U.S. Trade Deficit in Manufactures Surges 9% in Fourth Quarter, Chinese Surplus Up by 10%

Wednesday, February 19, 2014

U.S. Trade Deficit in Manufactures Surges 9% in Fourth Quarter, Chinese Surplus Up by 10%


Need to Know . . .

  • Chinese exports of manufactures in 2013 were 83% larger than U.S. exports, and on track to double them in three years
  • Chinese exports in information technology sectors of $769 billion in 2013 were 3.7 times larger than the $210 billion of U.S. exports, and Chinese export growth of $72 billion in 2013 compares with a meager $3 billion of U.S. export growth
  • A broad range of export-oriented growth strategies among major trading partners, with some powerful mercantilist forces in play, pose a continuing threat to U.S. trade competitiveness for manufactures

The U.S. trade deficit in manufactures was relatively flat during the first three quarters of 2013, compared with 2012, and then surged by 9% in the fourth quarter, for a calendar year deficit of $501 billion. The Chinese surplus in manufactures rose by 10% in the fourth quarter and for the full year, to $913 billion. U.S. exports for 2013 grew by only 2%, to $1,148 billion, while Chinese exports grew four times faster, by 8%, to $2,101 billion.

These striking contrasts in the dominant sector of trade that accounts for more than 70% of U.S. merchandise exports and more than 90% of Chinese exports raise important questions as to what will happen in 2014, and the outlook is uncertain. Will the very slow U.S. export growth and fourth quarter surge in the deficit continue? Will Chinese exports continue to grow much faster than U.S. exports while the trade surplus continues to rise faster than GDP?

This report provides the U.S. and Chinese trade data for the fourth quarter and calendar year 2013 for the manufacturing sector. There is also a breakout for the nine largest high-tech sectors of trade that accounted for 60% of U.S. manufactured exports and 52% of Chinese exports, and the data show the same pattern of much larger Chinese exports growing more rapidly. The trade performance of these two largest exporting nations is then put in a global context, which has been highly unfavorable for the U.S. trade balance since 2009, and the report concludes with commentary on the uncertain outlook for 2014.

U.S. and Chinese Trade in Manufactures in 2013
Table 1 presents U.S. and Chinese exports of manufactures and the trade balances for the fourth quarter and the calendar year 2013, with the percentage growth from 2012. U.S. exports rose by only 2% for the year, up slightly to 3% in the fourth quarter. This is disappointing since trade in manufactures usually grows faster than GDP; in the second half of 2013, exports grew at a slower pace. President Obama pledged to double exports in five years, but the 2% export growth in 2013 for the dominant manufacturing sector puts it on a five-year growth path of 10% rather than 100%.

Table 1 – U.S. and Chinese Trade in Manufacturers, 2013*

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

Much more disturbing is the surge in the U.S. deficit in the fourth quarter by 9%, compared to 2012, after being relatively flat for the first three quarters, for a year-on-year increase of 2%. The 5% increase in imports in the fourth quarter is primarily responsible for the larger deficit, reflecting higher U.S. growth and enhanced export-led growth strategies by some trading partners, particularly in Asia. The $11 billion increase in the fourth quarter deficit amounts to a three-month net loss of 40,000 to 100,000 American manufacturing jobs.

The striking contrasts in U.S. and Chinese trade performance go to the heart of the rapidly changing structure of world trade in the investment- and technology-intensive manufacturing sector. Chinese exports grew by 8% in the fourth quarter and for the full year, to $2.1 trillion for the year. This was 83% larger than U.S. exports of $1.1 trillion, and on track to double U.S. exports in three years. In historical perspective, U.S. exports of manufactures tripled Chinese exports in 2000, thus resulting in a dramatic changing of places between the two largest exporting nations in only 13 years.

The continued rapid rise of the Chinese surplus in 2013, by 10% for the year and through the fourth quarter, is again even more disturbing. The $82 billion increase in 2013 produced a more than 3% increase in Chinese manufacturing output and jobs, offset by an increase in deficits by trading partners, with the United States the number one “beggarly neighbor,” in trade parlance. In 2013, U.S. manufactured imports from China were $427 billion, more than five times larger than the $76 billion of exports to China, with a resulting sectoral trade deficit of $351 billion.

