Tag Archives: US

November – Trade Outlook

A Pivotal Meeting – A Closer look at US – China Trade

On the verge of their summit, Presidents Xi and Trump could not be in more different places. President Xi has become the champion of globalisation and a world order at which China is centre-stage. The National Congress of the Communist Party of China confirmed his leadership of the country for at least the next five years with no clear successor. By incorporating Xi’s philosophy to make China great into its constitution, the Party elevated Xi to the same status as Mao Tse-tung and Deng Xiaoping. China’s One Belt One Road policy, alongside its promotion of trade at the WTO means it is has become the focus, not just for trade between emerging economies in the Southern hemisphere, but also a pivot around which trade power is shifting from West to East.

In contrast, Donald Trump travels to Asia on the tide of economic nationalism and isolationism. His anti-trade rhetoric is, at best, damaging many of the multi-lateral structures that have been central to the way in which globalisation, such as the North America Free Trade Area, the EU, and, most recently, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Trump’s discussion with Xi will focus on reducing, even eliminating, China’s trade surplus with the US (Figure 1). This trade surplus is nothing new, but has been widening since the mid 1990’s when China’s market first started to open up; Microsoft, for example, moved into the market around 1996. In 1996 China’s imports from the US were 27% of their exports to the US. This peaked at 35% in 2013, but the gap has been narrowing since and now stands at 31%.

Figure 1:          Value of Chinese Trade with the US ($US bn), 1996-2018 (2017-18 forecast)

Source:            Equant Analytics, 2017

Indeed, it is possible to argue that Chinese exports to the US are a function of the globalisation of US electronics companies. Figure 2 shows the top five Chinese export sectors to the US in 2016 and projected for 2017. The first two, electrical machinery and equipment and components and machinery include mobile phones, washing machines, semiconductors and computers. Clearly, they inherently contain intellectual property which is a key focus for the discussions between the two leaders. These sectors also dwarf trade between the two countries in other sectors which actually might reflect more closely a pattern of trade between an emerging economy and a developed one: furniture, toys and clothing. Top US exports to China include the catch-all “Commodities Not Elsewhere Specified” which proxies well for oil and arms trade, and aerospace. Most of the top export sectors from the US to China show slight declines between 2016 and 2017 except aerospace.

Figure 2:          Value of China’s top five export and import sectors with the US (US$ bn), 2016 & 2017

Source:            Equant Analytics 2017

President Trump’s mantra since his election has been “America first” and most recently his actions in relation to Canada’s Bombardier were directly to support Boeing. In his discussions with President Xi, therefore, it is likely that aerospace could also be a key part of the trade negotiations (Figure 3). For example, exports of large aircraft were worth US$ 124 billion in 2016 and exports of large and smaller helicopters are projected to grow at 24.6% and 11.1% between 2017 and 2018.

Figure 3:          Chinese imports of aircraft from the US, 2016-17 and 2017-18 compared (year on year change, %)

Source:            Equant Analytics, 2017

In spite of all this, between China and the US it is clear who is in the weaker position. Perhaps because the US is realising that the period of globalisation up to around 2014 tilted trade, indeed economic power, towards emerging economies like South Korea and China, President Trump is now fighting a rear-guard action to maintain the central role in global trade that US companies have historically played. Using China’s trade in arms and ammunition as an example; China’s exports have grown at an annualised rate of 6% since 2009 while its imports have shrunk by 20% annually. Its imports are now just 2.5% of its exports in this sector. This tells its own story: while the US assumed it had global trade power leadership, it can no longer take this for granted. Globalisation and trade power is pivoting towards China. Trump’s meeting with Xi may merely confirm this as inevitable.

August – Trade Outlook

What does a US trade war with Russia mean?

Just as the world thought it was safe to go on holiday, at the beginning of August President Trump signed legislation to place severe sanctions on Russia because of their alleged interference in the US Presidential elections. At the same time, he declared the legislation to be “seriously flawed” and “unconstitutional.” Russia’s Prime Minister, Dmitry Medvedev responded on Facebook, that the action was, “the declaration of a fully-fledged trade war” against Russia and would damage US-Russian relations for years to come. More than this, he also stated, “The US establishment fully outwitted Trump… the Trump administration has shown its total weakness by handing over executive power in the ‘most humiliating way.’ ”[i] President Trump’s response? To tweet “Our relationship with Russia is at an all-time and very dangerous low. You can thank Congress, the same people that can’t even give us HCare!”[ii]

Escalation of tension

The politics of the escalation of tensions between the US and Russia clearly matter, but do the economics? From a US perspective it may appear not. Russia is not a top-ten import or export partner of the country. Its US$ 32bn of trade is less than 1% of the total value of US trade of US$ 3.9tn and has been falling since sanctions against Russia were first imposed in 2014 (Figure 1). Some of this may also be due to the collapse in oil prices between 2014 and 2015. A momentum-based projection into 2017 suggests that the increase in both imports and exports between 2015 and 2016 is unlikely to continue.

