The Trade Deficit Surges

To a 14 year high (in absolute terms, not as a share of GDP). Shrinkage in US-China deficit stalls.

Figure 1: US goods and services trade balance (blue), and US-China goods trade balance, 12 month trailing moving average (brown), both in millions of $. Gray dashed line at NBER defined peak. Orange shading denotes trade war dated from March 2018. Source: BEA/Census via FRED, and author’s calculations.

While the trade balance improves slightly during the trade war (shaded orange) pre-pandemic, I’d attribute that development more to macroeconomic conditions. The goods trade balance pre-pandemic was increasing, but from the pandemic onward, has trended sideways, with a downward move in latest months. This is merely an illustration of the point that tariffs and other trade barriers will to a first approximation only re-allocate the trade deficits between countries.

The dollar strengthening — due to safe haven effects exacerbated by policy uncertainty surrounding Trump’s erratic trade policies — worked against trade deficit shrinkage.

Figure 2: US goods and services trade balance, in millions of $ (blue, left scale), and real value of dollar against broad basked of currencies, in logs 2006M01=0 (red, right scale). Gray dashed line at NBER defined peak. Orange shading denotes trade war dated from March 2018. Source: BEA/Census via FRED, and author’s calculations.

It is interesting to see the rapidly increasing deficit occur against a backdrop of slow economic growth; consumer goods accounted for a large component of the increase in imports, so may represent the shift in consumption patterns specific to the pandemic.

Update, 5:35 PM Pacific:

Reader pgl asks how much is due to changes in imports vs. exports. Figure 3 shows that the deterioration in November was driven by import increases.

Figure 3: Change in exports (blue bar) and minus change in imports (brown bar), in millions of $ Source: BEA/Census via FRED, and author’s calculations.

 

37 thoughts on “The Trade Deficit Surges

  1. Moses Herzog

    I guess donald trump gave social science economists and pro-free traders the “event study” of their wet dreams.

    Can we expect CoRev and Ed Hanson to give their thoughts in this thread?? Perhaps Ron Vara will bless us all with his wisdom?? Awaiting with bated breath.

    Reply
    1. Moses Herzog

      The effects of Christmas gift purchases ??? [ He asked Jedi Master Menzie and NYC “man about town” pgl, and assembled wise men ]

      Reply
      1. pgl

        Man about town? I have not been to a restaurant in 10 months and avoiding Manhattan til this virus is under control. Was that you trying to sneak into Times Square on New Year’s Eve?

        Reply
        1. Moses Herzog

          @ pgl
          Heh, I wish. The irony is I’ve rarely gotten the flu my whole life, and at least in past years have quite strong immune system. That’s probably changed with mid-age and a few too many glasses of rotgut baijiu. My worry is someone in a very high risk segment I share living quarters with getting it, or randomly causes the death/deaths of people I don’t even know when I go out. Even if it’s “innocent” or “collateral damage” or whatever you want to call it, causing someone else’s death, “unknowingly” or not does not appeal to me in the slightest, and if I ever knew I had I think the guilt would get to me pretty bad.

          The reason I asked my poorly phrased the question on American imports, was I had seen more than one TV news story saying that because Christmas sales had shifted to internet sales that that had increased purchases from China vs “brick and mortar” shopping which would lean more towards American based products. I think your specialized knowledge is better than mine on that, so I though I would pose that one to you and Menzie. “man about town” was a slight wink-wink joke, but it’s actually a compliment when I’ve heard it used. So it was just a rib poke, not meant with ill-intent.

          Reply
          1. pgl

            Brick and mortar stores sell goods from China as well. Now whether it is at a lower propensity to import from China than the internet route is something I have not seen any evidence of but perhaps.

          2. Moses Herzog

            What I really wanna know now is if you’ve ever gotten to wander around in the upper floors of the Woolworth building.

        1. pgl

          We do buy a lot of iPhones assembled in China. But most of the purchase price goes to Apple (IP owner and distributor) and most of the Apple payment to Foxconn goes to the payment by Foxconn for components made in South Korea, Japan, etc. The last economist blog post that I saw on this was a few years old so an update would be awesome.

          Reply
        2. pgl

          https://www.census.gov/foreign-trade/statistics/product/enduse/imports/c5700.html

          Census shows we have been importing $108 billion of cellphones per year but the value imported from China dropped from just over $70 billion in 2018 to $64 billion in 2019.

          Of course this value represents what Apple paid the contract assembly (Foxconn for example) and not what we paid Apple. And of course the value added from assembly is less than 10% of what Foxconn got paid as most of the price represent cost of components.

          It does seem there are other nations assembling cell phones and their share may be going up.

          Reply
    1. Barkley Rosser

      No, JohnH, that is not what is going on here. Your source compares the overall trade balance with the bilateral one. Menzie’s post is about the overall one. Not a problem with data supposedly differing due to different sources. Simply different data.

