U.S. Trade Deficit in Manufactures Soared
The U.S. trade deficit in manufactures in 2015 soared by $89 billion, or 16%, to $650 billion, which resulted in a trade-related loss of 600,000 American manufacturing jobs, up from a job loss of 400,000 in 2014. Sixty percent of the global deficit was with China, with U.S. manufactured imports from China 5.8 times larger than U.S. exports to China.
The recorded Chinese trade surplus in manufactures increased by $48 billion, or 5%, but this understates the actual surplus because of over-invoicing of imports to circumvent capital outflow restrictions. China’s actual surplus was $1.1 trillion.
This report presents these disturbing results in detail, including U.S. and Chinese trade in the 10 largest high-technology sectors and a breakdown of U.S. trade with principal trading partners. There is also an explanation of the surge in Chinese over-invoicing of imports during the latter months of 2015.
U.S. and Chinese Global Trade in Manufactures
Table 1 presents U.S. and Chinese global trade in manufactures for 2014 and 2015 and the percent change from 2014. U.S. exports were down $40 billion, or 3%, and imports rose by $49 billion, or 3%, with a resulting surge in the trade deficit of $89 billion, from $561 billion to $650 billion, or 16%. This compares with a $61 billion, or 12%, deficit increase in 2014. The trade-related loss of American manufacturing jobs in 2015 was thus about 600,000, up from a 400,000 job loss in 2014, bringing the cumulative six-year job loss since 2009 to 2.5 million, or a quarter of the sectoral labor force.
Table 1 – U.S. and Chinese Global Trade in Manufactures*
Chinese trade statistics recorded a $59 billion, or 3%, decline in manufactured exports in 2015, of which $9 billion was iron and steel, but a much larger decline of $107 billion, or 9%, in imports, which resulted in a $48 billion, or 5%, increase in the trade surplus to $1,046 billion. The very large recorded drop in imports reflects the Chinese mercantilist trade strategy to discourage imports and increase the trade surplus so as to bolster sagging domestic demand for manufactures. For example, financial incentives and directions were given to multinational companies to produce more of formerly imported components in China.
These official Chinese trade statistics, however, significantly understate the decline of manufactured imports in the latter months of 2015 and thus also the growth in the trade surplus. The reason is that imports from Hong Kong and into free trade zones in Shanghai and elsewhere have been increasingly over-invoiced as a means of circumventing Chinese restrictions on capital outflow. In December 2015, compared with 2014, Chinese trade data recorded a 64% increase in imports from Hong Kong, while Hong Kong recorded an increase in imports of only 1%, with almost all of the Hong Kong imports in transit to China (see the January 27, 2016 Financial Times article “Invoice inflation adds to China capital flight”). Chinese imports from Hong Kong likewise increased by 70% from December 2014 to 2015. Thus the recorded decline of 9% in manufactured imports in 2015 was actually significantly larger, as was the recorded 5% increase in the trade surplus to $1,046 billion. The difference could well be into the tens of billions of dollars, clearly bringing the 2015 surplus to $1.1 trillion.
U.S. and Chinese Trade in High-Technology Industries
The rapid rise of Chinese technology-intensive export industries since 2009 is by far the most important qualitative development in the U.S.–China trade competitiveness relationship, shockingly demonstrated by the Table 2 presentation of U.S. and Chinese exports and trade balances in 2015 for the 10 largest high-technology sectors of trade, which accounted for 52% of total Chinese manufactured exports and 65% of U.S. exports. For the 10 sectors, Chinese exports were $1,127 billion, or 50% larger than the $752 billion of U.S. exports. Even more disturbing, Chinese trade was in surplus by $357 billion while U.S. trade was in deficit by $350 billion, and the Chinese surplus has soared by 128% since 2009, while the U.S. deficit is up by 166%.
