Led by China, Trade Deficit Falls in 2019

February 10, 2020

https://www.bea.gov/system/files/2020-02/trad1219.pdf

As reported by the Commerce Department on Thursday, America’s trade deficit in goods and services fell in 2019 for the first time in six years.  Trade in goods fell for the first time since 2016.  The decline was due entirely to the reduction of imports from China as a result of the tariffs put in place by the Trump administration.

The trade deficit in goods in 2019 fell to $853 billion from $875 billion in 2018. The decrease was led by a huge decrease in the deficit with China, which fell to $345.6 billion from $419.5 billion in 2018.  The trade deficit with China was the lowest since 2015.  Even more encouraging, the trade deficit in goods with China fell for the 5th consecutive month in December to $24.8 billion.  Imports from China fell by $87 billion in 2019.

Last month, the Trump administration signed the “Phase 1” trade deal with China, which rolled back some tariffs on Chinese imports in exchange for Chinese promises to boost imports of American goods.  The deal had been in the works for months.  If the Chinese wanted to demonstrate enthusiasm for this deal, they certainly didn’t show it in December.  The Chinese promised to increase their purchases of American goods in four different categories, using their 2017 imports as a baseline.  In 2020 they are to increase their purchase of American manufactured goods from $88.2 billion in 2017 to $121.1 billion this year.  They ended 2019 with purchases of $88.4 billion.

They promised to increase their purchases of American energy exports to $27.6 billion this year from $9.1 billion in 2017.  They ended 2019 with purchases of only $3.6 billion.

They promised to increase their purchases of American agricultural products to $36.5 billion this year from $24.0 billion in 2017.  They ended 2019 with purchases of only $10.2 billion.

And they promised to increase their purchases of American services.  That data hasn’t been released yet.

China needs to ramp up its purchases of American goods dramatically, beginning with the month just ended.  Did they?  We won’t know until next month when the January trade data is released.  Personally, I doubt that we’ll see much increase from China, if any.  They’ve already signaled that they think the coronavirus outbreak should give them a pass.  Trump will be a fool if he lets China get away with reneging on this deal.

Next month I’ll begin reporting on China’s monthly progress in meeting the terms of this deal.  I’ll also be keeping a close eye on the balance of trade with Mexico, now that the USMCA agreement has been signed into law.  I’m extremely skeptical of both of these agreements.  The only way to achieve a balance of trade with such densely populated nations is through the use of tariffs.  Such nations would never willingly agree to any deal that endangers their surplus of trade with the U.S.  But they’ll agree to any deal that forestalls the implementation of tariffs because it simply buys them more time for business as usual.

Time will tell, beginning next month.

 


China Already Weaseling Out of Trade Commitments

February 5, 2020

https://www.reuters.com/article/us-china-health-usa-supply/white-house-adviser-says-china-virus-to-delay-u-s-export-surge-from-trade-deal-idUSKBN1ZY1SD

As reported in the above-linked article, China has already begun to weasel out of the commitments it made in the “Phase 1” trade deal, signed only two weeks ago.  They’re blaming the coronavirus outbreak and citing a clause in the deal that provides for relief in the event of a “natural disaster or other unforeseeable event.”  And it seems that the Trump administration is buying it.

Give me a break.  At the time of this writing, approximately 500 people in China have died as a result of this new virus.  Compare that to the approximately 50,000 people who have died this season from the flu in China.  Ten million people die every year in China from one cause or another.  Remember that this is a country of 1.4 billion people, and we’re to believe that 500 deaths have rendered them unable to meet their trade commitments?  Do people in China eat less or otherwise consume less because of this outbreak?

Only two weeks into the trade deal, and China is already proving that it never had any intention of complying.  Rather, it was just a ploy to buy some time and tariff relief, in just exactly the same way that every other trade commitment it has ever made was merely a ploy to make the U.S. shut up and go away.  It seems to be working again.


Is the “Phase 1” trade deal with China a bad deal?

January 20, 2020

https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-1-trade-deal-idUSKBN1ZE2IF

The above-linked Reuters article provides a breakdown in basic terms of what’s included in the “Phase 1” trade deal with China.  To make it easier to understand – and in preparation for tracking progress – I’ve created this spreadsheet, which shows what China has agreed to in terms of boosting its imports from the U.S.  Phase 1 China Trade Deal.

In addition, China agreed to:

… stronger Chinese legal protections for patents, trademarks, copyrights, including improved criminal and civil procedures to combat online infringement, pirated and counterfeit goods.