      Reply
      1. JohnH

        Sorry, Rosser, the first graph (above)specifically shows the US-China goods trade. Other lines on the graph show the overall trade balance. Pay attention!

        And, yes, concerns about the US-China trade balance have more to do with geopolitics than with economics.

        Reply
        1. pgl

          You are the one who has this backwards. The first graph shows the overall US trade balance. The latter ones show the bilateral balance. Pay attention – dumbass.

          Reply
        2. Barkley Rosser

          JohnH,

          There is some recording of overall trade balance in one figure, but the link is all about the China trade balance issues, already reported on by Setser in October, with various folks here noting this Hong Kong Effect.

          Bottom line is that this does not explain the surge in the overall trade deficit of the US, although it does throw some uncertainty into just how big that surge is. But it does not explain it. This is basically a sideshow story you have dragged in here, although one not entirely without interest on its own. But it is ultimately not the explanation, which was my point and remains accurate.

          Frankly, I am ashamed to be an alumnus of the same institution of higher ed as you, JohnH. Your blunders are seriously embarrassing.

          Reply
          1. Barkley Rosser

            Moses,

            You are the last person to be making such a statement. I am completely justified in saying I am embarrassed to be associated with JohnH as a fellow alumnus of the UW-Madison. This is based not on some personal analysis. It is based on his repeated misleading and erroneous arguments. Heck, he was verging on getting personal with me with his “Pay attention!” crack, which was ridiculous given the context, only highlighting how dumb and inappropriate his post was.

            I understand that you feels some sort of kinship with him as the two of you like to dump on Biden and criticize his various appointments. You, at least, have been smart enough to figure out that Biden is actually better than Trump, even if you have used the forbidden “s word” on him various times. But then, hey, you have used it on quite a few others, being only one fairly small part of how massivley hypocritical it is of you to be making such an inappropriate remark. JohnH still seems to see no difference between Biden and Trump, or at least the Dems and the GOP, more flaming nonsense out of him.

            Of course, you have a long history of making incredibly stupid and ignorant remarks that you persist in pushing over and over and over long after they have been repeatedly shown to be a pile of nonsense. You do this while indulging in personal attacks, ones you admit you do out out of hatred and sadism. So, please, “Moses Herzog,” you really should stuff it.

      2. pgl

        I thought everyone knew that relying on Tyler Durden for reliable information is beyond dumb. Next JohnH will be citing Peter Navarro for wisdom on these issues!

        Reply
        1. JohnH

          If pgl bothered to read the piece, he would have noticed some very insightful observations from Brad Setser. Instead, pgl just wants to bad mouth.

          Reply
          1. pgl

            Did you mommy not feed you dinner when you were a kid? Seriously – you whine and whine over the dumbest things.

          2. JohnH

            If pgl had bothered to read the whole paper he would he have noticed that there is more to the puzzle than the HK effect:

            “ The puzzle now is why the sign on the discrepancy looks to be flipping

            There are a range of possible explanations.

            Chinese exporters might be overstating their exports, in general and to the United States. Overstating exports is a classic way of getting capital into a country with capital controls.

            But the simplest and most parsimonious explanation is that the U.S. tariffs have created a strong incentive for firms importing into the United States to go to some lengths to understate their imports from China. Thus, I would bet that U.S. imports from China are now slightly under-counted (which by implication holds the bilateral trade deficit down).

            No doubt more investigation will yield evidence that points toward a conclusive answer.

            Fact-checking can seem like a dull exercise. Mapping one country’s import data to a partner’s export data even more so, especially in a world where looking at bilateral trade balances is viewed as a bit retro, global value chain and all. But sometimes it yields interesting results. A similar exercise back in 2015—the Chinese current account surplus stopped tracking the goods balance—led me to look at whether the reported increase in tourism imports in the Chinese data was matched by a rise in the number of actual tourists (it wasn’t) and ultimately produced quite a good Fed paper. My guess is that the changing sign of the U.S. imports v. Chinese exports discrepancy will generate another good paper.”

            Could importers be cheating? I wouldn’t put it past them, just as you can put it past pgl to accuse someone of not reading a paper he hasn’t bothered to read.

          3. pgl

            “JohnH
            January 8, 2021 at 3:54 pm
            If pgl had bothered to read the whole paper he would he have noticed that there is more to the puzzle than the HK effect:”

            Of course I never said it was. But do continue with your stupid and childish comments. This is why engaging with a discussion with a troll like you is such a waste of space.

    2. Menzie Chinn Post author

      JohnH: Regarding the US-China trade balance, there are several reasons for the discrepancy (cif/fas, re-exports, HK, timing) as well as tax evasion and capital control evasion. Why we should care about the US-China balance is yet another matter.

      Reply
      1. pgl

        “there are several reasons for the discrepancy (cif/fas, re-exports, HK, timing) as well as tax evasion and capital control evasion.”

