(What’s Left of) Our Economy: A Decent Month & a Long Way to Go for US Trade

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Canada, Census Bureau, China, exports, Germany, imports, Made in Washington trade deficit, Mexico, NAFTA, North American Free Trade Agreement, recovery, South Korea, Trade, trade deficit, Trump, {What's Left of) Our Economy

America’s goods and services trade deficit decreased by 5.93 percent in June – a second straight sequential decline that resulted in its lowest level ($43.64 billion) since last October. Highlighting the month’s results was an all-time high services exports figure ($65.37 billion). In addition, total exports hit their highest level ($194.37 billion) since the end of 2014, and June goods exports to Mexico ($21.35 billion) were the second greatest total on record, and the merchandise deficit fell on month at its fastest pace (18.28 percent) since July, 2015.

Yet despite these milestones, the total trade deficit for the first half of the year ($276.60 billion) was the highest six-month total since the first six months of 2012. Further, goods exports to China – which accounts for roughly half of the total American merchandise trade deficit – fell in June at their fastest rate (4.74 percent) since January, 2016 (18.41 percent). And although the China-heavy manufacturing and high tech trade deficits fell on month, they are running ahead of last year’s totals as well. Indeed, the latter’s six-month total ($43.40 billion) represents an all-time high. Year-to-date merchandise shortfalls have risen – including a quadrupling of the Canada shortfall – with many of the foreign economies whose trade policies have been criticized by President Trump. (Germany and South Korea were important exceptions).

The June figures also showed a quarterly uptick in the drag on the current recovery of the Made in Washington portion of the U.S. trade deficit from an already lofty level – cutting 17.47 percent from cumulative growth since the expansion began in mid-2009, or just under $464 billion.

Here are selected highlights of the latest monthly (June) trade balance figures released yesterday morning by the Census Bureau:

>In June, the combined U.S. goods and services trade deficit dropped for its second straight month, from a downwardly revised $46.39 billion to $43.64 billion. The new total brought the shortfall to its lowest level since last October ($43.07 billion).

>Leading this progress were U.S. services exports, which rose on month by 0.94 percent to a a second straight new all-time high: $65.37 billion.

>Total exports hit something of a milestone, too, increasing by 1.23 percent sequentially to their highest level ($194.37 billion) since December, 2014 ($197.18 billion).

>Moreover, on the eve of the renegotiation of the North American Free Trade Agreement, the June data show that U.S. goods exports to NAFTA partner Mexico improved by 7.42 percent over May’s figure, to hit their second highest total ($21.35 billion) on record. (The all-time high of $22.35 billion was set in August, 2014).

>Yet in contrast to this good news, the combined American trade deficit for the first six months of the year ($276.60 billion) was the worst January-June total since 2012’s $281.46 billion – when economic growth was somewhat faster.

>Another June low-light: China, which may face punitive unilateral U.S. tariffs, bought 4.74 percent few goods from the United State than in May – the steepest such drop since January, 2016’s 18.41 percent.

>U.S. merchandise imports from China, however, rose by 1.17 percent, to $42.29 billion, and helped push the June American deficit up 3.08 percent, to $32.58 billion – the highest since last August’s $33.86 billion.

>Year-to-date, the U.S. goods deficit with China is running 6.08 percent ahead of last year’s pace, even though exports have risen nearly twice as fast (up 15.63 percent) than imports (8.39 percent).

>Although it fell on month in June (by 6.83 percent, to $8.82 billion), on a year-to-date basis, the trade deficit for high tech goods for the first half of this year set its own new record for the January-June period – $43.40 billion.

>In fact, this shortfall is up 33.37 percent from the previous January-June period.

>Between the first half of last year and the first half of this year, U.S. High tech exports inched up by only 0.36 percent, but imports have climbed 5.66 percent.

>A similar story unfolded in manufacturing. The trade gap fell 4.93 percent on a monthly basis, from $80.10 billion in May (the second highest total ever) to $76.13 billion.

>Manufacturing exports rose 2.98 percent on month, while imports dipped by 0.70 percent.

>Year-to-date, however, the manufacturing trade deficit is running 6.19 percent ahead of last year’s record pace, which resulted in an $853.07 billion 12-month total.

>Manufacturing exports are up 3.86 percent for the January-June period, but imports have grown by 4.98 percent.

>Mexico represents another example of a country criticized by President Trump whose merchandise trade surplus with the United States shrunk sequentially but has risen on a year-to-date basis.

