The Trade Deficit is Bankrupting the U.S.

February 13, 2018

Earlier this past week, the Commerce Department released the trade figures for the month of December.  The news wasn’t good.  The overall deficit jumped to $53.1 billion, the highest since the Great Recession in 2009.  Worse yet, the deficit in manufactured goods soared to a new record of $69.0 billion as a $2.7 billion increase in exports was swamped by a $6.7 billion increase in imports, which rose to $183.2 billion.  Check this chart:  Manf’d Goods Balance of Trade.  This is the 3rd month in a row that the deficit in manufactured goods has set a new record.  This is quite the opposite of what Trump promised during the campaign.  To be fair, the increase in the deficit is due to the improved economy, leaving Americans more willing to open their wallets and buy, and is not due to any trade policy blunders by Trump.  But Trump’s dithering on trade is directly responsible for the lack of improvement.  All we’ve gotten is talk, threats and endless (and pointless, I might add) negotiations (primarily on NAFTA) – nothing more than we’ve gotten from previous administrations for decades.

In another story last week, Congress approved (and Trump signed) a spending bill that ended the brief government shutdown – a bill that grows the national debt by an estimated $1.5 trillion over ten years.  This is on top of the $1.5 trillion added by the Republicans’ tax cut legislation.  And all of that is on top of the $1.5 trillion cost of the American Recovery Act implemented under Obama.  Yesterday, Trump introduced a budget plan that would grow the national debt by $7.5 trillion over the next ten years.

So what’s the relationship?  Why do I bring up the trade deficit and the national debt in the same post?  As I explained in Five Short Blasts, the trade deficit is the root cause of our federal budget deficit.  To understand, draw a line around the United States on a map.  Now, draw arrows that represent cash outflows from that circle and cash flowing in.  The money spent on imports – currently running at about $3 trillion per year – is an outflow.  The money we collect from exports that we sell – currently running at about $2.4 trillion per year – is an inflow.  That leaves a deficit of about $600 billion per year.  If that money didn’t come back in some fashion, every penny of U.S. wealth would eventually be gone.  Every American would be flat broke.  It’s exactly the same as your check book.  Keep taking money out without putting any back in and – well- you know what happens.

So the trade deficit puts us in a huge bind.  Fortunately, though, it presents those countries who sold us those imports with an equal but opposite problem.  They’re now collecting a big pile of U.S. dollars that ultimately have value in only one place.  The U.S. is the only place on earth where U.S. dollars are legal tender.  This means that those countries who sold us those imports now have to reinvest those dollars back in the U.S. in some fashion.  For one, they can use them to buy exports from the U.S. – which they do – but obviously not in equal measure.  What to do with the rest?  Invest in American companies?  That makes no sense.  Those are the same companies that their exports are trying to drive out of business.  So they use the money to buy American debt obligations, or “treasuries.”

The federal government then uses the money collected by selling treasuries to finance deficit spending, thus plowing back into the economy the dollars that the trade deficit took out.  In this way, the federal government is able to keep the economy on a positive footing, maintaining an illusion of prosperity in the U.S.  And the biggest way they do this is by collecting less tax revenue from you than it takes to finance their programs.  Essentially, the federal government subsidizes your income.

Check out this chart.  It graphically shows the relationship between the growth in the national debt and the cumulative effect of the trade deficit:  Cumulative Trade Deficit vs Growth in National Debt.  Notice how closely the two parameters track each other.  Also, you’ll notice that any time the growth in the national debt lags the cumulative trade deficit, a recession is the result – the most recent being the “Great Recession” of 2008.  In the run-up to that recession, Congress focused on reining in the deficit and the result was George Bush’s famous “jobless recovery” from the recession that occurred at the turn of the century.  Home ownership was declining and the housing/mortgage industry turned to sham loans to put people into homes – bad loans that nearly collapsed the entire banking industry.  When Obama took office, he correctly blamed global trade imbalances, and world leaders agreed.  What did they do about it?  Not a damn thing.  Like parasites, they could all agree that they were killing the host, but all continued to hungrily feed on it.

