I prioritized using easy to reproduce (and easy to update) data that tells the basic story over analytical perfection.

I also adjust the Chinese data by netting out processing imports from China’s exports in a way that I do not adjust the other countries data. Without that adjustment, China is on a different scale.

The result of this pattern of exports and imports is that the U.S. runs a sizable trade deficit in manufactures, while the other big integrated economic blocks run surpluses in manufactures.

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Two Trade Variables To Watch in 2017

by Brad Setser

I suspect that few variables will tell us more about the course of the global economy, and perhaps global policy, than the evolution of Chinese and U.S. exports. Sometimes the most important indicators are simple and straightforward.

China’s exports matter for a simple reason: they could provide the basis for a true change in the narrative around China’s currency.

I tend to think controls can play a role in stabilizing expectations. The trade account doesn’t signal an underlying overvaluation of the yuan. China’s goods surplus is quite substantial. And China’s exports, as the chart below shows, have outperformed U.S. exports both during the period of dollar weakness (05 to 13) and in the recent period of dollar strength (chart uses a volume index, Chinese data starts in 05).

us-v-china-real-goods-exports

With an ongoing trade surplus, the right exchange rate is ultimately a function of the scale of outflows—and those are in part determined by expectations about what others are likely to do. If everyone wants out and can get out, it is rational to try to get out first. That is why the controls could work, especially as the nominal return on safe assets in China (still) exceeds the nominal return on safe global assets. There is also a normative judgment here too: a new China shock from a significant further depreciation against the basket and against the dollar would not help the global economy, and would add to the already considerable risks of trade conflict.

At the same time, there are likely to be limits to how tight the controls can be. It should be relatively easy for China, if it wants too, to keep its state banks from running up their foreign assets. And to keep state-run financial institutions from buying U.S. corporate bonds for their portfolio. It is far harder to control the activities of China’s export sector. Chinese exporters will be far more likely to sell their dollars and euros for yuan if the exporters believe that there is real two-way risk on the currency.

And one thing that could convince the exporters that they risk losing out if they hold their export proceeds abroad is a run of decent trade data. China’s November exports were pretty strong—China releases its own export volume data with a month lag, and the latest data shows that exports were up 8% in November. In today’s global environment that is a solid increase—though the November increase needs to be evaluated in light of October’s weak numbers. December data (out Friday) will be interesting.

And U.S. exports matter for a host of reasons.

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Why Doesn’t Apple Export More Services (Wonky)

by Brad Setser

A big caveat. Apple is being used to represent a lot of companies with very valuable intellectual property (IP) that have built up similarly outsized piles of cash outside the United States; it is the most high-profile case, but it is hardly unique.

The iPhone, famously, is designed in California and is assembled in China out of parts manufactured (mostly) in Asia.

I do not think the recent coverage about what it would take for Apple to manufacture the iPhone in the United States has added much to Keith Bradsher and Charles Duhigg’s spectacular reporting back in 2012. And, to my mind at least, the big revelation in the Bradsher/Duhigg article was that even the high-end components of an iPhone, and even those high-end components that come from American companies, typically aren’t made in America. Corning now manufactures its gorilla glass mostly in Asia, the chip designers farm out production to Asian fabs, etc.

I suspect not much has changed since then.

I digress.

No one questions that the iPhone is designed in the United States. And a lot of the software that makes an iPhone an iPhone is also created in the United States. And the export of intellectual property rights—the U.S. design and engineering embedded in a “designed in California” iPhone sold in Asia or Europe—should in theory enter into the balance of payments as a services export.

I would think it should show up in the line item for the export of “charges for the use of intellectual property, computer software” though in practice it may enter as a payment for research and development services (see below). Like I said, this is a wonky post.

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The (No Longer) Almighty Soybean

by Brad Setser

The U.S. trade deficit rose in October.

One reason (no surprise): Soybeans. Seasonally adjusted, monthly soybean exports are now $3 billion off their July and August peak. Actual soybean exports—in billions of dollars—rose in October. As they should. Soybeans have real seasonality: U.S. exports peak after the harvest. The seasonal adjustment seeks to smooth out this natural month-to-month volatility.

soybeans-nsa-sa

The good news from the summer is now mostly behind us. Still, as a result of the out of season exports—and higher prices—the U.S. has already exported $7.5 billion more soybeans this year than last.

I want to highlight two other points, both of which are—I fear—a sign of things to come. What I suspect is the beginning of a sustained—though modest by past standards—rise in the petrol deficit, and, more concerning, the growing U.S. deficit in high-end capital goods.

I will not try to replicate Calculated Risk’s always excellent graphs. There is no doubt that the nominal petrol deficit has started to tick up, after big falls for several years (in nominal terms, the non-petrol deficit is back to where it was before the crisis, a shift that hasn’t gotten the attention it deserved).