>Thanks largely to those robust American goods export figures, the U.S. goods deficit with Mexico sank by fully 18.28 percent month-to-month – the fastest rate since July, 2015 (43.12 percent). American goods purchases from Mexico rose by only 0.52 percent over June’s levels.

>Year-to-date, however, the U.S. merchandise shortfall with Mexico is up by 13.26 percent, as goods exports have risen by 5.04 percent, but imports have grown by a faster 6.86 percent.

>An even more extreme example is provided by Canada, with which U.S. goods trade flows have been exceptionally volatile, albeit in the context of a balance that has become notably modest.

>In June, the American merchandise deficit with Canada nosedived by 54.42 percent. The decrease was only from $1.37 billion to $624 million in absolute terms, but that’s still the lowest Canadian goods surplus since June, 2016.

>On a monthly basis, U.S. goods exports to Canada improved by 1.11 percent, and imports fell by 1.77 percent.

>Between the first six months of this last year and this year, however, the U.S. goods deficit with Canada has more than quadrupled, from $2.20 billion to $10.51 billion. American merchandise exports have advanced by 3.94 percent, but imports rose by nearly twice as fast – 9.95 percent.

>Indeed, the American goods shortfall with its partners in NAFTA (the North American Free Trade Agreement), which will soon be renegotiated by the three signatories, dropped by 24 percent month-to-month in June, from $8.66 billion to $6.58 billion, on an export increase of 3.91 percent and an import dip of 0.61 percent.

>Year-to-date, however, this deficit has surged by 36.68 percent, from $34.24 billion to $46.79 billion, as U.S. goods sales to Mexico and Canada combined have improved by 4.44 percent, but purchases from the two grew by 8.36 percent.

>Yet U.S. goods trade with Germany has shown a reversal of this pattern. In June, the American merchandise deficit rose by 10.03 percent, from $4.99 billion to $5.49 billion. U.S. exports increased by a mere 0.18 percent, while imports were up by 5.36 percent.

>The American goods deficit with Germany on a year-to-date basis, however, has decreased by 5.48 percent, as U.S. merchandise sales to Germany have advanced by 7.04 percent, while purchases from Germany have slipped by 0.1 percent.

>U.S. goods trade with South Korea followed this pattern, but with bigger disparities between the on-month and on-year data. Sequentially in June, the American merchandise deficit jumped by 26.23 percent, from $1.46 billion to $1.85 billion. U.S. merchandise sales to South Korea were off 5.96 percent, but American goods imports increased by 1.95 percent.

>Yet between January-June, 2016 and January-June, 2017, this American merchandise deficit cratered by 31.91 percent, from $16.46 billion to $11.20 billion. U.S. goods exports to South Korea surged by 21.82 percent during this period, while imports slid by 2.38 percent.

>At the same time, on a monthly basis, the American merchandise trade deficit with South Korea has more than tripled (from $561.4 billion) since the bilateral trade agreement went into effect in March, 2012.

>The June trade figures make clear that the drag on American growth exerted by the Made in Washington portion of the U.S. trade deficit grew slightly between the first and second quarters of this year – from an already considerable level.

>This deficit consists of U.S. trade flows heavily influenced by trade agreements and other trade policy decisions – thus omitting services and oil trade – that are then adjusted for inflation.

>Between the second quarter of 2009 – when the current recovery officially began – and the first quarter of 2017, the increase in this Made in Washington deficit has cut cumulative U.S. growth by 17.40 percent, or $443.24 billion out of $2.5476 billion in real GDP expansion.

>As of the second quarter of 2017, this drag effect increased to 17.47 percent, or $463.97 billion out of $2.6551 billion in real GDP expansion.

(What’s Left of) Our Economy: More Evidence of Germany’s Stealth Protectionism

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Angela Merkel, consumers, consumption, developing countries, Financial Times, Germany, Global Imbalances, globalization, imports, Matthew C. Klein, protectionism, savings, taxes, Trade, Trump, value-added taxes, VATs, wage suppression, wages, {What's Left of) Our Economy

President Trump’s charges that the United States has signed terrible trade deals in recent decades, and that foreign economies have been the main beneficiaries, inevitably have triggered a potentially useful debate over which major countries are most open to trade and which are tightly closed. Unfortunately, such arguments won’t actually be useful until “open” and “closed” are properly defined, and a new Financial Times column on Germany’s economic policies nicely illustrates how remote that goal remains.

I’ve previously made the case that accurately measuring protectionism – and thus accurately gauging which countries are contributing adequately to global prosperity and which are free-riding – entails much more than adding up individual trade barriers. Such simple counts also mislead on the equally important question of which countries the United States can reasonably hope to trade with for mutual benefit, and which countries can’t possibly qualify.

