February – Graph of the Month

6th February 2017

Where will the biggest impact of President Trump’s Executive Actions be? The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TPP) look to be things of the past. The North America Free Trade Area (NATFA) will be undermined by the ongoing diplomatic and trade disputes with Mexico.

Yet US trade openness, that is trade as a percentage of GDP, was, on average between 1980 and 2013, 18.6%. Compared to a global average over the same period of around 45%, this just demonstrates the size of the US domestic economy – US jobs are created domestically to a greater extent than they are from trade. It follows that it will be global trade, the flows and patterns of trade around the world that will be transformed if the decisions translate into real action.

Figure 1:          Annualised growth in US trade with top ten partners and regions, 2015-2020 (%)
Source:            Equant Analytics, 2017

However, the US will not necessarily be the main beneficiary of the “bilateralism” of its trade policy. Longer term growth to 2020 presents US trade policy with several issues (Figure 1) irrespective of the intent behind recent changes:

  • Imports from Asia Pacific will grow at over 1.5 times the rate of exports to Asia Pacific. China is the exception, where exports will grow more quickly than imports. But as the US imports from China at nearly five times the rate that it exports to China, the faster rate of export growth is unlikely to have much long term impact on US net trade.
  • Exports to NAFTA look likely to increase more rapidly than imports. NAFTA works well for the US and any trade war with Mexico or disintegration of the regional trade area could damage US exports as much as it hurts Mexico.
  • Germany argues that the ECB keeps interest rates low which keeps the Euro low; President Trump argues that Germany benefits from the low value of the Euro and certainly the US will be importing from Germany at nearly twice the rate of growth that it exports to Germany. We expect faster growth in US imports from both the EU27 and the Eurozone as well.
  • Howsoever great the desire may be to create a bi-lateral trade partnership between the UK and the US, the UK is the US’s sixth largest country trading partner and, as an export destination less than half as important as either China or Mexico. The momentum of trade to 2020 suggests that nothing between the two countries will change.

If the policy is to support US jobs, then the sectors that China and Mexico trade with the US are important indicators of how effective this policy will be.

China’s imports into the US are predominantly in electrical equipment (cameras, audio-recording equipment etc) and the levels are substantially higher than they are for US exports to China in the same sector. However, within the broad grouping of “electrical equipment” are a range of products and the US exports to China in products that are higher at the value chain in both computing and machinery and electrical equipment.

 

Figure 2:          US trade with China by top import sectors, 2016 (USD bn)
Source:            Equant Analytics 2017

The other two top sectors for Chinese imports include furniture and bedding, toys and clothing, and potentially this reinforces the economic nationalism that is now reflected in US trade policy.

On one level there is truth in the statement that the US has exported many of its low and middle skilled jobs to China. This has been deliberate policy and was the product of the “globalization” which drove company performance and which is now likely to be thrown into reverse.

Yet, China is the USA’s third largest export partner by country and its exports are worth $150.6bn to the US economy a year. Most of this export trade is at the high end of the value chain (semi-conductors, aerospace, pharmaceuticals, biopharmaceuticals and automotives) and as such, reflects the strongly research and skills intensive nature of US trade that has evolved through the process of globalization.

Mexico, in contrast, is a key part of a North American value chain in oil and gas, electronics, computing and machinery and automotives in particular. These are the top four import and export sectors between the US and Mexico (Figure 3).

 

Figure 3:          Top four traded sectors between the US and Mexico, annualized growth, 2015-2020 (%)
Source:            Equant Analytics, 2017

Other things being equal, the trade momentum on the face of it at present looks positive for the US: export growth is higher than import growth in electrical equipment and oil and gas, and while import growth is faster in computing and automotives, against the backdrop of a considerable deficit with Mexico, the US itself is exporting equipment to fuel Mexican infrastructure development at a rate of nearly twenty times the rate that it imports. This is again the process of globalization and has been the case since the mid 1990’s.

The drop in oil and gas imports from Mexico presents a double-edged sword potentially. The US has not exported its crude oil historically and although this changed under President Obama, there is still no recorded data in United Nation databased to confirm that it now exports crude to Mexico.  However, it exports refined oil back to Mexico at four times the level that it imports it. Mexico has been accelerating its oil refining capacity over the last 2-3 years and the drop in imports potentially reflects both an increased self-sufficiency in the country and a loss of export revenue to US oil and gas companies.

The implications for global trade that are emerging as a consequence of the way in which US trade policy has been articulated since the inauguration of President Trump are not all about avocados, although even here there is an expected slowing momentum from 7.5% growth in 2016-17 to just over 4% by 2019-20! What is at risk, however, is that already the momentum of trade between the US and its key partners appears to be slowing.

The slowdown reflects flatter global trade growth and the increasing localization/regionalization of global supply chains. Any policy that seeks to disturb what is already a fragile equilibrium, may well cause the tectonic plates of trade to shift permanently.