In real (volume) terms, the U.S. petrol deficit is also starting to rise. The large tailwind that rising oil production, falling oil imports, and falling prices provided for the the overall U.S. balance of payments in the past few years is in the process of turning into a modest headwind.

petrol-deficit-real-v-nominal

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The Dollar Trumps Carrier

by Brad Setser

Here is a bit of ballpark math.

Carrier has announced it will keep open a factory in Indiana, retaining around 1,000 jobs.

Since the election, the broad dollar has appreciated by about 4%, presumably because of the impact of an expected loosening of fiscal policy. Let’s assume the change in the nominal dollar is equal to the change in the real dollar, and that the rise in the real dollar persists (e.g. it isn’t eroded by inflation differentials)

Using a rule of thumb I learned from the Peterson Institute’s Ted Truman (hence, the accumulated wisdom of the Federal Reserve’s International Staff in the 1990s) a 10 percent move in the dollar changes the U.S. trade balance by about 1 percent of GDP.

So the 4 percent dollar appreciation should raise the U.S. real trade deficit by about 0.4% of GDP.

Nominal U.S. GDP is about $18.65 trillion now (q3 data).

0.4% of GDP is currently about $75 billion.

The Commerce Department estimated that a billion dollar of (goods) exports supports about 5,300 (5,279) jobs in 2015.*

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Fiscal Reflation in One Country

by Brad Setser

President-elect Trump wants to cut taxes and increase investment in U.S. infrastructure (or at least provide a tax break for existing infrastructure investment) and doesn’t seem especially worried if the result is a larger fiscal deficit.

The call for larger fiscal deficits has some parallels to the agenda I think makes sense for balance of payments surplus countries like Germany, or Korea—though I have always advocated for more progressive tax cuts than those proposed by President-elect Trump, and wanted East Asia to use its fiscal space to finance an expansion of social insurance.

But just as fiscal expansion should reduce the external surpluses of those countries that now run sizable balance of payments surpluses, fiscal expansion in a country with a sizable balance of payments deficit, in any conventional macroeconomic model, implies a bigger balance of payments deficit.

The numbers on the fiscal side could be significant. Michael Feroli of J.P. Morgan estimated that full implementation of the proposed corporate and individual tax cuts, together with higher spending on infrastructure and defense, would raise the fiscal deficit by about 3 percent of GDP if they were adopted in full (see Gavyn Davies blog); Ryan Avent of The Economist has a similar estimate.

A 3 percent of GDP fiscal expansion, according to the IMF’s coefficients, raises the external deficit by about 1.4 percent of GDP (the coefficient on fiscal deficits was raised to 0.47 in the IMF’s latest external balance assessment; see table 3).* A lot of the rise in U.S. demand from a fiscal stimulus would be shared by the rest of the world. With the U.S. economy operating at close to potential, the fiscal stimulus would lead to the Fed to raise rates — and that in turn would push up the dollar.

There is no immaculate adjustment. A 1.4 percent of GDP increase in the current account deficit is consistent with a 10 percent or more rise in the dollar (see Joe Gagnon, quoted in Neil Irwin’s well-argued analysis of the tensions between President-elect Trump’s various goals).

Of course, many keen political and economic observers (including the previously cited Michael Feroli) expect that the actual fiscal package will be far smaller—maybe one percentage point of GDP a year over several years.

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Just How Unusual Has The Recent Spike in Soybean Exports Been?

by Brad Setser

In the spirit of bridging the urban/rural divide after a dramatic election, it somehow seems fitting to do a bit more soybean blogging.

The September trade data suggests that July’s dramatic spike in soybean exports in the seasonally adjusted data is probably petering out a bit. Real (e.g. adjusted for price) food and feed exports in September were around $12 billion; that is a couple of billion off the July-August highs of $13 billion. A “normal” level over the past few years would be around $9 billion per month.

For those who need a refresher, the true peak of U.S. soybeans exports usually comes in the fourth quarter, just after the harvest. They usually start to rise in September, with actual exports peaking in October and November. The volume of exports then fades in the first quarter. Relatively few U.S. soybeans are physically exported—in a typical year—in q2 and q3. In q2 and q3 global demand for soybeans is usually satisfied by production in the Southern Hemisphere.

This year, though, a bad harvest in Brazil meant that global demand in q3 was supplied out of U.S. inventories. Throw out-of-season exports into the model that adjusts from the strong seasonality, and, well, records are set.

real-all-yoy

A 35 percent year-over-year (y/y) change in a trailing 3 month sum of one of the main categories of U.S. goods exports is just not something that you normally see. The swings in auto trade around the global crisis (remember, GM, and Chrysler were in a bit of trouble at the time too) were bigger, but not much else

The size of the q3 spike in agricultural exports was large enough that it basically throws off all y/y export comparisons (q/q will be worse). Excluding foods and feeds, y/y real goods exports are still down a bit (though the pace of the y/y fall now is a bit smaller than earlier in the year).

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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.*

foreign-private-purchases

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.

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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.

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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”

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