…  follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms

… refrain from directly supporting outbound investment aimed at acquiring foreign technology

… refrain from competitive currency devaluations

China’s retaliatory Dec. 15 tariffs, including a 25% tariff on U.S.-made autos, have been suspended.

So what did the U.S. give up in return?

… will cut by half the tariff rate it imposed on Sept 1. on a $120 billion list of Chinese goods, to 7.5%.

Tariffs that were scheduled to go into effect on Dec. 15 on nearly $160 billion worth of Chinese goods, including cellphones, laptop computers, toys and clothing, are suspended indefinitely.

That’s the deal in a nutshell.  On the surface, it sounds like a good deal, boosting exports by $200 billion per year.  But don’t be fooled.  This deal rolls back some existing tariffs and suspends new tariffs – tariffs that were making rapid progress toward restoring a balance of trade with China – in exchange for nothing more than promises, and China has a long history of breaking its trade promises.  China got exactly what it wanted – time – more time to continue business as usual.

With this deal, the U.S. is once again trying to export its way out of its massive trade deficit.  It’s similar to the vow that Obama made in January of 2010 to double export within five years.  It didn’t happen.  Not even close.  It’s impossible to export your way out of a trade deficit with nations whose gross over-crowding makes them utterly dependent on manufacturing for export to sustain their bloated labor forces.  And that’s China, among others.

Aside from their promise to boost imports, that promise about protecting intellectual property has been made many times before.  It’s untrackable and meaningless.  And currency manipulation?  The data proves that trade deficits have nothing to do with currency valuation.

The only hope is that the Trump administration will be more diligent than previous administrations in holding China’s feet to the fire, returning to the use of tariffs when China fails to meet its commitments.  China’s betting they won’t, and that future administrations will roll over like previous administrations.

I’ll begin tracking China’s progress on meeting its import commitments (or lack thereof) beginning with the January trade data, which isn’t released until March.


Case Study on Shifting Production Out of China

January 15, 2020

https://www.fidelity.com/news/article/top-news/202001140706RTRSNEWSCOMBINED_KBN1ZD1FV-OUSBS_1

The above-linked article provides an interesting example of a small company trying to move production out of China to avoid the tariffs.  This is a low volume, niche bicycle company.  Some of the points made in the article merit comment:

After months of research and several trips, a small Taiwanese factory agreed to make his bikes but he had to triple orders and pay 30% of the cost of goods up front, unlike in China where he paid upon delivery.

The new terms locked up as much as $1 million of working capital until the bikes were shipped and required a new credit line. After a year of toil, State Bicycle managed to shift production of only two of its five models which are sold in the United States.

Let’s step back and take a look at this situation.  Bear in mind, we’re talking about bicycles here.  Bicycles are not terribly sophisticated nor difficult to make.  The biggest components – the frame and the handlebars – are nothing more than bent and welded tubing.  Tools to bend and weld tubing are readily available at low cost right here in the U.S.  Beyond that, we’re talking about rims, hubs, spokes, sprockets, bearings, axles, chain, a seat, tires and little else.  The million dollars of working capital and the money spent on those trips to Taiwan could have easily purchased the tooling to make those parts right here.  How much sense did it make to spend months of globe-trotting like a chicken with your head cut off, and all that money?

In a move to help bicycle companies, the Trump administration has been granting tariff exclusions to some of their imports since September. The relief, however, is only for a year and is meant to give them more time to move production – ideally to the United States.

Therein lies a big part of the problem.  Companies believe the tariffs won’t hold and can just wait them out.  Eat the tariffs for a year or so and avoid the cost of moving production.  Trump’s use of tariffs has been far too timid and too narrowly focused on China.  Why only focus on China when, in per capita terms, other countries’ trade surpluses with the U.S. are much larger?

Don DiCostanzo, chief executive officer of Pedego Electric Bikes https://www.pedegoelectricbikes.com in California, said higher labor costs and the absence of a viable supply base have made it “virtually impossible” to assemble bikes in the United States.

Seriously?!?!?  Again, we’re talking about bicycles here.  We build cars, trucks and airplanes in the U.S.  Are we to believe that the simple parts I’ve listed above can’t be sourced in the U.S.?  Most any half-competent machine shop, of which there are thousands in the U.S., could quickly produce those parts.  With a little effort, Pedego could set up shop and make them themselves.  Yes, labor costs would be a little higher, but not that much, and they’d be offset by far lower shipping costs.

