Report on U.S. Trade in Manufactures
This is my final MAPI Foundation report, on U.S. and Chinese trade in manufactures during the first half of 2016, as I am retiring from MAPI at the end of August. The report also provides a breakout of U.S. bilateral trade with China and Mexico, which has become a contentious electoral issue. As will be seen, the two bilateral deficits are critically different in terms of trade composition and policy relationships.
Table 1 presents U.S. and Chinese global trade in manufactures during the first half of 2016:
Table 1 – U.S. and Chinese Global Trade in Manufactures (January to June 2016, $billions)*
The extreme contrast in export competitiveness between the two dominant trading nations, in favor of China, is shocking. Chinese exports of $935 billion were 68% larger than the $555 billion of U.S. exports. This contrast is especially striking considering that in 2000, U.S. manufactured exports were three times larger than Chinese exports.
Even more important are the trade balance figures, which provide a measure of trade-related gains or losses in manufacturing production and jobs. The measures of success for trade surplus nations are the production and jobs gained from the trade surplus, but these gains have to be offset by trade deficits and jobs lost for trading partners. This trade surplus gain, when pursued through mercantilist policies, is referred to as “beggar-thy-neighbor” policy, which brings us to Table 2.
Table 2 presents U.S. bilateral trade in manufactures during the first half of 2016 for China and Mexico, which have become contentious election issues:
Table 2 – U.S. Bilateral Trade in Manufactures With China and Mexico (January to June 2016, $billions)
The U.S. deficit with China during the first half of 2016 was $168 billion, or 55% of the global deficit, and was therefore responsible for 55% of the trade-related loss of manufacturing jobs. The $30 billion deficit with Mexico, in contrast, equates to a much smaller 10% of the global deficit. Moreover, and highly relevant to the bilateral trade competitiveness relationships, the deficit with China was 4.4 times larger than the meager $38 billion of U.S. manufactured exports to China, while U.S. manufactured exports to Mexico were 2.4 times larger than the deficit. The $91 billion of U.S. manufactured exports to Mexico were thus 2.4 times larger than the $38 billion of U.S. exports to China. These extreme differences in the composition of bilateral trade with China and Mexico are the result of fundamentally different policy relationships that can be summarized as follows:
The highly lopsided U.S.–China bilateral trade account has been rapidly rising for more than a dozen years, principally as a result of the abandonment of the balanced, rules-based multilateral economic system created at Bretton Woods in 1944, which centered on the integration of trade and exchange rate policies in view of the high price, and therefore exchange rate, sensitivity of trade in manufactures. The IMF obligates members to maintain a convertible, market-based exchange rate free of manipulation (Articles IV and VIII), although in early decades this obligation was enforced principally among the industrialized nations, with strong U.S. leadership, including the imposition of interim import sanctions in 1971 to end currency manipulation by European and Japanese allies. Since 2000, however, China and other Asian exporters have become the major export competitors for manufactures, in large part through pegging greatly undervalued currencies to the dollar, often including currency manipulation, in gross violation of their IMF obligations. And, in parallel, import restrictions and export subsidies are rampant. In short, the Bretton Woods balanced, rules-based trading system has broken down across the Pacific, and a policy decision for the United States is whether and how, in concert with like-minded trading partners, to restore a balanced, rules-based multilateral trade and financial system. To say this would be very difficult and controversial is an understatement.
The growing and now excessive U.S. bilateral deficit with Mexico in manufactures developed only over the past couple of years and is the result of the successful North American Free Trade Agreement (NAFTA). Until recently, a modest deficit with Mexico was offset by a U.S. surplus in manufactures with Canada, within NAFTA. Now, however, and unlike other troubled and less developed Latin American economies, Mexico has risen to become a “newly industrialized” economy, as did South Korea 12+ years ago. And for this bilateral relationship, within NAFTA, the U.S. response should be to press Mexico to open its internal market more fully to U.S. exports, phase out no longer warranted domestic subsidies, and certainly permit the market-based peso to rise to the dollar, all of which would work to reduce the bilateral U.S. deficit, with mutual gains from trade for both nations. And certainly, highly protectionist actions by the United States that could destroy NAFTA should be avoided.
This completes my presentation of U.S. and Chinese trade in manufactures in the first half of 2016, and I conclude with reference to my June 2016 MAPI Foundation policy analysis report, The $15 Trillion U.S. Foreign Debt. The rapid growth of this official foreign debt, about half held by central banks and the other half by commercial creditors, is principally the result of the protracted, extremely large U.S. trade deficit in manufactures and the resulting half-trillion-dollar annual current account deficit. Over the next two to four years, as interest rates rise on the $15 trillion foreign debt, there is likely to be serious trade disruption within what will be a post-dollar, multi–key currency financial world, and I recommend that the economic team of whoever wins the election give this report a serious read.
And with that, I bid my farewell to more than 50 years in trade policy officialdom and on the think tank circuit in pursuit of fair, balanced, and ever more open trade, of mutual benefit to all participating trading partners.