Don't Blame China for the United States' Widening Trade Imbalance
February 10, 2010
by
Trade figures out of the United States and Canada today confirm that the global recovery is slowly moving forward. Looking at the trade of physical goods is one of the best measures of economic momentum. In my look at these figures last month, the story was of robust German trade in November. That robustness softened for Germany in December and now the focus has returned to the United States, where the trade deficit has widened further.
Japan put in a strong showing, while Canada still struggles to return to a trade surplus. In all, “normalization” is happening and trade is returning to incremental growth. This, of course, means that the United States trade deficit is on the rise again. Yet, this is not coming from its trade dynamic with China as many might assume.
U.S. trade grows as does the trade deficit
U.S. trade ended the year on a strong note. Monthly totals for merchandise trade (imported and exported goods) reached $244B, about 30% above their lows in February of last year. This rise has returned trade levels back to early-2007 levels but has also brought back the growth in the U.S. trade deficit. This deficit in goods in December stood at -$51.8B but is moderated to -$40.2B when services are factored in.
The pessimistic view holds that, as trade recovers, the U.S. deficit growth spurs new borrowing that must be funded by China and other countries. One counter to this is the fact that the deficit is a third less than it was in early 2007. Additionally, recent deficit growth is more the result of energy imports and prices than the U.S.-China trade relationship.
China is starting to buy from the U.S. en masse
While conventional wisdom often links the U.S. trade deficit with U.S.-China trade issues, the pattern might not be holding. Thanks to surging purchase of U.S. goods by China, the deficit has narrowed in the past two months. These purchases remained consistent at roughly $5.5B throughout last summer before jumping 18% in October, 7% in November and another 14% to $8.4B in December. Prior to that, such Chinese purchases had never reached $7B, even in the best of economic times.
It is as if China is no longer satisfied holding dollars and bonds as IOUs for future purchases but, rather, is cashing that paper in for hard goods from the U.S. and elsewhere. The numbers are still small at this point but, if this trend continues, it could be a positive for all parties. China does not need excess dollars sloshing around in its markets and the U.S. dearly needs to start satisfying its obligations through the supplying of finished goods.
While the deficit with China has narrowed in the past two months, this has been offset by deficit growth with Canada, Mexico, Nigeria and Venezuela. This reflected higher energy prices and a normalization in the automobile manufacturing sector in North America.
Canadian trade grows but a surplus remains elusive
Higher energy prices and some normalization in North American automobile production should have allowed Canada to return to the days of trade surpluses. Unfortunately, the $3.6B trade surplus Canada printed with the U.S. barely offsets the deficit it runs with the European Union and other countries. Surplus or not, though, increased trade is good for Canada.
German trade surplus with the U.S. remains robust but trade elsewhere weakened
After an unusually strong November, German trade ended the year on a weak note. The bounce off the bottom in auto sales as well as capital goods production for the rest of the world has allowed German trade to remain strong. One weak month does not necessarily mean a loss of momentum but does mean we should watch carefully as Germany wrestles with the fiscal problems of its weaker neighbors in the Euro Zone.
Japanese trade is trending in the right direction
The above chart for Japan is kept in a common format with that of Germany as the two countries share so many similarities in trade. Yet, where Germany took a pause at the end of the year, Japan kept its momentum up in recovery. This factor can be easily explained by each country’s closest neighbors. Japan’s recovery has some linkage to the United States, and its auto market, but most of the credit goes to other Asian economies.
Australian exports finished the year on an up note
Australian exports are composed of many products from minerals to natural gas to agriculture. Yet, lately, month-to-month dynamics have been driven by just two products going to one destination – iron ore and coal shipments to China. True to form, these items jumped in December, leaving Australia with its highest export level since March ’09.
In conclusion, global trade continues to improve. Such moves are incremental but consistent, providing some reassurance in the short term. The IMF has continually warned that the only long-term remedy to global financial stability is that imbalances in trade start to correct. This means that spending nations need to save more and saving nations need to spend more. The past few months have shown some hints of that trend between the two biggest offenders in the world of imbalances – the United States and China. We can only hope that trend continues.
Disclosure: No Positions
