U.S. Trade Deficit in Manufactures Up by 30%

Need to Know . . .

  • China is pursuing an economic strategy to fundamentally restructure its exports from labor-intensive to technology-intensive industries
  • Within high-technology industries, China’s lead over the U.S. is widest in informational technology goods
  • In the first quarter, the $88 billion U.S. deficit in manufactures with China accounted for 62% of the global deficit

U.S. exports of technology-intensive manufactures of $282 billion in the first quarter of 2015 were 76% of total merchandise exports, but they face a large and rapidly growing trade deficit. The deficit in manufactures in the first quarter, compared with 2014, as shown in Table 1, soared by $33 billion, or 30%, which equates to a net loss of about 230,000 American manufacturing jobs for this one quarter. Exports were down by 2% and imports were up by 7%. The Chinese trade surplus also soared, by $45 billion, or 24%, with exports up by 5% and imports down by 8%.

Table 1 – U.S. and Chinese Global Trade in Manufactures*

*SITC 5-8 Source(s): U.S. Census, FT-900, and China’s Customs Statistics (Monthly Exports and Imports)

*SITC 5-8
Source(s): U.S. Census, FT-900, and China’s Customs Statistics (Monthly Exports and Imports)

This huge increase in the U.S. deficit, after a 14% deficit increase in the fourth quarter of 2014, and with the higher dollar’s adverse impact on price-sensitive manufactures, presents a grim outlook for U.S. manufacturing production and jobs for 2015, which these quarterly MAPI Foundation reports will continue to report. The soaring Chinese surplus, also following a 14% rise in the fourth quarter, presents a more complicated picture in view of developments within the Chinese economy, and brief comments on both economies are provided below. First, however, more detail on U.S. and Chinese exports in high-technology industries and a bilateral breakdown of the U.S. deficit.

U.S. and Chinese Exports of High-Technology Industries
China has been pursuing an export-led, technology-oriented economic strategy that has resulted in a fundamental restructuring of Chinese exports from labor-intensive to technology-intensive industries, with Chinese firms shifting labor-intensive production to low-wage Southeast Asian nations, such as Bangladesh, Vietnam, and Myanmar. The results, shown in Table 2, present U.S. and Chinese exports of the 10 largest high-technology export industries for the first quarter of 2014 and 2015, which in 2015 accounted for 66% of total U.S. manufactured exports and 52% of Chinese exports. If other, smaller high-technology industries were included, these shares would be significantly higher.

Table 2 – U.S. and Chinese Exports of High-Technology Industries* ($billions)

*SITC 54, 71-72, 74-79, 87 Source(s): U.S. Census Bureau, FT-900, and China’s Customs Statistics (Monthly Exports and Imports)

*SITC 54, 71-72, 74-79, 87
Source(s): U.S. Census Bureau, FT-900, and China’s Customs Statistics (Monthly Exports and Imports)

For all 10 industries, Chinese exports of $254 billion in the first quarter of 2015 were 37% larger than the $185 billion of U.S. exports, and the $10 billion growth from 2014 was double the $5 billion U.S. growth. Even more disturbing, although not shown in the table, China had a large surplus for the 10 industries, up from $64 billion in 2014 to $82 billion in 2015, while in the other direction the $34 billion U.S. deficit in 2014 doubled to $70 billion in 2015. This is a sad picture of decline in U.S. export competitiveness relative to China for high-technology industries.

The varying competitive performance among the industries is also of interest. The Chinese lead is widest for the three IT industries, listed 5 through 7, where Chinese exports in 2015 of $168 billion were more than three times larger than the $52 billion of U.S. exports. For the three machinery industries, listed 2 through 4, both the United States and China recorded $43 billion of exports in 2015; these Chinese exports grew by $3 billion, or 8%, from 2014, while U.S. exports were flat.

The United States had the biggest lead in medical and pharmaceutical products, $14 billion versus $3 billion in 2015, although trade was relatively smaller compared to IT and machinery. The largest U.S. export leads, well ahead of China, were for road vehicles, reflecting the highly trade-integrated North American automotive industry, although globally the United States is in large deficit in this sector, and for other transport equipment, thanks largely to Boeing.