So how bad is the national debt?  Let’s begin with a little historical perspective.  In 1929, the national debt was $16.9 billion dollars, which was about 16% of GDP (gross domestic product).  By the end of World War II, it had understandably ballooned to $269.4 billion, or 121% of GDP – unacceptably high.  By 1973, it was whittled back down to only 33% of GDP.  Then it began to grow again.  Not coincidentally, in 1975 the U.S. ran its last trade surplus and became a “debtor nation.”  Soon after, the national debt began to explode.

Some economists have used the benchmark of the GDP to gauge the seriousness of the debt.  As long as it doesn’t exceed 100% of GDP, they would claim, the national debt is manageable.  Where do we stand now?  Take a look at this chart of national debt, measured as a percentage of GDP:  National Debt as Percentage of Chained GDP(2).  We’re back over 100%.  It actually declined slightly last year as the budget deficit shrank a little and as the GDP grew more than it has in years.  We’re not likely to see it decline again any time soon as the national debt is now expected to grow by $7 trillion in the next ten years.  Although it took 32 years to climb from 32% of GDP to 100% in 2013, it will hit 200% in much less time if nothing is done about the trade deficit.

However, the situation is actually worse than that.  The “GDP” isn’t the one who is on the hook for the national debt.  It’s taxpayers – you and me.  So let’s take a look at the national debt in per capita terms – that is, how much of it each one of us owes.  Take a look at this chart:  National Debt Per Capita, 1929-2017.  This should scare the hell out of anyone.  Each of us is now on the hook for $50,000 of the national debt, which is 2-1/2 times the burden of each American at the end of World War II!  And look at this chart:  National Debt as Percentage of Total Household Net Worth.  In 1962, the national debt was only 3% of the total household net worth of all Americans.  Today, it’s hovering near 30%.

“Total household net worth” includes some very wealthy households, like those of Bill Gates, Warren Buffet and other billionaires.  Where does your household’s net worth fit in?  Take a look at this chart of household net worth, as measured by the Federal Reserve in its tri-annual survey of household finances:  Household Net Worth.  While the “mean” (or average) household net worth has grown nicely  from $163,000 in 1962 to $692,000 in 2016, the “median” value remains stuck at about $100,000 where it’s been for two decades.

You need to understand the difference between “mean” and “median.”  If nine people have $1 in their pockets and a tenth person has $100 in his pocket, then the “mean” value of what these ten people have in their pockets is the total divided by the number of people which, in this case, is $10.90.  The “median” represents the value at which half of the people have more and half have less.  In this case, the “median” value of how much these people have in their pockets is only $1.  Half of these ten people have $1 or less, and half have $1 or more.  (One of them has a lot more!)

This means that the household net worth of at least half of all Americans is $100,000 or less.  And, in all likelihood, most of the other half don’t have a whole lot more than $100,000.  The median value is skewed by only a small percentage of households.

On average, a household has 3.2 people.  Remember that each American “owes” $50,000 of the national debt.  That means that each household owes about $160,000 on the national debt.  Compare that to the median household net worth of $100,000.  In all likelihood, if the amount you owe on the national debt were subtracted from your net worth, you’d be completely broke.  You’d actually be “in the hole” by about $60,000!

To be honest, I’ve been hearing warnings about the national debt for all of my nearly seven-decade life.  So far, nothing really bad has happened.  At some point, you have to begin to wonder if those who claim that the national debt doesn’t matter are right.  Who knows how this might actually turn out?  Nobody knows.  Will Americans ever have to pony up the money to pay the debt?  I doubt it.  It’s in no one’s interest to bankrupt Americans.  After all, the rest of the world depends on us continuing to buy their products.  What is likely to happen, in my opinion, is the same thing that has happened in other cases where nations have been unable to repay their debts.  There will be a “debt-forgiveness” program of some sort, perhaps overseen by the World Bank, that will let us off the hook, but will come with some extremely harsh concessions – a Greek-style austerity program as a minimum.  The U.S. will become a slave-state for the rest of the world, never again able to exert any influence over world events or even our own destiny.