 

The trade between US and Russia between 1996 and 2017

Figure 1: US trade with Russia, 1996-2017, US$ bn (2017 projection)
Source: Equant Analytics 2017

What does the US Export to Russia?

US exports to Russia are predominantly in aircraft and aerospace (Figure 2). It accounted for US$ 3.2bn in 2016 and this was nearly double the second largest export sector, machinery and components, which includes computers and data storage. In every year since 2011, and in spite of sanctions against Russia, US exports in aircraft have grown by just over one third. This is admittedly from a relatively small base but it does demonstrate the fact that there is activity in what is both a highly politically sensitive and strategic sector for the US. On the basis of a momentum projection into 2017, it might be expected that exports would grow by a further 8%. This represents a lost value of around US$ 256m, which is small in the grand scheme of US exports. Although it represents a sector-specific loss, Russia is a relatively small export destination and does not feature in the US’s top ten biggest market in this sector.

 

the change in US exports to russia in different sectors

Figure 2: US top five largest exports to Russia, Compound Annualised Growth Rate, 2011-2016 and year-on-year projected growth 2016-17 (%)
Source: Equant Analytics, 2017

What does the US Import from Russia?

Just over 52% of the US’s imports from Russia are in oil and gas. It is the US’s fifth largest import partner in this sector but the value of US$ 10.6bn is dwarfed by Canada at over US$ 72bn. Russian oil and gas imports represent just over 4% of US total oil and gas imports and have been falling over the past five years (Figure 3). In fact, the only area to show any substantial increase is fertiliser imports which are projected to grow by 7.9% between 2016 and 2017 but from a low base and a period of five years during which they have declined annually by around 1% each year.

 

change in us imports from russia

Figure 3: US imports from Russia, Compound Annualised Growth Rate, 2011-2016 and year-on-year projected growth 2016-17 (%)
Source: Equant Analytics, 2017

Figure 3 illustrates two things: the US has imposed sanctions on Russian imports progressively over the past five years and the downward trend is likely to continue. But second, and perhaps more importantly, the substantial drop in oil and gas trade with Russia reflects the US growing independence in this sector as its own exports increase and as shale gas production becomes increasingly efficient.

What are the consequences?

So what does this tell us about the importance of a trade war between the two countries? From a US perspective, Russia is another country with whom it has a trade deficit, albeit proportionately small at US$ 6bn in 2016. It has been reducing its imports from Russia and the country is not a major trading partner. In terms of the economics of its own trade, it loses relatively little and is making a strong political point. But equally, the US is not a top ten importer into Russia and is only its sixth largest export destination. Even though this has been driven in the last few years by sanctions and dropping oil prices, it seems that the relationship is economically less important than it is politically.

It is the politics that are the key point here. When leaders of two major countries start declaring a “trade war,” they are raising the stakes. Trade becomes political rather than economic and this is dangerous.

July – Trade Outlook

Three charts to show why the South and East China Seas matter

Japan does not officially have an army, it has a Self Defence Force. So, when it starts sending warships into the South China Seas in an attempt to keep China’s territorial claims in check, it is clear there is a problem. Its Izumo helicopter carrier’s presence is to provide the assurance to the region that it is willing to move into a more proactive military role in the interests of regional security at a time when US interest is at best only focused on North Korea, and at worst, waning. While the US nominally retains its commitment to the “Freedom of Navigation Operations” (Fonops) to provide a base for regional security, its military operations are taking a lower key and not being publicised as they were under the Obama regime. As the US appears to look away, China continues to build and protect what it deems its sovereign and economic rights. China can play a long game without using its military muscle, but the very fact that it is demonstrating its regional influence reinforces the perception that tensions in the region are dangerous.

The region matters to world trade flows and to its energy security. The importance of the South and East China Seas cannot be understated. It is not just a source of geopolitical tension, it is also a major trading route. The countries in the region’s US$ 10.7tn trade accounted for just over 54% of world trade in 2016. More than this, the countries in the South and East China seas account for just over 40% of world oil trade (Figure 1). Any risk of disruption or threat of instability should make markets and commentators alike feel nervous as a result, not just because of the spill-over effects into the global trade system but also because of the region’s strategic importance.

 

Figure 1:  Share of world oil trade for countries in the South and East China Seas area 2016
Source:  Equant Analytics 2017

The region matters to China as well. Trade with the other countries in the South China Seas account for some 51% of China’s trade (Figure 2)

Figure 2:   China’s trade with nations and Hong Kong in the South and East China Seas
Source:  Equant Analytics, 2017

Hong Kong is China’s biggest trading partner in the region at more than twice the value of trade compared with Japan, its second largest trading partner. The regional partners, Indonesia, the Philippines, Malaysia and Vietnam in particular, are important contributors to regional supply chains in electronics and machinery & components meaning that their regional fortunes are intertwined. As China has gone through its economic reform programme of the past few years, it is these regional partners who have had to adjust. But any political instability in the region threatens trade flows within the region as well as between the region and the rest of the world. This impacts China just as much as it does other countries and as a result, China will be keen to ensure that there is no escalation of tensions beyond rhetorical ones simply because it is in its own strategic interest.

