U.S. Exports Pivot Away From Asian Markets

Tuesday, July 29, 2014

U.S. Exports Pivot Away From Asian Markets

There has been much talk about the Obama defense strategy to pivot toward Asia so as to balance the growing Chinese military presence and capability. Of far broader and greater long-term importance, however, is U.S. export competitiveness, which has been pivoting away from Asian markets, while Chinese exports to the region soar. From 2009 to 2013, U.S. merchandise exports to 13 principal Asian trading partners grew by only 37%, while exports to the rest of the world were up by 52%. And in dramatic contrast, Chinese exports to the Asian markets grew by 85%. As a result, Chinese exports rose from roughly double U.S. exports in 2009 to 2.7 times larger in 2013. Even more disturbing, U.S. trade deficits with almost all of those 13 Asian trading partners, as well as with China, surged during the four years, up by $153 billion to $478 billion in 2013, amounting to 70% of the global deficit.

This report addresses the U.S. export competitiveness pivot away from these Asian markets, and is in two parts. The first part presents trade accounts for U.S. and Chinese trade within Asia from 2009 to 2013, and export growth for the first half of 2014. The second part comments on three policy issues related to the U.S. export pivot away from Asia: currency manipulation, the TPP trade negotiations, and transition from the dollarized financial system.

The U.S. Export Pivot
U.S. and Chinese merchandise exports to 13 principal Asian trading partners1 from 2009 to 2013 are presented in Table 1. U.S. global exports grew by 50% over the four years, but exports to the 13 Asian nations grew by only 37%, while exports to the rest of the world were up by 52%. And, in parallel, Chinese exports to the 13 Asian nations soared by 85%, or more than twice as fast as U.S. exports. Moreover, this very large export growth differential carries over to all 13 Asian trading partners. Chinese exports grew 40% faster to South Korea, roughly doubled U.S. export growth to Japan and India, grew three times faster to Vietnam, and grew five times faster to Malaysia. Thus U.S. exports have been pivoting away from principal Asian markets, and most strikingly relative to China.

The resulting absolute levels of Chinese exports in 2013, as shown in the first column of figures in Table 1, required an adjustment related to how China records its trade through Hong Kong. China records exports through Hong Kong as exports to Hong Kong, while imports through Hong Kong are recorded by the country of origin. Thus, in 2013, recorded exports to Hong Kong were $385 billion, or 17% of global exports, while imports were only $16 billion, or less than 1% of global imports, with a resulting trade surplus with Hong Kong of $369 billion, much larger than the global surplus of $260 billion. This anomaly in recording exports to and imports from Hong Kong results in substantially smaller exports and trade surpluses in recorded bilateral trade with the rest of the world, on average by 16%. In order to adjust for this in Table 1, Chinese official export figures for 2013 for the 13 Asian markets have been increased by 15% as a reasonable estimate of actual exports.

Table 1 – U.S. and Chinese Exports to Asian Trading Partners, 2009-2013

*Estimated, based on a 15% upward adjustment related to Hong Kong
**Negligible; U.S. exports in 2009 were less than $0.05 billion
Source(s): U.S. Census Bureau, FT-900, and China’s Customs Statistics (Monthly Exports and Imports)

In 2009, not shown in the table, Chinese exports to the 13 Asian markets were roughly double U.S. exports. By 2013, however, as a result of the much higher growth of Chinese exports throughout the region, Chinese exports of $707 billion were 2.7 times larger than the $259 billion of U.S. exports. And again, the great disparity prevailed in all 13 markets. Chinese exports to Japan, South Korea, and India were about 2.5 times larger than U.S. exports, to Malaysia and Indonesia at least 4 times larger, and to Vietnam 10 times larger. The smallest disparities were with Taiwan, with Chinese exports 1.8 times larger, and Australia and Singapore, 1.7 times larger.

This disappointing U.S. export performance in the 13 Asian markets stands in sharp contrast with U.S.-China trade, which has been growing more rapidly in both directions, but with U.S. imports more than three times larger than exports. In 2013, U.S. exports to China were $122 billion, imports were $440 billion, and the deficit rose to $318 billion.

