(What’s Left of) Our Economy: Little to Like Trade-Wise in the New U.S. GDP Report

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CCP Virus, coronavirus, COVID 19, digital services tax, exports, GDP, goods trade, gross domestic product, imports, inflation-adjusted growth, real GDP, services, services trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

Today’s first official report on U.S. economic growth in the third quarter of this year was not only much worse than the final results revealed for the second quarter. It was also a near-mirror image of its predecessor estimate of the increase in the gross domestic product (GDP) in terms of its trade figures – and not in a good way.

Chiefly, during the second quarter, the economy grew at a strong clip (6.56 percent after inflation at an annual rate) while the real trade deficit practically stabilized versus the first quarter figure. In fact, this progress prompted me to venture that a pretty encouraging post-CCP Virus trade normal could be settling in for Americans.

But third quarter inflation-adjusted annualized growth was just two percent – the worst such performance since the pandemic-induced nosedive of last year’s second quarter – and the trade deficit increased sequentially by 5.40 percent. The $1.3117 trillion annualized total, moreover, was the fifth straight record quarterly high. And just for good measure this level also represented an all-time high for the real deficit as a share of price-adjusted GDP (6.74 percent).

The quarterly trade gap growth rate was still the second slowest of the current (still CCP Virus-distorted) economic recovery. But it’s much faster than the 1.50 percent increase between the second and third quarter. Worse, the prospect of stronger future GDP growth (assuming the pandemic resumes easing), and an untangling of the supply chain bottlenecks that have dramatically impacted both import and export flows, could well create a renewed trade shortfall surge in the coming quarters.

That possibility should concern more than just trade watchers, because that sequential increase in the deficit reduced third quarter growth for the total economy by 1.14 percentage points. So if the trade gap hadn’t increased at all, GDP would have expanded by 3.14 percent in real annualized terms. That’s still not spectacular, but it would have been an improvement of fully 57 percent. And it’s the biggest relative trade hit to growth since the third quarter of 2018, when the deficit’s increase sliced 1.66 percent points off of the 1.93 percent total growth figure – cutting it by 86.01 percent.

The only small bright spot in the new GDP report came in goods trade – which accounts for the vast bulk of U.S. trade flows. Its after-inflation annualized third quarter trade deficit of $1.4234 trillion was just 1.53 percent higher than the second quarter figure. And although it represented an acceleration ove the second quarter’s sequential increase of just 0.44 percent, the speed-up was far from alarming.

The big problem with the third quarter real trade figures came on the services side. The sector has suffered the most virus-related damage of any in the economy, but the plunge in its long-time surplus of 25 percent, to $114.3 billion, was stunning nonethless. The level was the lowest level since the $110.9 billion recorded in the second quarter of 2007, and the sequential drop by far the biggest ever on a relative basis– surpassing those during the Great Recession following the financial crisis of 2007-08, and even during the early CCP Virus and lockdowns period.

Services exports actually rose a bit sequentially – by 0.94 percent, to $614.7 billion. The total was the best of the pandemic era, but still 20.55 percent below pre-pandemic (fourth quarter, 2019) levels. Services imports, however, jumped by 9.59 percent. The new $500.4 billion total was also the highest of the CCP Virus period and 8.52 percent below that of the fourth quarter of 2019. In addition, the quarterly increase was the biggest of all time. (Detailed service trade figures only go back to 2002.)

If it lasts, the heavy concentration of the economy’s trade problems in services industries could provide the real deficit’s growth with some extra oomph.  The problem isn’t just that the virus’ resilience could keep the sector under continuing and unusual pressure, which would mean that it won’t be nearly as much of a trade winner as before 

It’s also that there seems to be only a slim chance that trade policy can make much of a difference – since so many countries view service sectors like telecommunications and finance (and now digital services) as crucial to their own futures, and want to maintain and increase their own players’ advantages.  That’s mainly why services trade liberalization has made so much less progress than goods trade liberalization. Indeed, the United States and five European countries have just managed to avoid a trade war fought over and with digital services taxes – which would have been new trade barriers. 

At this point, it seems, the nation will have its hands full simply preventing higher trade deficits from becoming major drags on growth.  Anyone awaiting significant reductions in the shortfall, even as a share of GDP, will likely need lots of patience.              

(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.