from Follow the Money

The $58 billlion July trade deficit

September 13, 2005

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Consider the increase in non-petroleum imports relatively to imports in the same month a year ago.

  • January y/y increase: 16.3%
  • February: 13.6%
  • March: 7.7%
  • April: 10.6%
  • May: 9.1%
  • June: 8.5%
  • July: 6.3%

All data comes from the BEA

Monthly non-petroleum goods imports are stuck around $117b, monthly service imports are stuck in the $26-27b range.   That generates monthly non-oil imports of around $144b.

Forecast $144b in monthly (non-oil) imports out for the entire year, and y/y (non-oil) import growth still works out to be around 8.1%.  Non-oil imports still increase by around $140 billion.  Oil imports are set to increase by about $62 billion, assuming oil falls back to $60 a barrel for the remainder of the year.   Total imports then would reach $1965 b.

If exports stayed at their current level of around $106b a month, total 2005 exports would be around $1260 billion (a y/y increase of about 10%).  The trade deficit comes in around $705 billion, and the current account deficit would be in the $805-10 billion range.

I (still) expect some pick up in non-oil import growth in the second half of the year.  And I expect the current sluggishness in exports - monthly exports have been stuck at $106 b a month since April - to be sustained.   That is more from a sluggish world economy than anything else, and more because of a bad grain harvest than any sustained interruption in the operations of the Mississippi river ports.   So I am looking for an overall trade deficit in the $720 billion range and a current account deficit of around $820 billion - up about $150 billion from 2004.

A few additional points:

1. Oil import volume continues to be sluggish.  High prices are having an impact.  YTD, the overall volume of US petroleum imports (from Exhibit 17) is only up by between 2.1 and 2.2%.  (of course, those imports cost a lot more - the total value of US petroleum imports is up 36.4%).  Compare 2.1-2.2% with the 5.7% increase in 2004 and the 7.3% increase in 2005.  

Chinese oil import volumes (through August) are only up 4% as well.  The increase in oil prices is having an impact on oil demand.   There is a reason why the IEA is revising its demand forecasts down. 

US imports from China continue to surge - they are up 27.2% [corrected, I initially had 26.2%] YTD.  And strong Chinese export data from August hardly suggests any slowdown.   Total US imports from China are likely to be around $250b this year.  That is 13.5% of China's GDP.  It is also more than the US is projected to import from the rest of the Pacific Rim or the Eurozone.  It is also a far faster increase than the overall increase (ytd) in non-oil imports (around 11%); China is increasing its share of the US import market.

2. US import growth from Mexico (8%) and the rest of the Pacific rim (4.5-5%) has lagged the overal increase in US non-oil imports; China is clearly taking market share from Mexico and countries like Korea (US imports are down ytd) and Taiwan.

3. US imports from the Eurozone continue to rise - they are up 9.5% ytd.  The weak dollar (or, no-longer-quite-so-weak dollar) has not crimped US demand for European goods significantly.  Compared with US exports to the Pacific Rim - up only 4% ytd, US exports to Europe are positively buoyant.   In dollar terms, exports (YTD) to the eurozone are up by $6.7b - more than the $2.7b increase in US exports to China.   China's rapid growth is NOT translating into rapid increases in demand for US goods.

Dollar depreciation (after a lag) does have an impact.   Europe is growing more slowly than the Pacific Rim, but US exports to Europe are growing more rapidly than US exports to the Pacific Rim.  But dollar depreciation has a bigger impact on exports than imports - and with a big gap between the US export base and the US import base, that makes it hard for dollar depreciation alone to bring about an improvement in the trade deficit.

Dollar depreciation (and associated RMB depreciation) also had an impact on China's exports to Europe.  They are up about 40% in the first half of the year, while China's imports from Europe have stagnated.

5. US exports to resource exporting regions (Latin America and OPEC) continue to soar.

Looking at the world as a whole - and forecasting out current YTD growth rates in imports and exports, I would estimate, in ball park terms, that:

  • US imports from China ($250b) will exceed US exports to China ($40b) by about $210b.
  • US imports from the rest of the Pacific Rim($310b) will exceed US exports to the rest of the Pacific Rim ($180b) by about $130b.
  • US imports from the euro zone ($230b) will exceed US exports to the euro zone ($140b) by about $90b.
  • US imports from NAFTA countries ($445b) will exceed US exports to NAFTA countries ($330b) by about $115b.

My conclusions:

China truly is central to the global rebalancing story.   The US runs large bilateral deficits with the entire world to be sure.  But the US also runs a particularly large deficit with one of the fastest growing parts of the world.  And the US deficit with China is growing particularly rapidly. 

Of course, bilateral deficits should not be the basis of any analysis of a global problem.  But China's overall current account surplus also is rising (see the IMF's forecast - which strikes me as way too low), so China's rising surplus with the US is no longer being offset by rising Chinese deficits with the rest of the world.   More accurately, China's deficit with oil exporters is growing - as one would expect given the energy intensity of China's economy.  But China's deficit with resource exporters is not rising enough to offset the rise in its surplus with the US and Europe.   Given the surge in oil prices, one would expect the current account surplus of a major oil importer like China to fall - not rise. 

Yet even with high oil prices, China looks set to run sustained current account surpluses of well over 5% of its GDP over the next few years.   Japan did not run global surpluses that big even at the peak of dollar strength in the mid 1980s.

Finally, China's neo-mercantilistic strategy of relying on exports to offset weak domestic demand growth (with the central bank hoarding dollar reserves in the way Spain once hoarded gold) is starting to squeeze other Asian economies.  Their export growth has slowed dramatically, and they are paying more for imports.  There is a growing discrepancy between the performance of China and the rest of Asia.

To be clear - the interest-sensitive sectors of the US and Europe are "winners" from China's neo-mercantilism.   China surging reserves and growing holdings of dollar and euro debt help keep US and European interest rates below what they otherwise would be.  

Over-investment in US and European housing is the flip side of over-investment in China's export sector.  Resources are being misallocated on both sides of the Pacific ...

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