Is that what we want?  There’s only one escape from this dilemma – the restoration of a balance of trade.  The only way to make that happen is through the use of tariffs.  It’s exactly what Trump proposed during his campaign but now seems unwilling or unable to implement.  Where is the media outrage over this situation?  Instead of the news being dominated by stories of our looming economic demise – which it should be, all we get is stuff that more properly belongs in tabloids or on page 20 of The Times, at best.  It seems that our journalists are either too ill-informed on the subject of economics to probe the issue, or are too lazy to bother looking into it.  The salacious “she said, he said” stuff is easier and sells better.  It’s not exactly “fake news” but, in the grand scheme of things, it’s certainly trivial news.  There are much more important things, like the trade deficit and the national debt, that needs our focus.

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An example of how dumb we’ve gotten about trade

February 1, 2018

https://www.reuters.com/article/us-usa-trade-tariffs-jobs/hung-out-to-dry-twice-tennessee-city-stumped-by-trumps-washer-tariffs-idUSKBN1FI0G1

I came across the above-linked article a couple of days ago.  It reports on reaction by officials in Clarksville, TN to Trump’s newly-announced tariffs on washers and parts.  It seems that Clarksville is the site of a new washer manufacturing plant planned by LG Electronics.  It’s a good example of just how dumb Americans have become about trade and tariffs.  It seems that the mayor and others reacted with hand-wringing, fearful that LG would now cancel their plans to build the plant to retaliate against the Trump move.  Here’s what the mayor had to say:

“It’s like déjà vu for Clarksville, to say ‘how can this be happening twice to us,’” the city’s mayor, Kim McMillan, told Reuters.

She said that the city government was scrambling to help the South Korean manufacturer accelerate its production launch by ensuring that utilities and infrastructure are quickly put in place at the factory site and expediting approvals.

“We’ve got to do whatever we can to make sure that LG is able to still open their facility and hire people,” McMillan added.

What’s to stop LG from opening their plant?  The whole purpose of tariffs is to encourage foreign manufacturers to locate their production in the U.S.

Trump’s decision to impose 20 percent to 50 percent tariffs on washer imports and parts has local officials asking what his “America First” stands for: supporting all U.S. manufacturing jobs or just favoring traditional American brands over foreign rivals.

How dumb.  Tariffs favor domestic manufacturing over imports, and have nothing to do with favoring any one brand over another.

LG told U.S. retailers on Wednesday it would raise prices in response to the tariffs. That could dent its market share, reducing initial output and employment, said company spokesman John Taylor.

Of course they’d have to raise prices on imported washers!  That’s the whole point!  If they want to hang onto their market share, they have no choice but to move their manufacturing to the U.S.

It’s probably unfair of me to label the Clarksville mayor as “dumb.”  It’s not a matter of being dumb.  Rather, it’s an example of how effectively the globalists have brain-washed Americans about the supposed benefits of free trade and the supposed dangers of protectionist trade policies like tariffs.  Does no one ever wonder why protectionist policies work so well for the rest of the world but can’t be used just as effectively by the U.S.?

The effect of these tariffs will be to accelerate LG’s plans to move to the U.S., along with Samsung and any other foreign manufacturer.

Before I was able to finish writing this, a follow-up article appeared on Reuters the next day, and it drives home the point I’m trying to make.  Here’s the article:  https://www.reuters.com/article/us-usa-trade-samsung/u-s-washer-tariffs-put-samsung-lg-supply-chains-through-the-wringer-idUSKBN1FJ0LZ.  This time, the reporters interviewed officials from LG and Samsung about how they plan to react to these tariffs.  Not only do they plan to accelerate the construction of their washer assembly plants, but the fact that the tariffs also apply to parts has forced them into their “worst case scenario” for their supply chain – they’ll have to manufacture the parts here too.

After committing hundreds of millions of dollars to build the plants and bring jobs to South Carolina and Tennessee, the ruling caught the companies by surprise and was a “worst case” scenario, according to one executive.

Samsung says it will use imported parts until its factory runs at full capacity and becomes ready to produce key parts, expected to be by the end of the year.

…  LG was set to start production at its new plant in the third quarter at the earliest and is now working to accelerate its launch with officials in Clarksville, Tennessee who are eager for the jobs the new factory will bring.

