U.S. Trade Deficit: August 2015
The U.S. trade deficit in manufactures soared by 30% in the first quarter, inflated by weather and a West Coast dock strike, and then adjusted to a lower 15% increase in the second quarter. For a more balanced first half of the year, U.S. manufactured exports declined by 1% from 2014, imports were up by 5%, and the deficit surged by 19%, or by $48 billion, which equates to a trade-related loss of 300,000 American manufacturing jobs. In the other direction, the Chinese trade surplus in manufactures surged by 14%, or by $59 billion, during the first half of the year.
These quarterly MAPI Foundation reports on U.S. and Chinese trade in manufactures usually focus on the most recent quarter, but for the reasons stated above, this report begins with summary figures on trade in the second quarter, and then proceeds with a more detailed analysis of trade during the first half of the year.
Table 1 presents U.S. and Chinese exports, imports, and the trade balance for the second quarters of 2014 and 2015. U.S. exports were $298 billion, down 2% from 2014, imports were $456 billion, up 3%, and the deficit rose by $21 billion, or 15%. Chinese exports were also down by 2% while imports declined by 8%, with a resulting increase in the trade surplus of $14 billion, or 6%. As noted above, however, these still substantial increases in the trade imbalances were much lower than the 30% increase in the U.S. deficit and the 24% increase in the Chinese surplus in the first quarter, influenced by weather and the dock strike, and then offset by lower increases in the second quarter.
Table 1 – U.S. and Chinese Global Trade in Manufactures, 2nd Quarter 2014/2015*
Table 2 presents, in the same format, trade in manufactures for the first halves of 2014 and 2015. U.S. exports in 2015 were down 1%, imports rose by 5%, and the deficit soared by $48 billion, or 19%. Chinese manufactured exports grew by 1%, while imports plunged by 8%, with a resulting increase of $59 billion, or 14%, in the trade surplus.
Table 2 – U.S. and Chinese Global Trade in Manufactures, 1st Half 2014/2015
Thus although global trade in manufactures is growing at a much slower pace in 2015, the U.S. and Chinese trade imbalances continue to surge at high, double-digit rates. The U.S. $48 billion deficit increase in the first half of the year equates to a loss of 300,000 trade-related American manufacturing jobs, and the deficit is on track for a loss of 500,000 or more jobs for the calendar year. This is the sixth consecutive year of soaring trade deficits and very large job losses, which from 2009 to 2015 will total 2.5 million, or 25% of the sector labor force.
Continued double-digit percentage growth in the Chinese surplus is more difficult to project in view of the restructuring underway within the Chinese economy, including a possible relative decline of the manufacturing sector. Nations facing such a decline in technology-intensive manufacturing often turn to mercantilist actions to offset a decline in domestic consumption growth through an increased trade surplus, as China has been doing in recent years through maintaining an undervalued currency. It has also adopted financial incentives and directives to manufacturing companies to produce more components in China and thus increase the share of domestic value-added, which has risen from 40% to 70%, and is evident in the sharp decline in manufactured imports. In any event, the Chinese trade results in the third and fourth quarter MAPI Foundation reports will be particularly revealing.
Trade in High-Technology Industries
Trade competitiveness between the United States and China is increasingly concentrated in high-technology industries, where China now holds a definitive lead. Table 3 presents U.S. and Chinese exports and trade balances during the first half of 2015 for the 10 largest high-technology sectors of trade, which made up 65% of total U.S. manufactured exports and 52% of Chinese exports. Chinese exports of $532 billion were 41% larger than the $376 billion of U.S. exports. Far more disturbing were the trade balances, with a large $166 billion Chinese surplus standing in stark contrast with the $160 billion U.S. deficit.
Table 3 – U.S. and Chinese Trade in High-Technology Industries, 1st Half 2015 ($billions)*
This imbalance favorable to China is even more striking in the competitive performance among the industries. The Chinese lead is widest for the three IT industries, listed 5 through 7, where Chinese exports of $354 billion were 3.4 times larger than the $105 billion U.S. exports. And again the trade balances are even more disturbing, with a $138 billion Chinese surplus in contrast with a $102 billion U.S. deficit. The three machinery sectors, listed 2 through 4, show largely balanced exports—$90 billion for China and $85 billion for the United States—but a $37 billion Chinese surplus versus a $21 billion U.S. deficit.