China’s strategic interest is evident in the East China Seas through its relationship with North Korea. As sanctions have become more stringent, China’s share of North Korean trade has increased (Figure 3). The momentum projections suggest that this may well stabilise over the next few years but at over 85% of North Korea’s trade, China has a strong strategic leverage over Pyongyang.

Figure 3:   Percentage share of North Korea’s trade accounted for by China (1996 – 2021)
Source:  Equant Analytics, 2017

The US and China have engaged in talks since their Summit in April, not overtly about North Korea – but about trade. Why? President Trump explained this in a tweet on the 11th April: “I explained to the President of China that a trade deal with the US will be far better for them if they solve the North Korean problem!” In other words, trade is a strategic tool to gain influence over North Korea. An explicit “trade war” between the two countries was avoided because of the post Summit “100 day plan” and although the deals struck since then have been modest, they have the effect of diverting global attention away from the region.

The perception of geopolitical risk in the South and East China Seas is not new. In the South China Seas the disputes are territorial and between countries; the role of the US has been to keep the trade route that it represents open in the economic strategic interests of the world. The risks in the East China Seas and Korean Peninsular are as much about strategic influence as they are about trade.

However, a deliberate armed conflict is unlikely as the example of North Korea and the “trade deals” with China show. It is simply too important to the US and the world, in terms of energy security, in terms of trade flows, in terms of economic interests and more generally in terms of national interest and power. Increasingly, the disputes in the region are centred around strategic influence. Trade, or the threat of disruption to trade is the means by which any conflict will be fought: it is a bargaining chip. China knows this and holds increasingly more of the cards as the US looks away.

 

 

 

April – Trade Outlook

What does trade tell us about the oil price? In the first Trade Outlook of 2017, we pointed to a somewhat negative outlook for oil prices. Although analysts at the time saw prices increasing as demand recovered and production stayed at similar levels, based on our trade forecast for oil, we felt that the picture was at best neutral and maybe slightly negative. This was in line with OECD thinking but the World Bank and the EIU at the time were both suggesting that prices would rise.

The reason for the more negative outlook that we had at the time was because of the very high correlation between world trade values and the oil price (Figure 1). This correlation, of 90%, does not tell us how the oil price will move. It simply tells us that it is highly correlated with trade values, which is reasonable since oil is the world’s third largest traded sector with a value of $1.9 trillion in 2015. However, it does tell us that if trade is projected to remain static, then there is a greater likelihood that oil prices will also remain static.

 

Figure 1:  Monthly value of world trade in oil (USDm) vs oil spot price (last price monthly), Jan 2010-Jan 2017
Source:  Equant Analytics, 2017

The trajectory for oil prices since January has been downwards reflecting the flatter pattern in world trade.  Last month highlighted the difficulties of predicting oil prices. In the middle of the month, oil prices had fallen 10% in one week to their lowest level since OPEC cut production in November 2016. In the last week of the month, prices had rallied with the best week so far in 2017. A Reuters poll at the end of March suggested that analysts were not expecting oil prices to rise to $60 a barrel until 2018 at the earliest. But with the trade outlook flat for 2016 and 2017 and growing only slightly into 2017-18, the prediction of $60 a barrel in the near term would appear to be only possible were there an unexpected dose of market hubris! (Figure 2)

Figure 2            Projected growth in total world trade vs world trade in oil year on year (2016-17 and 2017-18)
Source: Equant Analytics 2017

There are two key issues. The first is whether demand is increasing relative to production. As the US increases its output of shale, there is little doubt that the US itself will be able to meet its domestic demand, taking market share from OPEC and non-OPEC aligned producers. This will keep prices flat during the course of the year if this pattern continues and, potentially at least, push prices downwards if the OPEC producers decide to go for an all-out price war when they meet in May. Falling projected global trade in oil suggests that demand will be at best weak relative to prices.

The second is the shift in the patterns of production in the market. This is evident in how trade has grown over the past five years and how it is projected to grow over the next five years (Figure 3).

Figure 3           Selected mineral fuel trade vs electrical energy growth 2010-15 and 2016-21 (CAGR %)
Source             Equant Analytics, 2017

The prospects for growth in each mineral fuel sector is more positive from the second period with 2016 as its base compared to the post-crisis period. However, only trade in petroleum wax, coke and bitumen and bitumen and shale show positive annualized growth and the most substantial projected growth is in the bitumen and shale sector. Although electrical energy’s decline in trade growth is projected to slow, it is still a very small sector compared to other mineral fuel sectors and its improvement does little to suggest that a major change is on its way.

What this suggests is that the oil sector as a whole is likely to dominate for some time to come despite environmental pressures. Demand is growing, but it appears that it will be met by current energy sources rather than new ones. The greatest improvement in trade growth over the two time periods is in bitumen and shale and this corroborates the view that US shale production, increasingly cost effective as it is, is likely to compete favourably in oil markets with crude and refined oil to meet the growth in demand, particularly in the US itself.

 

 

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.