from Follow the Money

Two stunnings numbers

January 12, 2005

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Both start with six. China’s end 2004 reserves: $609.9 billion . And the United States’ $60.3 billion November trade deficit.

The surge in China’s reserves should not have been that much of a surprise to anyone, and certainly not to readers of this blog. The euro rose against the dollar in q4. The much more undervalued renminibi did not. Keeping your currency weak against the dollar costs money. It was pretty clear that China’s reserves -- like those of the rest of emerging Asia -- soared in q4.

$610 billion is a really, really big number; it is close to 40% of China’s GDP (GDP at market rates). China’s reserves soared because it intervened massively in the currency market: China added $207 billion to its reserves this year and no more than $10 billion of that growth is explained by the impact of changes in euro/dollar on China’s existing holdings of euros. $207 billion is well over 12% of GDP. Just to put things in perspective, an economy of the United States’ size would have needed to have added $1.4 trillion to its reserves to match China’s reserve increase.

The surge in the November trade deficit was more of a surprise. Maybe it should not have been. Yes, oil prices dropped a bit, but oil import volumes had been a bit sluggish for several months. That seems to have reflected hurricanes in the Gulf rather than any slowdown in underlying demand growth. Import volumes picked up in November, leaving our (not seasonally adjusted) bill for imported petroleum unchanged at $17.7 billion (See exhibit 17) despite a slight fall in the price of imported petroleum. Our seasonally adjusted crude oil bill consequently jumped $2 billion (the non-seasonally adjusted number was up only $0.2 billion ...)

Of greater concern, though, is the drop in exports. Yes, monthly numbers bounce around a bit, and this month was unusually bad. But the basic trend is down: monthly Y/Y export growth was 14% in August; 13% in September, 11% in October, and 6% in November.

Incidentally, the usual cause of monthly variation -- fewer Boeing planes sold abroad -- doesn’t seem to be the explanation this time; there was a general decline in capital goods exports, apparently, from the bilateral trade data, capital goods exports to Europe and Japan.

If the December trade deficit is around $58.5 billion, the overall 2004 trade deficit would come in at $620 billion, up from $497 billion in 2004. And there is some risk that December’s data will surprise on the downside. China recorded a $11 billion monthly trade surplus in December -- and its exports have to go somewhere.

Roughly, $45 billion of the overall deterioration in the trade balance comes from oil, but $50 billion comes from trade with the Pacific Rim. In effect, the Pacific Rim countries -- themselves big oil importers -- made up for their larger oil import bill by exporting a lot more to the US. For example, the US bilateral deficit with China looks set to rise from $124 billion in 2003 to $160 billion in 2004. So long as US imports from China continue to increase by 25% a year, the US bilateral deficit with China, and, more importantly, the overall US trade deficit, look likely to keep on expanding ...

Update: Phil Coggan of the FT states a simple truth. Given the gap between the US import and export bases, strong foreign demand that leads to strong US export growth is not going to be enough to reduce the trade deficit to more sustainable levels. Remember, world growth was very strong in 2004, though it tailed off a bit at the end of the year. US exports are on track to do very, very well in 2004. The trade deficit is still growing very, very rapidly. The type of growth matters too: too much of the world’s strong growth in 2004 was the mirror image of strong demand growth in the US.

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