In the 1970s, the United States assembled more than 15 million bicycles a year. Now it makes fewer than 500,000, according to industry data presented to the United States Trade Representative (USTR) in 2018. By contrast, China made about 95% of the 17 million bikes sold in 2018, U.S. Census data showed.

OK, wait a minute.  This paragraph just refuted the whole premise of this article – that there’s no supplier base and labor costs are too high to build bicycles in the U.S.  Now we learn that somebody is actually building a half million of them in the U.S.  Obviously there actually are sources available for the parts and bikes can be built and sold here at a profit.

Pedego Electric Bikes said it didn’t have any difficulty finding a factory in Vietnam because it was among the first companies to move there. But it faced other challenges.

It had to bring in workers from China to train local staff. Batteries had to be sourced from Japan or Korea and tires from Malaysia. “We had to set up the supply chain,” DiCostanzo said. “That was perhaps the most frustrating part.”

They had to bring workers in from China to train the Vietnamese?  Why didn’t Pedego train them themselves?  It’s likely because Pedego laid off everyone in the company who actually knew how to manufacture bicycles when they moved to China in the first place.  Personally, I’d be ashamed to market bicycles that I didn’t even know how to make.  Nor would I want to buy one from a company who knew so little about their own product.

“It is very difficult to get out of China,” said Alex Logemann at U.S. industry association PeopleForBikes https://peopleforbikes.org.

Baloney.  They had no problem getting into China when it was an undeveloped backwater of rice farmers and little else.  Getting setting up somewhere else, especially in the U.S., should be far easier.

By the way, I own two bicycles myself – both of them Schwinn.  The oldest, a Schwinn Continental that I bought in 1971, is a beautiful bike that was built in the U.S.  While somewhat crude by today’s standards, it was one of the finest bikes you could buy back then and it’s my favorite.  The newer one I received as a gift and it’s a nice bike, but it saddened me when I learned that it was built overseas.

When I first read this article, I was rooting for these companies to figure out a way to set up shop in the U.S.  I think I’ve changed my mind.  Frankly, I hope they all fail, making it that much easier for those companies who are currently building those half million American-made bikes to flourish and grow.  Nearly every bike sold in the U.S. was American-made at one time.  It could be that way again.

 


November Trade Report Best in Two Years

January 11, 2020

https://www.bea.gov/system/files/2020-01/trad1119.pdf

… or three years, depending on how you look at it.  In terms of the overall trade deficit, it was the lowest since October of 2016.  More importantly, the deficit in manufactured goods, at $63.2 billion, was the lowest since September of 2017 – good news, but that’s still a horrible deficit.  (A link to November’s report is attached above.)  Check out this chart of the balance of trade in manufactured goods:  Manf’d Goods Balance of Trade.

The drop in the deficit is due entirely to a decline in imports.  (Exports remain flat.)  Most notably, the deficit with China shrank to $26.4 billion, the lowest reading since March, and down from $37.9 billion during the same month in 2018 – a 30% drop.  This is solid evidence that the tariffs on China are having the desired effect.

In related news, this Reuters article reports that tariffs – primarily the tariffs on China – have cost U.S. companies $46 billion.  That’s actually good news.  It means that they’re “eating” the cost of the tariffs and not passing it on to consumers.  It also means that U.S. companies are evaluating what to do about it.  Should they keep their manufacturing in China in the hopes of waiting out the “trade war” for the tariffs to come down?  Or do they begin implementing plans to shift manufacturing to other locations?  If they choose the latter, do they move operations to some other country and risk facing tariffs there too?  Or do they bite the bullet and move operations back to the U.S.?  If the U.S. is serious about cutting its trade deficit, it has to remain committed to tariffs and implementing them on a much broader scale.  If they do, moving manufacturing back to the U.S.  is the only logical choice for U.S. companies.  Adapt or just keep “eating” those billions of dollars.


Another Phony Story about “Trade War” Woes for Farmers

January 8, 2020

https://www.reuters.com/article/us-usa-trade-china-agriculture-insight/u-s-farmers-see-another-bleak-year-despite-phase-1-trade-deal-idUSKBN1Z20CK

This above-linked article about suffering on American farms caused by Trump’s “trade war” with China was posted on Reuters last week.  I’ve been sitting on it, waiting for the latest trade data (which was posted yesterday by the Commerce Department) to refute the claims in the article.  This seems to have become a favorite tactic of the globalist media – trying to get Americans – especially farmers, a key component of Trump’s base of support – up in arms over the tariffs he imposed on China.  The article leads you to believe that American farmers had a horrible year, thanks to China retaliating against the tariffs by stopping their purchases of American agriculture products – most notably soy beans.  Here’s some samplings from the article:

… U.S. farmers are stuck with fields full of weather-damaged corn – a crop they planted after the U.S.-China trade war killed their soybean market.