And because Germany’s government has both taken trade fire from Mr. Trump and vigorously replied, I’ve used it to illustrate the above points. In a short op-ed for USA Today and a much more detailed RealityChek post, I’ve noted that, as with many other leading foreign economies, the main problem with Germany as a promising trade partner stems at least as much from its overall national economic strategy as from its specific trade practices. That is, countries like Germany, which heavily emphasize growing by saving, producing, and exporting, can’t possibly be good trade matches for countries like the United States, whose priorities have been the diametric opposites.

Of course, those national economic strategies manifest themselves in specific practices and policies. (How else could their focus be established?) But the links to trade flows aren’t always clear. For example, there’s widespread reluctance to acknowledge the trade impact of value-added taxes (VATs), which promote exports and penalize imports. The role played by other German policies, like suppressing wages or skimping on infrastructure spending, has been even less apparent.

What the new Financial Times post adds to the mix is a generally neglected form of wage suppression: Germany’s taxes on low-wage workers – which author Matthew C. Klein describes as “among the highest in the world” since at least the turn of the century.

These taxes inflict an outsized blow on Germany’s imports – and on the the world economy as a whole – in at least two important respects. First, economists tend to agree that the lower an individual’s or household’s income, the higher the share of that income will be spent (as opposed to saved). If they’re right, then these taxes ave been hitting Germany’s overall consumption and import levels especially hard. Therefore, these levies look like notable contributors to the bloated German trade and current account surpluses that are not only detrimental to America, but that could threaten the entire world’s financial stability.

Second, as supporters of pre-Trump U.S. trade policies constantly point out, much of what low-income consumers buy is produced and exported by low-income countries (e.g., apparel or school supplies or furniture). So since high taxes on low-wage workers in Germany prevent them from importing as much from the developing world as they could, third world countries need to focus more on customers in more promising markets – like America’s.

Germany and its leader Angela Merkel lately have been basking in the glow of praise from the political classes in the United States and abroad, which have anointed them as among the new, post-Trump champions of free trade and all its purported benefits. (China’s another alleged globalization champion, but that’s another story.) Its lofty taxes on low-wage workers add to the evidence that these titles are wildly premature.

(What’s Left of) Our Economy: A Mixed Bag of May U.S. Trade Figures

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(What's Left of) Our Economy. trade, Census Bureau, China, exports, Germany, high tech goods trade, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, recovery, services trade, South Korea, Trump

America’s goods and services trade deficit decreased by 2.27 percent sequentially in May, to $46.51 billion, as services exports ($64.82 billion) and services imports ($43.84 billion) both hit all-time monthly highs. Combined exports rose 0.45 percent on month to $192.03 billion – their best total since April, 2015 ($192.59 billion).

But the huge, chronic U.S. manufacturing trade shortfall jumped by 13.92 percent, to $80.10 billion, its second highest level ever (after last November’s $80.75 billion). Merchandise exports to South Korea – whose free trade deal with the United States has been faulted by President Trump – rose sequentially to a record monthly level of $4.49 billion. Yet the immense U.S. goods trade deficit with China soared by 14.39 percent, to an eight-month high of $31.61 billion. The jump came amid signs of higher overall U.S.-China tensions.

And the overall year-to-date U.S. trade deficit of $233.07 billion was its highest since January-May, 2012’s $238 billion, when growth was somewhat faster. In fact, the cumulative trade drag on the long but weak American economic recovery (as of the first quarter of 2017) remained above 10.50 percent (representing nearly $230 billion in lost inflation-adjusted growth). Nearly twice as great has been the growth hit from the increase in the Made in Washington real non-oil goods deficit was still nearly twice as great.

Here are selected highlights of the latest monthly (May) trade balance figures released this morning by the Census Bureau:

>In May, the total U.S. trade deficit dropped by 2.27 percent, from a downwardly adjusted $47.59 billion to $46.51 billion.

>Highlighting the results were record services exports ($64.82 billion) and services imports ($43.84 billion). The services trade surplus improved by 1.04 percent on month, from April’s upwardly adjusted $20.77 billion to $20.99 billion.

>The total trade deficit’s narrowing was also helped by the best monthly combined goods and services exports figure ($192.03 billion) since April, 2015’s $192.59 billion. The May total export level was 0.45 percent higher than April’s upwardly adjusted $191.17 billion.

