U.S. Trade Deficit in Manufactures Surges by 19% in the Second Quarter, Chinese Surplus Up by 9%

Thursday, August 14, 2014

U.S. Trade Deficit in Manufactures Surges by 19% in the Second Quarter, Chinese Surplus Up by 9%

The U.S. trade deficit in manufactures surged by $21.6 billion, or 19%, in the second quarter, compared with 2013, following an 8% increase in the first quarter. In the opposite direction, the Chinese surplus increased in the second quarter by $20.0 billion, or 9%.

These sharply divergent trends for the dominant trading sector, which accounts for 75% of U.S. merchandise exports and 95% of Chinese exports, raise important questions about the trade policy course ahead and warrant a closer look at the details, as provided in the following three tables. Table 1 presents U.S. and Chinese global trade in manufactures in the second quarters of 2013 and 2014. U.S. exports were up by a lackluster 3%, while imports grew by 7%, with a resulting surge in the deficit of $21.6 billion, or 19%. This follows 8% growth in the deficit in the first quarter and indicates momentum toward double-digit deficit growth for the calendar year.

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

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

The Chinese surplus declined by 8% in the first quarter, but this decline reversed to a $20.0 billion, or 9%, increase in the second quarter. China is clearly pursuing an export-led growth strategy to stimulate lagging GDP growth, including very large official foreign currency purchases to lower the exchange rate, and is achieving robust industrial growth, much if not most of which is for export. Whether the high growth in the trade surplus will continue is not clear, with growing export competition from other Asian and European exporters. This competition centers on exports of high-technology industries, which account for the majority of both U.S. and Chinese manufactured exports, as shown in Table 2.

Table 2 presents U.S. and Chinese exports for the nine largest high-technology export sectors in the second quarters of 2013 and 2014. In 2014, these sectors account for 60% of total U.S. manufactured exports and 50% of Chinese exports, with Chinese exports of $274.3 billion 50% larger than the $183.4 billion of U.S. exports. Sharp differences in performance by sector tell the full story. The only two sectors where the United States has far larger exports are road vehicles, reflecting very large U.S. automotive exports to Canada and Mexico within NAFTA, and other transport equipment, thanks to Boeing. Indeed, half of the $4.6 billion nine-sector U.S. export growth in 2014 comes from this latter sector. For the first three listed machinery sectors, exports were roughly balanced in 2014, with $45.5 billion for the United States and $46.8 billion for China, but with the 2014 growth by China of $3.1 billion much higher than the $1.2 billion U.S. growth. Most important by far for Chinese exports are the three IT sectors—office and data processing equipment, telecommunications and sound recording, and electrical machinery and appliances—where Chinese exports in 2014 of $185.6 billion were more than three times larger than the $53.4 billion of U.S. exports. There was a $2.9 billion decline in 2014 of Chinese exports of electrical machinery and appliances, but this relates to an export surge in the second quarter of 2013, and it will be revealing to see the growth performance of this largest Chinese export sector in the second half of the year. Finally, the professional and scientific instruments sector is noteworthy not only because of its especially high-technology content, but for the narrowing U.S. export lead, approaching parity. In 2014, U.S. exports of $15.7 billion were up by only $0.1 billion while Chinese exports of $14.8 billion were up by $0.7 billion.

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

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

In this overall picture of a rapidly growing U.S. deficit and Chinese surplus, concentrated in high-technology industries, another key dimension is how the growth of the U.S. deficit is spread among major Asian and European trading partners. U.S. bilateral deficits with the three largest Asian export competitors—China, Japan, and South Korea—and the three largest members of the eurozone—Germany, France, and Italy—are presented in Table 3. In 2014, the United States was in deficit with all six, and five of the deficits increased from 2013.

Table 3 – U.S. Bilateral Deficits in Manufactures* ($billions)

*SITC 5-8
Source(s): U.S. Census, FT-900

The economic forces in play for these growing bilateral deficits are complex, and no attempt is made here to explain them. Just three observations are made to help focus a more in-depth examination. First and most obvious, China dominates. U.S. manufactured imports from China in the second quarter of 2014 of $110.5 billion were five times larger than the $20.7 billion of U.S. exports to China, with a resulting deficit of $89.8 billion, which amounted to 66% of the global deficit shown in Table 1. Moreover, the $6.9 billion increase in the deficit was larger than the increases with the other five combined. The second observation is that the deficits with the other two Asian nations listed, Japan and South Korea, rose only slightly, and the deficit with Japan actually declined by $0.2 billion. This is a change from the faster-growing deficits over the past several years, and these balances will be tracked over the second half of this year in these quarterly MAPI reports. And third, U.S. deficits with the three largest members of the eurozone all increased in 2014, together by a substantial $4.6 billion, to $27.9 billion, which flies in the face of eurozone claims that the euro is overvalued to the dollar. Indeed, the eurozone has a current account surplus of 2.6% of GDP, compared with a 2.5% deficit by the United States. The eurozone, in fact, is engaged in a mercantilist trade strategy of ever-larger trade surpluses with nonmembers to help offset internal trade imbalances, most glaringly shown in the table for the rapidly growing Italian surplus in manufactures with the United States.

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As for the important questions ahead for the rapidly growing U.S. trade deficit for manufactures, the number one question is should the United States adopt a results-oriented strategy for reducing the deficit, and if so, what should it be? The deficit is heading toward $600 billion this year, or about half the size of domestic production, while most major Asian and European competitors are pursuing an export-led growth strategy centered on the technology-intensive manufacturing sector, with the United States playing a largely passive role as importer of last resort. An effective U.S. response would have to be comprehensive, including trade, exchange rate, domestic economic, and foreign policies, but there is no apparent serious analysis underway, in or out of government, to develop such a strategy.

More immediate in this election year, the U.S. deficit in manufactures is on track to increase by $60 billion in 2014, which equates to a net loss of about 400,000 American manufacturing jobs in just one year.1 Should this not be an issue of serious concern and debate for candidates on both sides of the political aisle?

 

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  • 1. Studies show that a $1 billion increase in the trade deficit for manufactures results in a net loss of 4,000 to 10,000 jobs, depending largely on the mix of industries examined, and the midpoint of 7,000 is used here as a reasonable estimate.