from Follow the Money

The October trade data was really bad …

December 18, 2004

Blog Post

I missed the actual release, but it is worth noting that the "guts" of the October trade data are rather discouraging. Forget the headline number: we knew it would be bad because of oil. Look at what happened to non-oil imports and export growth. Export growth is still strong (y/y), at 12.8% or so. But export growth also seems to be slowing: the y/y increase was 14% in August, 13% in September, and 11% in October ... the monthly data bounce around a bit, but the basic trend seems pretty clear.

Conversely, non-oil import growth if anything seems to be accelerating -- year to date it is now almost 15% (14.7%), up from its YTD increase earlier in the year. That implies each new monthly data point is showing a stronger y/y increase ... Imports from China are up 28% y/y; even imports from old Europe (eurozone) are up 12% y/y (not bad, given the fall in the dollar/ rise in euro in 2003). (Growth in US imports from the UK and Japan have lagged the overall market, as one, suspects has growth in US non-oil imports from Mexico).

All this is bad news -- there is no evidence yet that the underlying expansion of the US trade deficit is close to turning around, even though the dollar fell substantially in 2003. To slow the expansion of the trade deficit, non-oil import growth simply has to slow. In 2004, it looks like US imports increased by $250 billion, providing an enormous impetus to the global economy -- there is no way US exports can grow that fast, given our small (roughly $1 trillion) export base. Steve Roach, as usual, nicely laid out the harsh realities on Monday.

If oil stays at 40 or close to it, import growth of 6% and export growth of 9% would be consistent with a CONSTANT trade deficit. Right now, a slowing world economy looks likely to slow export growth to around 9% -- with the lagged impact of dollar depreciation keeping export growth from slowing further. But unless something changes, import growth does not seem to be trending towards 6%. Rather the opposite ...

One last point: Can we retire the argument that China’s rapid export growth is just due to the shift of production from other Asian economies to China? That argument appeared most recently on the oped page of Friday’s Wall Street Journal. The argument is based on the fact that between 2000 and 2003, overall US imports from the Asian Pacific region did not increase much. Rising imports from China were offset by falling imports from the Asian NICs. During this period of time, overall import growth was relatively flat too: overall goods imports only rose by $40 billion between 2000 and 2003. (Edited for clarity -- Brad)

However, the facts have changed: US imports from China and the Asian NICs are now both growing strongly. In 2004, overall imports from the Asia Pacific region are set to rise by 17%, or by about $70 billion. That is faster than the overall rate of increase in all imports -- 16% -- and all the more impressive because the US is not importing oil from Asia(oil imports are likely to increase 30%). Imports from China are set to rise by over $40 billion, and to reach $190 billion -- an amazing 28% y/y increase. But imports from the NICs and Japan are also rising -- imports from the NICs are set to increase by $13 billion, or 14%. China’s export growth clearly stems from more than just the shift of production lines from Asian NICs to China. We don’t have all the data for 2004 yet, but we have ten months of data -- the basic trend won’t change. Is it too much to expect people to use the latest data points in their analysis?

The Asia-Pacific region’s bilateral surplus with the US is set to rise by about $45 billion this year -- an increase that will largely offset their Asian-Pacific region’s higher oil/ commodity import bill, and keep the region’s aggregate current account in substantial surplus.

The key question is what happens next year. Will China’s export growth continue at its torrid pace? A lot of investment in China is certainly based on that premise. And if so, will it come at the expense of other Asian producers, or will China take market share from Mexico/ US domestic producers? The pie simply cannot keep expanding at its current rate, which means competition for market share is going to get more brutal.