Even more disturbing is the rapid growth in U.S. trade deficits, from 2009 to 2013, with almost all of the 13 markets, as well with China, as shown in Table 2. The deficit with the 13 rose by 63% to $160.0 billion in 2013, even faster than the 40% increase in the deficit with China to $318.4 billion. The deficit with Japan was up by $28.4 billion, with South Korea by $10.0 billion, with Vietnam by $10.4 billion, and with India by $15.1 billion. The 13 plus China thus registered an increase in the U.S. deficit of $153.2 billion, or 47%, to $478.4 billion in 2013, which amounted to 70% of the $688.0 billion global deficit.

This is the four-year picture of a large U.S. export competitiveness pivot away from the 13 Asian markets, both in terms of export growth, which was much higher for the rest of the world, and the rapidly growing regional trade deficit, including China, now up to 70% of the global deficit. Moreover, U.S. exports to Asia continued their lackluster growth relative to China during the first half of 2014. U.S. exports to the 13 Asian markets were up by only 3% for January through May, while Chinese exports grew three times faster, at 9%. And if these growth rates continue during the second half of the year, the five-year export growth, from 2009 to 2014, will be 41% for the United States and 102% for China.

Table 2 – U.S. Trade Balances With Asian Trading Partners

Source(s): U.S. Census Bureau, FT-900

This final observation has a sad and striking irony for President Obama’s trade strategy. He pledged to double U.S. exports over these five years, while in Asia, China has co-opted the doubling path while U.S. export performance in the 13 markets was well below half of the president’s goal.

This export competitiveness pivot away from Asia raises important questions as to what will happen over the next five years. Will Chinese exports rise from triple to quadruple U.S. exports while the U.S. regional trade deficit continues to grow at a rapid pace, or will the U.S. export pivot away from Asia reverse course? And what are the economic policies in play that are causing this extraordinary shift in trade competitiveness across the Pacific, to the detriment of the United States?

The Trans-Pacific Export Challenge Ahead
The progressive loss of U.S. export competitiveness across the Pacific centers on the technology-intensive manufacturing sector, and is the result of radically different trade strategies by Asians compared with the United States. In 2013, 75% of U.S. exports to the 13 Asian markets were manufactures, as were 95% of Chinese exports, and the large majority of U.S., Chinese, Japanese, and South Korean manufactured exports are in high-technology industries.2

As for national economic strategies, first Japan and South Korea, then China, and more recently India and some other Asian nations, have pursued export-oriented growth, centered on the manufacturing sector, including an ever-larger trade surplus. In short, a mercantilist growth strategy, which has intensified within the export-oriented economic recovery strategies from the 2008 global recession. And the United States, in near total contrast, has almost entirely ignored the resulting rapid growth in the trans-Pacific trade deficit in manufactures, as well as lackluster export growth, with great loss to American manufacturing jobs. U.S. economic strategy has focused far more on domestic objectives, often with adverse impact on export competitiveness for manufactures.

This radical difference and underlying conflict in trade strategies across the Pacific deserve a comprehensive, in-depth analysis for charting a more export-competitive U.S. course ahead. Only brief comment is offered here on three related issues confronting the international trade and financial system: currency manipulation, the Trans-Pacific Partnership (TPP) trade negotiations, and the transition underway from the longstanding dollarized financial system.

Currency manipulation. Currency manipulation, whereby a government intervenes in currency markets to lower its currency below its market-based level, is the ultimate mercantilist policy instrument. If China manipulates its currency 30% below its market level, the result is an across-the-board 30% surcharge on imports and a 30% subsidy for all of its exports. IMF Article IV obligates members not to manipulate their currencies so as to gain an unfair competitive advantage in trade, with manipulation defined as protracted, large-scale official purchases of foreign exchange, which have the direct and immediate effect of lowering the currency. And if the $4 trillion of official Chinese purchases over the past dozen years are not protracted and large scale, IMF Article IV is a travesty rather than a meaningful anti-mercantilist obligation. Moreover, while China has been the outstanding manipulator, other Asian nations, with a dominant, rapidly growing share of their trade with China, have seen it in their interest to peg their currencies to the Chinese currency, thus becoming manipulators as well, with results evident in Table 2.