Table 2 – U.S. and Chinese Trade in High-Technology Industries, 2015 ($billions)*
The full picture of the rapid rise of Chinese trade competitiveness in high-technology industries is revealed by the performance of the 10 individual industries. The only two industries where the United States maintains a large export lead are road vehicles, centered on the deeply trade-integrated North American automotive industry within NAFTA, dating back to the U.S.–Canada free trade Auto Pact of 1965, and other transport equipment, thanks largely to Boeing. But for road vehicles, the United States had a very large global deficit of $152 billion in 2015, as a result of deficits with Asia and Europe. The United States also had a lead in exports of medicines and pharmaceuticals, although the trade is relatively smaller, and the U.S. $36 billion global deficit was far larger than the $6 billion Chinese deficit.
The Chinese lead centers on the information technology industries—office and data processing equipment, telecommunications and sound recording, and electrical machinery and appliances—listed 5 through 7. Chinese exports for the three industries of $773 billion were 3.6 times larger than the $213 billion of U.S. exports, and even more striking, Chinese exports were in surplus by $302 billion, compared with a U.S. deficit of $227 billion.
For the three machinery industries, listed 2 through 4, Chinese exports of $175 billion were larger than the $165 billion of U.S. exports, and again the Chinese surplus of $73 billion compares with a U.S. deficit of $48 billion. And at least to end on a positive note, for professional and scientific instruments, U.S. exports of $60 billion are slightly higher than the $59 billion of Chinese exports, while the U.S. $8 billion surplus stands in favorable contrast with the $22 billion Chinese deficit.
U.S. Bilateral Trade in Manufactures
Table 3 presents U.S. trade in manufactures with principal trading partners in 2015 and the bilateral percentages of the global deficit. The deficit is dominated by China, with $387 billion, or 60% of the global deficit, and by the six listed Asian nations, whose deficit totaled $573 billion, or 88% of the global deficit. Also noteworthy in the Asian context, the three listed members of the Trans-Pacific Partnership (TPP) trade agreement—Japan, Malaysia, and Vietnam—recorded a deficit of $132 billion, or 20% of the global deficit, with U.S. imports from Vietnam of $34 billion, or nine times larger than the $4 billion of U.S. exports to Vietnam.
The four principal EU trading partners listed show a sharp distinction between the three members of the eurozone—Germany, France, and Italy—with a U.S. deficit of $110 billion, of which $73 billion was with Germany, and the non-eurozone United Kingdom, with only a $2 billion deficit. This reflects the undervalued euro to the dollar over the past several years for price-sensitive manufactures.
The NAFTA trade relationship with Canada and Mexico deserves to be highlighted in view of strong criticism of the deficit with Mexico during recent electoral debates. The $405 billion of exports to NAFTA were more than double the $190 billion to the six listed Asians and more than triple the $127 billion to the four EU members. And the trade balance differential is even more striking. The $11 billion NAFTA deficit, consisting of a $48 billion surplus with Canada and a $59 billion deficit with Mexico, is trivial compared with the $573 billion deficit with the six Asians and the $112 billion deficit with the four EU nations. There was a negative shift in the 2015 NAFTA balance, however, with the Canadian surplus down $15 billion and the Mexican deficit up by $13 billion, but this shift relates largely to the much larger deficits across the Pacific and the Atlantic, which include rising exchange rate–related Canadian and Mexican deficits, and the U.S. response, while dealing with the Mexican deficit, needs to begin with confronting mercantilist Asian currencies, which should benefit all three NAFTA members.
Table 3 – U.S. Bilateral Trade Balances in Manufactures, 2015 ($billions)
This completes the report on U.S. and Chinese trade in manufactures in 2015. These trade figures raise serious questions as to what lies ahead for trade in 2016, and for U.S. trade strategy in broadest terms for the next president. These MAPI Foundation quarterly reports will continue to track U.S. and Chinese trade through the election year. More important, over the next several weeks I will complete an in-depth study of where the international trading system is headed and what the United States should do to reduce the crippling trade deficit impact on U.S. manufacturing, entitled, Time to Restore a Balanced, Rules-Based Multilateral Trading System With Technology-Intensive Manufactures at Center Stage.