> Total imports inched down by a mere 0.09 percent in May, from April’s upwardly adjusted $238.76 billion to $238.54 billion.

>Another May record: U.S. merchandise exports to South Korea, whose 2012 trade agreement has been criticized by President Trump. These American goods sales reached $4.49 billion – a 1.48 percent increase over April’s $4.43 billion.

>U.S. goods imports from South Korea declined by 3.65 percent on month in May, to $5.96 billion, and the merchandise deficit plummeted by 16.60 percent, to $1.46 billion. That total, however, is still nearly three times greater than the trade gap when the trade treaty went into effect in March, 2012 ($561 million).

>At the same time, as Mr. Trump has soured on China for North Korea-related reasons, the PRC’s mammoth goods trade surplus with the United States jumped 14.39 percent sequentially in May to $31.69 billion – an eight month high.

>U.S. goods exports to China climbed by 3.59 percent sequentially in May, but imports were up much faster – by 11.56 percent.

>Year-to-date, moreover, the China merchandise trade surplus is up 5.28 percent.

>The widening of the China gap could largely explain the big (13.92 percent) sequential deterioration of the huge, chronic U.S. manufacturing trade deficit – from $70.31 billion in April to $80.10 billion in May. That May figure is the second worst on record, after last November’s $80.75 billion.

>Manufacturing exports advanced by 3.80 percent on month in May, from $89.26 billion to $92.65 billion.

>But the far larger amount of manufacturing imports soared by 8.26 percent, from $159.57 billion to $172.75 billion.

>These results pushed the January-May manufacturing trade deficit up 6.96 percent, to $356.226 billion.

>Year-to-date manufacturing exports have risen by 3.67 percent in 2017. But the much larger amount of imports is up 5.10 percent.

>The good May results notwithstanding, the total U.S. trade deficit for the first five months of 2017 ($233.07 billion) was the worst such figure since the $238 billion of 2012 – when economic growth was somewhat faster.

>America’s trade performance with Germany, which the president also has criticized, provided better news in May. The U.S. merchandise shortfall dropped by 8.90 percent on month, to $4.99 billion, as American goods exports advanced and imports fell. And year-to-date, the bilateral gap is down by 6.73 percent.

>Less encouraging were May’s high tech goods trade numbers – which tend to be volatile. The American global deficit in this category skyrocketed by 56.73 percent, to $9.47 billion.

>U.S. high tech goods exports were off only by 0.51 percent sequentially, to $28.48 billion. But imports rose by 9.46 percent, to $37.95 billion.

>Year-to-date, the high tech goods gap has ballooned by 37.13 percent – to $34.58 billion. As with the overall trade deficit, that’s the highest figure since the first five months of 2012 ($35.21 billion).

>The cumulative trade drag on the long but slow American economic recovery stood at 10.66 percent as of the first quarter of 2017. That means that the increase in the inflation-adjusted trade deficit since the expansion began in the second quarter of 2009 has cut real economic growth during this period by $229.3 billion.

>The trade drag of the Made in Washington trade deficit – which adjusts trade flows for inflation and omits service and energy trade flows that are only lightly affected by U.S. trade policy – has been nearly twice as great. As of the first quarter, it stood at 20.57 percent of cumulative growth, or a $441.51 billion hit.

>Between April and May, this real non-oil goods trade deficit grew shrank from $62.23 billion to a still lofty $60.38 billion. If June’s total is comparable, the Made in Washington trade drag on the recovery will rise yet higher, and will be calculable once the second quarter gross domestic product figures are released.

(What’s Left of) Our Economy: April’s U.S. Trade Figures Sure Weren’t Winners

Tags

China, economic growth, exports, GDP, Germany, gross domestic product, high tech goods, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, Trade, trade deficit, {What's Left of) Our Economy

Since last Friday was one of those days when both the U.S. jobs figures and trade figures were released the same morning, and since I was traveling that day, I didn’t get a chance to report on the latter as promptly as usual. But that doesn’t mean the trade figures should be overlooked! Here’s a quick rundown of the high- (or low-) lights, which cover the month of April:

>The combined goods and services U.S. trade deficit rose by 5.15 percent on month, from $45.28 billion to $47.62 billion. But for a change, the big news in this total trade shortfall category was in the revision for the March gap – it was upgraded from an initially reported $43.71 billion. That’s a ginormous 3.61 percent.

>Total exports fell sequentially in April by 0.25 percent, from $191.46 billion to $190.98 billion, and total imports increased from $236.74 billion to $238.59 billion, or 0.78 percent.