These are the basic facts about trade in high-technology industries, which warrant serious consideration in terms of U.S. trade strategy to strengthen export competitiveness.

U.S. Bilateral Trade Balances in Manufactures
Table 3 presents U.S. bilateral trade in manufactures in the first quarter of 2015 for 10 selected trading partners, with huge differences by country and region. The overriding picture in Table 3 is that the U.S. trade deficit in manufactures centers on Asia. The $88 billion deficit with China is by far the largest, amounting to 62% of the global deficit. The three other listed Asians bring the share of the global deficit to 81%, and if all export-oriented Asians were included, the total Asian deficit would be much larger than the U.S. global deficit. Moreover, for the four listed Asians, U.S. imports of manufactures from China were more than five times larger than U.S. exports, for India three times larger, and for Japan and South Korea more than double. This extremely unbalanced trade in the strategic, technology-intensive manufacturing sector raises vital questions about fair and balanced trade.

Table 3 – U.S. Bilateral Trade Balances in Manufactures, First Quarter 2015

Source(s): U.S. Census, FT-900

Source(s): U.S. Census, FT-900

For the four European nations listed, there is a substantial U.S. trade deficit, but it reflects the very large financial and trade imbalances within the eurozone, and most importantly the extremely large U.S. deficit with Germany of $17 billion, with U.S. imports of $28 billion almost three times larger than exports of $11 billion. In striking contrast, U.S. trade with the United Kingdom, not a member of the eurozone, is in balance. A reduction of the U.S. deficit with the eurozone will depend on what happens within the eurozone, which at this point is very unclear.

There is finally, and very importantly, the trade relationship in manufactures with NAFTA partners Canada and Mexico. Free trade and investment in North America, with market-based exchange rates, has led to very high growth and mutual gains from trade for all three nations.For a full analysis, in historical context, see Ernest H. Preeg, NAFTA: A 50-Year Success Story for U.S. Manufacturing (MAPI Foundation, April 2014). In the first quarter of 2015, U.S. NAFTA exports of $99 billion amounted to 35% of global exports, far larger than the $41 billion of exports to the four listed Asian nations. Moreover, the United States had a small trade surplus with NAFTA partners of $2 billion, with a moderate surplus with Canada offsetting the deficit with Mexico. And yet outspoken protectionist voices in the United States have vilified NAFTA as detrimental to U.S. production and jobs. As shown in Table 3, however, these protectionists are either ignorant of the facts or deliberately misleading for political ends.

The U.S. Trade Policy Course Ahead
The immediate course ahead in 2015 for U.S. trade in manufactures is grim, in part from the adverse effects of the stronger dollar on price-sensitive manufactures, and in part from mercantilist policies by others, mostly in Asia, to stimulate exports, especially through undervalued exchange rates. The second and third quarter MAPI Foundation reports on the resulting trade imbalances will be especially revealing for developing an effective U.S. policy response to restore export competitiveness.

The course ahead for China is less clear because of difficult restructuring underway within the Chinese economy. There are conflicts between reduced investment and industrial growth and increased services and domestic consumption, on the one hand, and the goal of becoming the preeminent advanced-technology superstate and dominant center of a newly industrialized Asia. A mercantilist trade strategy for manufactures resolves this conflict, but at considerable cost to trading partners, and most importantly to the United States. The Chinese trade surplus in manufactures in 2014 soared to a stunning $1 trillion, and based on the first quarter results, the surplus is headed substantially higher in 2015. The bottom line is that the trade surplus now accounts for half or more of Chinese manufacturing production and jobs, which would suffer large losses if the surplus began to decline.

In response, the United States and like-minded trading partners need an integrated trade and exchange rate strategy to restore a balanced, multilateral system of trade, which will require strong and sustained U.S. leadership. This challenge, in broad systemic and analytic terms, has been presented in my April 2015 MAPI Foundation report, The Decline of U.S. Export Competitiveness for Manufactures and Its Consequences for the World Economic Order. And if an effective policy response is not forthcoming, policy conflict and trade disruption could well ensue.

Kristin Graybill