As the U.S. farm economy reels from the worst harvest in decades after nearly two years of the trade war, U.S. grain growers are struggling to decide what crops might keep them in business.

China has … deepened ties with rival exporters such as Brazil and Argentina. Brazilian soy cultivation is expanding after record exports to China in the past year and China is investing in South American ports.

The article makes no mention of the fact that European nations have now turned toward the U.S. for their supplies, having been displaced from the South American market.

Many U.S. farmers have tried shifting crops to dodge the economic fallout from losing such a crucial export market. They planted 76.5 million acres of soybeans in 2019, 14.3% fewer than the previous year, according to the latest U.S. Department of Agriculture data. U.S. plantings of sorghum – used in livestock feed and the fiery Chinese liquor baijiu – dipped about 7.5% in 2019, to 5.3 million acres. Plantings of cotton have dropped, too, as China pulled back on purchases.

Come on, Reuters, isn’t the real reason that fewer acres were planted this year the fact that vast swathes of farmland were still under water in the early summer as a result of spring flooding?  I guess they want you to forget that factor.

“The agricultural system is completely broken” because of the trade war, severe weather and mounting farm debt, Hora (an Iowa farmer) said. “We have to farm smarter.”

The fact is that, in terms of exports, American farmers actually had a pretty good year.  According to the trade report released yesterday (see page 20), exports of “food, feeds and beverages” were actually up slightly year-to-date through November, rising to $123.998 billion in 2019 from $123.247 billion in 2018.  Soybean exports are up dramatically to $21.687 billion from $17.583 billion in 2018.  Other categories are up or down sightly with the exception of corn, which is down by $4.638 billion compared to last year.  (The Reuters article did note that severe weather had damaged a lot of the corn crop.)

Don’t get me wrong.  It’s a struggle to survive for farmers, even in the best of times, especially for small family farms that are being driven out of business primarily by big corporate farms.  But in spite of poor weather conditions, American farmers have actually had a pretty good year in terms of exports.  Yes, exports to China are down, but those have been offset by exports to other countries that had been sourcing from South America.  The people of the world still need to eat, and so do livestock, regardless of what’s happening with trade policy.

Pay no attention to these fake stories about the “trade war” hurting farmers.  The globalists are desperate to put a bad spin on tariff policy, especially as their other dire warnings about economic doom have been proven false.  The November trade report has even more good news about the impact of the tariffs.  I’ll post about that next.


“Phase 1” Trade Deal with China a Major Disappointment

December 17, 2019

https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-one-trade-deal-idUSKBN1YH2IL

On Friday, the Trump administration announced that it had reached a “Phase 1” agreement with China that cancels a new round of tariffs that were to have taken effect Sunday, and rolls back some other tariffs, in exchange for … well, nothing really, except some empty promises by the Chinese.  (The above-linked article details what’s included in the deal.)  This is a huge disappointment.  It sends a message to manufacturers that waiting out the tariffs was the right move, as opposed to repatriating their manufacturing operations, and it’s now “business as usual” with China.

Trump clearly got suckered on this one.  China has a long history of reneging on their promises and this will be no different.  Actually, it’s worse than that.  Even if most of these promises are kept, it’ll have no impact on America’s economy.  Why?  Let’s go through the items in the deal as listed in the above-linked article, and see why.

China canceled its retaliatory tariffs due to take effect that same day, including a 25% tariff on U.S.-made autos.

China scarcely imports any U.S. autos anyway, and that’s not going to change regardless of whether or not they’ve placed tariffs on them.  China is awash in auto manufacturing capacity and isn’t about to put their auto workers out of business in order to import cars from the U.S.  So this concession is of zero value to the U.S.

U.S. officials say China agreed to increase purchases of American products and services by at least $200 billion over the next two years, with an expectation that the higher purchases will continue after that period.

Note that it’s “U.S. officials” making this claim.  China hasn’t actually agreed to this and they would never do it.  They have no capacity to absorb such imports.  Mark my word, U.S. exports will scarcely rise at all in the next two years.

China has committed to increase purchases of U.S. agriculture products by $32 billion over two years. That would average an annual total of about $40 billion, compared to a baseline of $24 billion in 2017 before the trade war started. … China agreed to make its best efforts to increase its purchases by another $5 billion annually to get close $50 billion.