>And quite naturally, the March revisions were substantial, too. That month’s combined export total was upgraded by 0.25 percent, and the much larger combined import total revised up by 0.87 percent.

>Also disturbing about the new trade figures: They show that for the first four months of this year, the total trade deficit is up by 13.43 percent on a year-to-date basis. That’s more than four times as fast as the total economy grew between the first quarter of last year and the first quarter of this year (4.08 percent – both these figures are in pre-inflation dollars).

>With Germany’s trade policies in the Trump administration’s cross-hairs and therefore in the news, it’s noteworthy that the U.S. merchandise shortfall with Germany grew sequentially by 5.43 percent, to $5.48 billion in April. That’s the highest monthly total since last August’s $6.05 billion.

>U.S. goods imports from Germany fell by 4.11 percent sequentially, but America’s goods exports sank on month by 15.34 percent.

> At the same time, the Germany goods deficit is down by 5.24 percent year-to-date.

>Of America’s other major trade partners, only the merchandise deficit with China increased significantly on month – from $24.58 billion to $27.63 billion, or 12.42 percent.

>U.S. goods exports to China advanced by 2.22 percent, but imports rose by 9.55 percent.

>The U.S. merchandise trade deficit with China is 4.21 percent larger in the first four months of this year than it was the first four months of last year.

>The April manufacturing trade deficit of $70.31 billion was just 0.79 percent higher than March’s $69.76 billion. Manufactures exports were off by 7.91 percent sequentially, while the much greater amount of imports fell by just 4.27 percent.

>Year to date, the manufacturing trade deficit looks set to establish yet another annual record. At $276.12 billion, it’s already running 6.20 percent ahead of last year’s pace.

>For the first four months of this year, manufacturing exports are up by 3.44 percent, but imports are 4.64 percent higher.

>The story is even worse in high tech goods. The trade shortfall actual dipped by 0.49 percent on month in April – from $6.07 to $6.04 billion. Exports were 8.28 percent lower than in March, and imports were off by 7.01 percent.

>Year-to-date, however, the high tech trade gap is up by 36.69 percent – from $18.37 billion to $25.11 billion. Exports have inched up by 0.25 percent, but imports are 5.42 percent higher.

>The U.S. trade deficit in oil fell by a sharp 35.56 percent sequentially in April, from $8.43 billion to $5.43 billion – the lowest monthly total since last September ($5.13 billion).

>But the April non-oil goods deficit of $61.71 billion was 9.22 percent higher than March’s $56.50 billion. It was also the highest monthly total for this shortfall – which is heavily influenced by U.S. trade agreements and other trade policy decisions – since March, 2015’s $61.74 billion (the highest monthly figure in a data series that goes back to 1992).

>Moreover, in real terms, the April non-oil goods deficit climbed 7.62 percent on month, to $62.04 billion. That’s also the highest total since March, 2015’s $62.80 billion (which was another all-time high).

>Since the headline U.S. government data on changes in the gross domestic product (GDP) are adjusted for inflation, this lofty figure for the real non-oil goods deficit indicates that this Made in Washington shortfall’s growth will drag on economic growth in the second quarter of this year.

Making News: A New USAToday Op-Ed – & More!

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automation, climate change, Germany, Jobs, Lifezette.com, Making News, manufacturing, Paris climate accord, Trade, Trump, USAToday

I’m pleased to announce the publication of my latest op-ed article – a piece that appears in USAToday this morning on President Trump’s criticisms of Germany’s trade policies. Here’s the link.

Incidentally, the article ran as a rejoinder to an unsigned USAToday editorial on the subject that also was published today.  The paper’s editors have been using this “pro-con” format for many years, and I think they deserve great credit for seeking out viewspoints with which they disagree.

In addition, a June 1 post on Lifezette.com included my (skeptical) opinions about claims that Mr. Trump’s withdrawal from the Paris climate change accord will cede global leadership on the issue to China.

Moreover, a May 25 Lifezette article quoted me on a new study finding that trade and offshoring have been responsible for much more manufacturing job loss lately than automation.

And keep checking in with RealityChek for news of upcoming and recent media appearances and other developments.

 

 

(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

Tags

advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

Following Up: Germany’s Merkel on NATO and Defense May be Leading, but Could Lack Followers

Tags

allies, Angela Merkel, Europe, Following Up, Germany, NATO, North Atlantic treaty Organization, Pew Research Center, polls, Russia, Trump

German Chancellor Angela Merkel, who’s not known as a bomb-thrower, at least chucked a pretty good sized grenade into newly volatile relations between the United States and the European members of the North Atlantic Treaty Organization (NATO).