The largest U.S. export leads are for road vehicles, reflecting the highly trade-integrated North American automotive sector, although globally the United States is in large deficit, and other transport equipment, thanks largely to Boeing. The United States also has a large export lead for medical and pharmaceutical products, although again combined with a large deficit, and a small lead for professional and scientific instruments, where China, for once, is the deficit country.
U.S. Bilateral Trade in Manufactures
Table 4 presents U.S. bilateral trade in manufactures for the first half of 2015 for 10 major trading partners, who together accounted for 100% of the $301 billion global deficit. The overriding deficit picture centers on Asia. The $180 billion deficit with China is by far the largest, accounting for 60% of the global deficit, and the three other Asians listed—Japan, South Korea, and India—bring the share of the global deficit to 83%. U.S. manufactured imports from China were 5.5 times larger than U.S. exports to China, and imports from the other three Asians were 2.4 times larger than U.S. exports to them.
Table 4 – U.S. Bilateral Trade in Manufactures, First Half 2015
The U.S. deficit with the EU is sharply higher for members of the eurozone, from the undervalued euro resulting from the Greek financial crisis and uncertainty about the future of the unified currency. The United States had deficits with all three eurozone members listed, totaling $53 billion, or 18% of the U.S. global deficit, with Germany far in the lead with a $35 billion deficit, or 12% of the global deficit. And in contrast, U.S. trade with the principal non-eurozone trading partner, the United Kingdom, was in balance, with a $1 billion deficit.
The NAFTA trade figures are particularly noteworthy in light of recent politically charged criticism of the U.S. trade deficit with Mexico. In fact, U.S. trade in manufactures with NAFTA partners is in balance, with a $27 billion surplus with Canada offsetting a $26 billion deficit with Mexico. Moreover, the deficit with Mexico is relatively small, amounting to 28% of U.S. manufactured exports to Mexico, compared with the Chinese deficit at 450% of U.S. exports to China. More broadly, there have been mutual gains from the rapid expansion of trade among all three NAFTA members, with market-based exchange rates to adjust growing trade imbalances, as may soon lead to a stronger peso. Most striking, the $205 billion of U.S. manufactured exports to NAFTA partners was 35% larger than U.S. exports to the other eight listed Asian and European trading partners combined.
In conclusion, the surging U.S. trade deficit in manufactures is overwhelmingly an Asian problem, with the smaller EU deficit hopefully an interim problem. The four listed Asians accounted for 83% of the global deficit, and if all Asians were included, the deficit share would greatly exceed 100%. The deficit with the eurozone, in contrast, is not only much smaller, but also should be rectified once the eurozone financial crisis is resolved in some way.
The Threatening Course Ahead
What lies ahead for U.S. trade competitiveness for technology-intensive manufactures that make up 75% of total merchandise exports? Performance during the first half of 2015 was grim, continuing six years of rapid growth in the trade deficit and the large loss of American production and jobs. From 2009 to 2014, the U.S. trade deficit in manufactures doubled to $550 billion, while the Chinese surplus doubled to $1 trillion and the EU surplus doubled to $500 billion. And based on the first half of the year, these trade imbalances are headed toward even faster growth in 2015. Most disturbing, on August 10 China announced it is devaluing its currency relative to the dollar in order to stimulate exports, even while its $1 trillion trade surplus in price-sensitive manufactures is growing by double digits, and with an annual $300 billion current account surplus and $4 trillion of reserves in the Central Bank. Moreover, with 60% of the U.S. $600 billion annual deficit in manufactures with China, exchange rate–induced exports by China result principally in increased U.S. imports, which economists refer to as the “beggar-thy-neighbor” effect.
These MAPI Foundation quarterly reports will record the facts about trade in manufactures for the two principal protagonists, the United States and China, setting the stage for the question of what the United States should do to reduce if not eliminate its huge trade deficit and the resulting loss of U.S. production and jobs. And, of course, the grim U.S. trade figures for 2015 will be hard to ignore in the presidential debates in 2016. In broadest economic policy terms, the soaring trade deficit problem is central to disappointingly low U.S. productivity growth, with manufactures accounting for 70% of R&D expenditures and 90% of new patents and U.S. manufacturing performance deeply troubled by the loss of trade competitiveness.