They might actually increase their imports of U.S. agriculture products some, but so what?  If they do, Europe will return to buying theirs from South America (where the Chinese have been sourcing theirs), so the increase in Chinese imports will be offset by a loss of other exports.  The impact on American farmers will be zilch.  Regarding that last statement, “China agreed to make its best efforts …”  That’s their way of saying they won’t.

China has committed to reduce non-tariff barriers to agricultural products such as poultry, seafood and feed additives as well as approval of biotechnology products.

For the reasons I just stated, this commitment is meaningless.  Shifting American exports from other markets to the Chinese market accomplishes nothing.

The deal includes stronger Chinese legal protections for patents, trademarks, copyrights, including improved criminal and civil procedures to combat online infringement, pirated and counterfeit goods.

The deal contains commitments by China to follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals and to eliminate any government advantages for such transfers.

China also agreed to refrain from directly supporting outbound investment aimed at acquiring foreign technology to meet its industrial plans — transactions already restricted by stronger U.S. security reviews.

They’ve agreed to these same things many times in the past.  When it doesn’t happen and an American company complains, China will brush it off as an isolated incident that they’re addressing.

The currency agreement contains pledges by China to refrain from competitive currency devaluations and to not target its exchange rate for a trade advantage — language that China has accepted for years as part of its commitments to the Group of 20 major economies.

So here’s another agreement that the Reuters article correctly identifies as nothing new.  Besides, as I’ve explained many times in other posts, currency values have absolutely nothing to do with trade imbalances.

Under dispute resolution is an arrangement allowing parties to resolve differences over how the deal is implemented through bilateral consultations, starting at the working level and escalating to top-level officials. If these consultations do not resolve disputes, there is a process for imposing tariffs or other penalties.

I’m sure the Chinese love this one.  “Dispute resolution” is something they’ve used for decades to forestall any meaningful retaliation when they violate or fail to live up to their agreements.

U.S. officials said the deal includes improved access to China’s financial services market for U.S. companies, including in banking, insurance, securities and credit rating services.

When China was given “most favored nation” trading status by Clinton in the late ’90s, it was clear that the manufacturing factor sector of our economy was about to be destroyed.  The free trade globalists promised that America would be transformed into a services powerhouse economy.  It never happened.  Such services are nothing more than computer transactions and create few jobs.  The inclusion of a promise of more access to the Chinese economy would mean virtually nothing to the American economy, even if it did happen, which it likely will not.

All of the emphasis in this trade deal is on exports to China, with no emphasis on the reduction of imports.  It’s as though Trump has taken a page from Obama’s playbook when Obama promised in 2010 to re-balance trade by doubling exports in five years.  How did that work out?  Five years later, exports of manufactured goods were up by only 9% – not even keeping pace with inflation, which means that exports actually fell.  By the time Obama left office, exports were even lower.  Obama’s failure to do anything meaningful to re-balance trade during his two-term tenure was a major factor in Trump’s victory over Hillary Clinton.

So that’s it.  Trump’s trade agenda has been not just stalled, but rolled back to some degree, for nothing more than promises that won’t be kept.  The emphasis on boosting farm exports is a blatant pandering to Trump’s electoral base.  It seems as though, with this trade deal, Trump believes that the U.S. will be better off if it returns to being an agrarian society.  If we were a country of 100 million people, like in the late 19th century, that might be true.  With a population of 330 million people, we can’t have a viable economy without an industrial base.  The de-industrialization of America has got to stop.  When dealing with a badly overpopulated nation like China, it’s impossible to export your way out of a trade deficit.  They have no capacity to boost their imports because their per capita consumption, emaciated by overcrowding, prohibits them from even absorbing their own domestic industrial capacity.

So what would a better deal look like?  No deal at all.  No overpopulated nation like China will ever deal away the manufacturing for export that is so vital to their economy, and wouldn’t comply with any deal that threatened it.  The only way to restore a balance of trade with China is to levy heavy tariffs to make their products noncompetitive with American-made goods.  If it ultimately leads to a cessation of trade with China altogether, the American economy would enjoy a $450 billion/year boost.  The American economy would actually be far better off if China fell off the map.

The Trump administration needs to stop seeing tariffs as negotiating leverage, and start seeing them as the only way to maintain a balance of trade.  Trump is frittering away his opportunity to truly “Make America Great Again,” something he can’t legitimately claim has happened until America is restored to the industrial powerhouse that it once was.