U.S. and Chinese Exports of High-Technology Industries
Chinese export strategy centers on rapid growth of exports and the trade surplus for high-technology industries, and this objective can be driven by mercantilist trade and exchange rate policies. Table 2 presents U.S. and Chinese exports of the nine largest high-tech sectors of exports for 2012 and 2013. In 2013, these nine sectors accounted for 60% of U.S. manufactured exports and 52% of Chinese exports.

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

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

Chinese exports of the nine sectors in 2013 of $1,092 billion were 58% larger than the $692 billion of U.S. exports, and the $76 billion Chinese increase from 2012 was almost six times larger than the $13 billion U.S. increase. In terms of export competitiveness, the focus for the United States and China is on these nine and other high-tech industries, with China rapidly pulling ahead.

The breakdown by sector is even more pointed. The two sectors where the United States has the largest export lead over China are road vehicles, reflecting the highly trade-oriented North American free trade market, and other transport equipment, mainly Boeing. The Chinese lead centers on the three IT sectors—office and data processing equipment, telecommunications and sound recording, and electrical machines and equipment—in each of which Chinese exports in 2013 were two to five times larger than U.S. exports and with total exports of $769 billion 3.7 times larger than the $210 billion of U.S. exports. Moreover, Chinese export growth in these three sectors in 2013 was $72 billion, compared with a meager $3 billion of U.S. export growth. China is thus winning the IT export competitiveness race hands down at a very rapid pace.

The Global Challenge for U.S. Export Competitiveness
In the broader export competitiveness race for manufactures, the same downward path, especially since 2009, is clear for the United States, although not as sharply drawn as for the China relationship.1 The five largest exporters of manufactures—China, the EU (in trade with non-members), the United States, Japan, and South Korea, in that order—account for about two-thirds of global exports, and the other four recorded large increases in their surpluses from 2009 to 2012: China $416 billion, the EU $251 billion, Japan $70 billion, and South Korea $69 billion. And the United States, with a passive exchange rate policy as the center of the dollarized financial system, suffered an offsetting $192 billion increase in its deficit, resulting in a net loss of 800,000 to 2 million American manufacturing jobs in just three years.

This is the global challenge in starkest terms for U.S. export competitiveness in the strategic, technology-intensive manufacturing sector. There is little recognition of this challenge, however, by the U.S. government, with rare reference to the trade figures presented here, and with rhetorical expressions of optimism that things will get better. The results for 2014 will therefore be of deep-seated relevance for such optimism about improved U.S. trade competitiveness.

The Uncertain Outlook for 2014
The trade figures for 2013 raise important questions about the path ahead in 2014 for trade in manufactures, both for the United States and China. Will U.S. export growth of only 2% in 2013, down from 5% in 2012, bounce back? And will the surge in the deficit in the fourth quarter continue or reverse course in 2014? As for U.S. policies to strengthen U.S. export competitiveness, little positive change can be expected in 2014 for trade, exchange rate, and domestic policies. The outcome will therefore depend on whether U.S. companies can work to become more cost competitive, and this will depend in large part on what trading partners, most importantly China, do to stimulate their exports.

The outlook for China is far more complex. There has been profuse commentary on the Chinese macro policy objective to shift from excessive investment to increased consumption, but in 2013 investment continued to grow a bit faster than GDP. There is also widespread concern that Chinese GDP growth in 2014 will fall below the 7.5% target, largely as a result of non-performing investments financed by the shadow banking sector. But if internal growth should fall well below 7.5%, would the Chinese government also permit the huge trade surplus in manufactures to experience zero or negative growth, thus accelerating the downward path for GDP? And, of decisive importance, will the highly targeted top priority on rapid growth for export-oriented, technology-intensive industries, with important linkages to defense industry, continue to receive most-favored-national treatment?

No projection for trade in 2014 is attempted here except to say that there is a broad range of export-oriented growth strategies among major trading partners, with some powerful mercantilist forces in play, which in the aggregate pose a continuing threat to U.S. trade competitiveness for manufactures. The actual results, in any event, will soon unfold in the monthly trade accounts, and these MAPI quarterly reports for U.S. and Chinese trade in manufactures should be of considerable interest, perhaps with some surprises.

 

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  • 1. For a full analysis of the implications of this paragraph, see Ernest H. Preeg, Twilight of the Dollar With Technology-Intensive Manufactures at Center Stage, MAPI, November 2013.