The U.S. response to this unprecedented scope of currency manipulation in violation of IMF obligations has been total denial. Twice each year, the secretary of the treasury is required to report to the Senate Banking Committee on currency manipulation, and for years, he has stated that no nation, including China, has been manipulating its currency in violation of its IMF obligations.

The TPP trade negotiations. The United States has been negotiating a trans-Pacific free trade agreement for five years, an effort that recently became much more important when Japan joined the negotiations. Such an agreement would stimulate trade among members across the Pacific, and with the nonparticipation of China, an agreement would help the United States regain market share in some Asian markets. The negotiations are currently bogged down, however, most importantly by the inability of the president to obtain trade negotiating authority from the Congress, where Democratic leaders in both houses oppose the authority. In the past, such negotiating authority has required bipartisan leadership support in order to obtain a majority.

There are also important substantive issues in contention that became clear in draft legislation considered in the House. One noteworthy issue is currency manipulation, where a bipartisan House majority wants a commitment in the TPP that participants will not manipulate their currencies. If the United States and participant Asian nations open their markets to free trade, and the Asian nations then manipulate their currencies against the dollar, there could be an acceleration of the growing U.S. deficit thanks to free trade. Such a currency manipulation provision in the TPP, however, would be almost impossible for the United States to pursue. How could the U.S. trade representative insist on a currency manipulation commitment in the TPP when the secretary of the treasury, twice each year, states that currency manipulation does not exist? The prospect for a TPP agreement, therefore, is exceedingly dim for 2014 and highly problematic for 2015.

Transition from the dollarized financial system. The dollarized international financial system of the past seven decades is in transition to some form of multi–key currency relationship. Principal economic dimensions for the change are the sharp decline of the U.S. share of global exports and the huge accumulation of U.S. foreign sovereign debt. For manufactures, the dominant and fastest growing sector of trade, the U.S. share of global exports plunged from 19% in 2000 to 12% in 2012, while the Chinese share tripled from 7% to 22% and the EU share was down slightly, from 22% to 19%. The related large U.S. current account deficits, plus large-scale official dollar purchases as others manipulate their currencies, quadrupled U.S. foreign sovereign debt from $2.6 trillion in 2000 to $10.3 trillion in 2013.

A full analysis of this far-reaching systemic change has been presented elsewhere.3 Of relevance here is that the transition is more likely to be driven by financial markets than managed by key currency governments, and that the regional orientation, as shown for U.S. trade in Tables 1 and 2, will take place largely if not principally in Asian financial markets. The implications of this systemic transition are far-reaching, including, yet again, the currency manipulation issue, but they have received almost no official U.S. attention.

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This concludes the discussion of the recent U.S. export pivot away from Asian markets and some related policy issues. The questions raised certainly deserve more serious examination. MAPI provides quarterly reports on U.S. and Chinese trade in manufactures, and these reports for the second half of 2014 and 2015 will shed important further light on where the trans-Pacific U.S. trade relationship is headed. It is not too soon, however, for the United States to take actions to reduce lagging exports to Asia. A first step would be to state that China and some other Asian nations are manipulating their currencies in violation of their IMF obligations, and that such manipulation should stop.

Finally, there are broader U.S. geopolitical as well as commercial interests in play that are not discussed in this technical trade report. The need to pivot U.S. defense strategy toward Asia to balance the growing Chinese military capability has received much attention, but what are the geopolitical implications of the rapidly growing Chinese trade and related investment engagement in the region, as Chinese exports rise from tripling toward quadrupling U.S. exports? Something for geopolitical experts to ponder.

 

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  • 1. Australia is a trans-Pacific trading partner, but is included here more broadly within the Asian trading region.
  • 2. Many business services are integrated with manufacturing and the United States has a trade surplus in business services, about one-quarter as large as the deficit for manufactures, but this surplus leveled off in 2012, in the face of rapidly growing Indian and Chinese competition. See Ernest H. Preeg, U.S. Trade Surplus in Business Services Peaks Out (MAPI, January 2014).
  • 3. See Ernest H. Preeg, The Dollar Twilight Dilemma, June 18, 2014, in a presentation before the American Fiber Manufacturers Association, available on the MAPI website.