Merkel told a crowd at a political rally today that “The times when we could fully rely on others have passed us by a little bit, that’s what I’ve experienced in recent days.” She clearly was referring to her experience with President Trump, a longtime skeptic of the Atlantic alliance, at NATO’s summit last week. And Merkel continued, “For that reason,” Merkel continued, “I can only say: We Europeans really have to take our fates in our own hands.”

These remarks don’t count as full-fledged bombs for several big reasons. First, as I noted in a recent post, the Trump refusal to endorse explicitly NATO’s Article Five pledge to aid militarily any member under armed attack might have the transatlantic foreign policy crowd in a state of hysteria, but the clause is ambiguous and German and other European leaders have always known – and fretted – about this.

Moreover, U.S. allies repeatedly have discussed creating a meaningful defense capacity of their own with varying degrees of independence from the United States. So far, they’ve never followed through – mainly because American leaders typically responded with renewed pledges of undying loyalty. So the allies understandably felt perfectly free to continue free-riding.

But let’s say that This Time It’s Different (and sometimes it is, otherwise, we’d have no history). What’s interesting to say the least is that Merkel is going to face some major obstacles with her own people and many others in Europe. How do we know this? Let’s simply look at that Pew Research Center NATO poll I posted on yesterday.

Now some sharp RealityChek readers may be wondering why I’m using this Pew data, since yesterday’s post demonstrated many fatal flaws. Here’s the answer: My criticism of Pew focused on its failure to inform American respondents that the nation’s NATO commitments created any risks. That’s important given how ignorant so many Americans remain about even major foreign policy realities, because they’re so physically isolated and insulated from the rest of he world.

But European publics – which were also surveyed by Pew, and whose views I’ll discuss below, are substantially different. After all, they live much closer to Russia, NATO’s main concern. So even if they’re by no means foreign policy experts, the continent’s war-torn past is something much more apparent to them, and especially to their parents and grandparents. Just as important, they’re the ones who will have to live with the worst consequences of poor governmental national security decisions. And if the views they expressed to the Pew researchers are representative, Merkel could well find it almost impossible to help create an independent European defense effort worthy of the name.

Interestingly, Merkel herself implicitly acknowledged that not all the forces jeopardizing European unity are coming from Washington. As she observed, the United Kingdom just voted to withdraw from the European Union last year. And of course she knows how strong anti-EU sentiments remain throughout Europe, and how many stem from resentments over the outsized role Germany has played in dealing with (and allegedly contributing to) recent economic crises like the one that’s engulfed Greece.

Yet what Merkel may not yet know about her compatriots and other Europeans should trouble her even more. For example, according to Pew, German support for NATO is strong (67 percent view the alliance favorably). But only 40 percent of Germans agree that their country should use military force to defend a fellow NATO ally under attack. Fully 53 percent would want Germany to sit out the conflict.

Merkel might draw some comfort from seeing that Germany’s commitment to NATO’s core mission is the weakest among the countries surveyed. But it’s not whoppingly lower than the support for going to war registered in the two other major European military powers, the United Kingdom (45 percent) and France (53 percent). Further, the Pew results show that a distinct minority of those surveyed in NATO’s European members view Russia as a “major threat to their nation.”

Merkel, however, isn’t the only national leader who should be paying close attention to these Pew findings. If they’re accurate, President Trump and the rest of Washington need to ask themselves whether America can count on any prompt, significant assistance from NATO Europe if push comes to shove.

Our So-Called Foreign Policy: Trump’s Real NATO Mistake

Tags

allies, Article Five, Baltics, Barack Obama, Charles de Gaulle, Cold War, Europe, France, Germany, NATO, NATO expansion, North Atlantic treaty Organization, nuclear deterrence, nuclear weapons, Our So-Called Foreign Policy, Poland, Russia, Soviet Union, tripwire, Trump, United Kingdom

President Trump’s tireless critics are at it again, accusing him of calling into question America’s “sacred” and allegedly legally binding obligation to come to the military defense of any of its European allies in the North Atlantic Treaty Organization (NATO) if they come under armed attack.

As charged by the author linked above (from the reflexively establishmentarian Brookings Institution), the president’s refusal to endorse this obligation explicitly in his speech today at alliance headquarters in Brussels, Belgium, will “raise grave doubts about the credibility of the American security guarantee and provide Russia with an incentive to probe vulnerable Baltic states.” Sounds awful – and unprecedented – right? Actually, not even close.  But as you’ll see, Mr. Trump could be on his way to creating another big – and completely unnecessary – problem.