        I forgot who it was but someone here knows a bit about Hong Kong where the export/GDP and import/GDP ratio is well in excess of 200%. Hong Kong is known for “processed trade” where the Hong Kong affiliate buys components and relies on China for toll manufacturing. All sorts of transfer pricing games plus it sort makes a mockery out of bilateral balances. Of course this is a bit more than Tyler Durden can grasp.

        Reply
      2. pgl

        Now that JohnH is mad we are not reading where Tyler Durden quoted Brad Setser, we should note Tyler references not one but two Brad Setser posts noting the Hong Kong effect as well as why bilateral balances can be misleading. And of course this footnote:

        ‘For what it is worth, the bilateral data on services trade really does not line up at all in most states of the world. The United States at least used to report a surplus with the UK, and the UK a surplus with the US.’

        There is also a nice literature as to how the US and Canada have different reportings of their bilateral balances. But keep in mind – JohnH has not read any of this stuff.

        Reply
          1. pgl

            Brad Setser’s post are excellent. That your BFF is reading what he has written second hand via Tyler Durden is a problem that your BFF shares with Bruce Hall. Always consult with the original.

          2. Moses Herzog

            My BFF?? I haven’t even show him my stamp collection yet~~~let alone my Topps baseball trading cards.

  2. rjs

    Exhibit 10 in the Full Release and Tables shows monthly goods trade figures by end use category and in total adjusted for price changes in chained 2012 dollars…with that one can determine that the 4th quarter’s real exports of goods are running at a 24.25% annual rate above those of the 3rd quarter, while our real imports through November have been growing at annual rate of 19.56% from those of the 3rd quarter…the net of those changes is a negligible impact on 4th quarter GDP…

    https://www.bea.gov/sites/default/files/2021-01/trad1120.pdf

    Reply
    1. rjs

      since that probably seems improbable in light of Menzie’s post, i’ll show my math:
      4th quarter export growth (((143,883 +144,581) /2) / ((133,129 + 136,679 + 140,025)/3)) ^ 4 = 1.2425
      4th quarter import growth (((233,736 + 241,121) / 2 ) / ( (224,421 + 229,058 + 227,687) / 3)) ^ 4 = 1.1956

      Reply
  3. Barkley Rosser

    Moses,

    You are the last person to be making such a statement. I am completely justified in saying I am embarrassed to be associated with JohnH as a fellow alumnus of the UW-Madison. This is based not on some personal analysis. It is based on his repeated misleading and erroneous arguments. Heck, he was verging on getting personal with me with his “Pay attention!” crack, which was ridiculous given the context, only highlighting how dumb and inappropriate his post was.

    I understand that you feels some sort of kinship with him as the two of you like to dump on Biden and criticize his various appointments. You, at least, have been smart enough to figure out that Biden is actually better than Trump, even if you have used the forbidden “s word” on him various times. But then, hey, you have used it on quite a few others, being only one fairly small part of how massivley hypocritical it is of you to be making such an inappropriate remark. JohnH still seems to see no difference between Biden and Trump, or at least the Dems and the GOP, more flaming nonsense out of him.

    Of course, you have a long history of making incredibly stupid and ignorant remarks that you persist in pushing over and over and over long after they have been repeatedly shown to be a pile of nonsense. You do this while indulging in personal attacks, ones you admit you do out out of hatred and sadism. So, please, “Moses Herzog,” you really should stuff it.

    Reply
  4. pgl

    Under JohnH’s claim that he knows a lot more than the Hong Kong effect he pens this gibberish:

    “Chinese exporters might be overstating their exports, in general and to the United States. Overstating exports is a classic way of getting capital into a country with capital controls.

    But the simplest and most parsimonious explanation is that the U.S. tariffs have created a strong incentive for firms importing into the United States to go to some lengths to understate their imports from China. Thus, I would bet that U.S. imports from China are now slightly under-counted (which by implication holds the bilateral trade deficit down).

    No doubt more investigation will yield evidence that points toward a conclusive answer.”

    Let me correct his sloppy language. The physical number of goods is not being misstated when the ships unload their Chinese cargo in the Port of Los Angeles but one can imagine that related party trade has transfer pricing issues. Especially when the good is made in China but sold by a Hong Kong affiliate (one part of the Hong Kong effect). Now one could imagine that the Chinese manufacturing affiliate wanted to have a high transfer price but maybe JohnH is too stupid to realize that most multinationals tend to not want high Chinese taxable income so chalk this first claim by JohnH is being dumber than a rock.

    Would the US importing affiliate want to declare a low transfer price (JohnH’s 2nd claim)? Oh gee – the IRS would love the extra taxable income but most multinationals would not want to pay more in US taxes. So chalk the 2nd claim is being dumber than the 1st.

    OK with high tariffs, declaring a low transfer price for customs valuation might be inticing to a multinational but every who gets this understands what section 1059A says. I’ll leave to our village idiot to do a little research on that. Assuming this utter moron ever figures out what transfer pricing means.

    Reply

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