In the first place, in concrete terms, Article Five legally obligates the United States to do absolutely nothing specifically if one of its NATO allies comes under assault. The clause simply requires treaty signatories to “assist the Party or Parties so attacked by taking forthwith, individually and in concert with the other Parties, such action as it deems necessary, including the use of armed force, to restore and maintain the security of the North Atlantic area.”

And this flexibility-preserving wording is no accident, or product of jargon-addicted diplomats or international lawyers. It resulted from the U.S. Congress’ insistence that the American government and the people to which it owes its first loyalties to retain the legally recognized right to decide when to go to war. And keep in mind: Congress was determined to reserve the right to stay out of a conflict in Europe as the Cold War was reaching its height.

Just as important: The European allies recognized this right – and its implications – as well, especially after the Soviet Union’s development of major nuclear forces greatly increased the risk to the American homeland of nuclear attack if it plunged into war on the allies’ behalf. We know this for sure because the continuing ambiguity ultimately persuaded both the British and French to create their own nuclear forces. As former French President Charles de Gaulle warned, the United States could not reasonably be expected to endanger the existence of New York or Detroit to save Hamburg or Lyons.

Tragically, American leaders were so strongly opposed to its allies taking back control over their own fates that they strove almost fanatically to convince the Europeans that the United States could indeed be trusted. And Washington put its money where its mouth was, stationing hundreds of thousands of American soldiers, sailors, and air force personnel and their families on or around the European continent. The idea was to create a “trip wire” aimed at denying any U.S. President a real choice of rushing to Europe’s defense with whatever threats or means were necessary. For standing by in the face of aggression would mean a slaughter or American troops and possibly innocents by vastly superior Soviet military forces.

Even during this era of high East-West tensions, however, American leaders never completely lost sight of the desirability of shifting as much of the burden of nuclear risk as possible onto the Europeans – while maintaining as much control as possible over nuclear weapons use. The transatlantic feud over intermediate-range nuclear forces – which threatened to confine the nuclear damage of any East-West war to Europe, leaving the American and Soviet homelands unscathed – was only one prominent example. And even this U.S. aim was fatally muddied, or at best thoroughly confused, by the continuing enormous military presence in Germany, directly in the likeliest path of the Soviet conventional juggernaut.

After the Cold War ended, the tripwire was steadily dismantled, but American presidents continued to treat Article Five as an ironclad promise to defend NATO members militarily – as demonstrated by the 2013 Obama statement in the Atlantic article linked above. Moreover, once Russian military and paramilitary activity began to increase in Moscow’s “near abroad,” Washington began, hesitatingly, to be sure, to respond to the demands of the newest NATO members in Russia’s sights for U.S. tripwire forces of their own.

Hence the charges that President Trump’s latest statement could dangerously destabilize NATO’s eastern flank. But there’s far more to the situation. In the first place, there’s much evidence linking Russia’s new revanchism to NATO’s expansion eastward right up to Russia’s borders. Second, if Article Five were rigidly applied to new NATO members such as the Baltic states or former Soviet bloc countries like Poland, the United States would be running the risk of nuclear attack on behalf of countries that (a) are completely un-defendable with conventional military forces alone, because they’re right next door to Russia; and (b) consequently, have never been considered vital or even significant interests of the United States.

Troublingly, however, despite the latest Trump statement (or lack thereof), which arguably could inject the Eastern European countries with a needed dose of realism concerning their real options in dealing with Moscow, the president has so far continued the policy of incrementally responding to these countries’ requests for tripwires.

In other words, his big mistake isn’t casting doubt on America’s commitment to these and other European countries. For if the United States might have balked risking New York or Detroit for Hamburg or Lyons, it’s certainly not going to jeopardize an American city or two to save Warsaw or Vilnius. Instead, Mr. Trump apparently is trying to fence-straddle here, which could well create the worst of both worlds on both sides of the Atlantic.

(What’s Left of) Our Economy: U.S. Trade Deficit Took a (Largely Asian) Holiday in February

Tags

Asia, Census Bureau, China, exports, Germany, high tech goods, imports, Japan, Made in Washington trade deficit, manufacturing, New Year, non-oil goods trade deficit, recovery, South Korea, Trade, trade deficit, Trump, {What's Left of) Our Economy

America’s goods and services trade deficit dropped by a marked 9.58 percent on-month in February from the near-five-year high it reached in January. Largely responsible were narrower trade gaps with China (down 26.64 percent) and other Asian countries celebrating their new year. In turn, these results contributed to smaller shortfalls in the manufacturing (down 19.88 percent) and high tech goods (down 46.39 percent) so prominent in their commerce with the United States. Combined goods and services exports in February inched up sequentially to reach their highest level ($192.87 billion) since December, 2014 ($197.46 billion).

Goods exports rose slightly (to $128.46 billion) – their best total since April, 2015 ($128.97 billion). High tech goods imports, meanwhile dropped to their lowest level ($25.39 billion) since February, 2015 ($28.80 billion). In addition, the total trade deficit, the goods deficit, total imports, and goods imports declined by their biggest sequential amounts since last March. Although Germany’s trade and currency practices have been targeted by the Trump administration, February’s goods trade shortfall with Germany ($4.44 billion) was the smallest since January, 2013 ($3.93 billion).

The real non-oil goods deficit – which is heavily influenced by policy and thus should be considered Made in Washington – decreased by 7.30 percent, which suggests that trade’s recovery era drag on U.S. growth will diminish.

Here are selected highlights of the latest monthly (February) trade balance figures released this morning by the Census Bureau:

>The February U.S. trade deficit seemed to take (an Asian) holiday. Its 9.58 percent drop from January’s (downwardly adjusted) near-five-year high of $48.17 billion to $43.56 billion largely reflected subdued business in Asian export-heavy economies that celebrated their new year.

>The longstanding and enormous U.S. merchandise trade deficit with China, for example, plunged by 26.64 percent sequentially in February – from $31.30 billion to $22.97 billion. U.S. goods exports to the still strongly growing Chinese economy decreased by 2.72 percent, but American goods imports were down by 20.82 percent.

>Similarly, the merchandise shortfall with Japan fell by 14.64 percent on month in February, from $5.47 billion to $4.67 billion. U.S. goods exports actually grew (by 3.38 percent) but merchandise imports shrank by a great 6.02 percent.

>In addition, in February the goods trade gap with free trade agreement partner Korea nosedived by almost half – from $2.59 billion to $1.30 billion. U.S. merchandise exports to Korea climbed by 6.06 percent, but the much greater amount of imports was off by 18.21 percent.

>The smaller Asia deficits also showed up in February’s manufacturing and high tech goods trade flows.

>America’s chronic and huge manufacturing trade deficit slid by 19.88 percent, from $75.54 billion to $60.52 billion. Manufactures exports inched up by 0.87 percent, but imports were down 9.07 percent.

>In high tech goods, the U.S. shortfall cratered by 46.39 percent, from $8.46 billion to $4.54 billion. Exports of these products decreased by 2.57 percent, to reach their lowest level since last February ($25.57 billion), but imports dropped by 13.31 percent, to $29.93 billion – their lowest level since February, 2015 ($28.80 billion).

>February saw America’s total exports grow by only 0.19 percent, but that was enough to achieve their highest total ($192.87 billion) since February, 2014 ($197.46 billion).

>Goods exports in February advanced modestly, too (by 0.27 percent on month), but that gain resulted in their best monthly performance since April, 2015 ($128.97 billion).

>Meanwhile, in February the total trade deficit, the goods deficit, total imports, and goods imports fell by their biggest monthly drops since last March – though the latest declines themselves were considerably smaller.

>The 9.58 percent February decrease in the combined goods and services shortfall compares with last March’s 18.27 percent.

>The 6.56 percent February shrinkage of the goods deficit compares with last March’s 12.14 percent decline.

>The 1.77 percent February decline in total imports compares with last March’s 4.65 percent.

>And the 2.13 February percent fall-off in goods imports compares with last March’s 5.59 percent.

>President Trump’s administration has charged Germany with racking up excessive trade surpluses due to currency manipulation and other protectionist practices, but in February, Germany’s merchandise trade surplus with the United States dropped for the fourth straight month. In fact, the $4.44 billion total was the lowest since January, 2013’s $3.93 billion.

>Also down in February was the inflation-adjusted U.S. non-oil goods deficit. These trade flows – which are heavily influenced by American trade agreements and similar policies – are decidedly Made in Washington, and throughout the current economic recovery, they have dragged on feeble U.S. growth. As of year-end, 2016, their increase had slowed cumulative recovery growth by 17.64 percent, or $433.43 billion.

>Calculating the growth drag for the first quarter of 2017 will require a release of first quarter GDP figures – which are scheduled for later this month. But if the Made in Washington deficit continues to shrink, trade could well wind up making a rare net contribution to the expansion.

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

Tags

bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.