“We had several scenarios… this safeguard measure turned out to be the worst case one,” Kim Gun-tai, head of LG’s home appliance division told a conference call last week.

LG, which announced a plan to raise prices on its washing machines sold in the United States last week, said in a separate statement to Reuters it was absorbing a significant portion of the tariff on parts. Once its U.S. plant’s operation began it would produce key parts on site, it added.

So there you have it.  Both LG Electronics and Samsung are now working feverishly to not only finish their assembly plants but to also ramp up production of the washer components in the U.S., something they hadn’t planned to do until they learned that the tariffs would apply to parts as well as assembled washers.

Tariffs work.  They force companies – both domestic and foreign – to manufacture in the U.S. in order to remain profitable.  Just imagine if similar tariffs were applied to every product.  Our economy would absolutely explode in a way that few ever dreamed possible.

 


Trump’s “Shithole Countries” Remark

January 17, 2018

I’ve been torn about whether or not to comment on this controversy since, by its nature, the topic violates my own site rules about the use of profanity.  Since it has now become so central to the debate over immigration, however, it’s impossible for me to ignore, since immigration is one of a few topics that lies at the core of my campaign against destructive population growth.

Let’s back up a bit and examine what it was that elicited such an angry response from Trump.  In exchange for generously offering to not just change the temporary status of DACA immigrants (“deferred action childhood arrivals” – kids brought here by illegal aliens) to permanent status, but to even grant them a path to citizenship, Trump insisted on three additional things:

  • an end to “chain migration,” the visa program that allows immigrants to apply for visas for family members, who then are eligible to bring in more family members – creating an endless and exponentially expanding flow of immigration,
  • an end to the “diversity visa lottery” program, which brings in another 50,000 immigrants per year from countries who are “under-represented” in the general U.S. population,
  • funding for the border wall, currently estimated at $18 billion.

These are reasonable immigration reforms that most Americans agree with.  He had said that he was willing to sign any bill that met these criteria.

So here’s the bill that senators Dick Durbin (D) and Lindsey Graham (R) brought to him:

  • DACA immigrants would be barred from the chain migration process.  The 690,000 DACA “kids” would not be able to apply for re-entry for their parents.  Otherwise, chain migration continues as usual for other immigrants, probably numbering somewhere around 25-30 million.
  • The “diversity visa lottery” program would end, but the 50,000 immigrants would be reallocated to other visa programs.
  • Only about 10% of the border wall funding was included, plus a little more funding for other “non-wall” border security.
  • Extending “temporary protected status” to 437,000 immigrants from El Salvador, Honduras, Haiti, Nicaragua, Sudan, Somalia and Yemen.

In other words, Durbin and Graham tried to play Trump for a fool, offering him a bill that did absolutely nothing to rein in our out-of-control immigration, if anything making it worse.  It’s no wonder that he was incensed enough to lapse into the use of a vulgarity in a “behind the doors” meeting.  Most people would in that situation.

Durbin saw an opportunity to stir up hysteria, characterizing Trump’s remark as “racist.”  It was nothing of the sort.  While there is no formal definition of the word “shithole,” it’s clearly a vulgar term used to describe a foul place, not a person or people.  In terms of poverty, political corruption, violence, extremism, a failure to meet basic human needs and a denial of human rights, these are foul places.  Places like El Salvador, Honduras, Nicaragua, Sudan, Somalia, Yemen and others (unfortunately disproportionately represented by Africa) are, in fact, “shitholes.”  That’s not meant to demean the people of those countries, but their unfortunate circumstances.  If a country is so bad that no one – not even its own citizens – wants to live there, then it is a shithole.

Trump then reportedly went on to ask, “why don’t we bring in more people from places like Norway?”  (Trump had just visited with the prime minister of Norway and, reportedly, was highly impressed.)  It’s this contrasting of Norway with the aforementioned places that may have hinted at racism, a suspicion that has dogged Trump beginning with this comments about Mexican immigrants early in his campaign.  Is Trump a racist?  I don’t know.  What I do know for sure is that Trump is a “money-ist.”  He’s been all about money his whole life.  So while African countries are black and Norway is snow-white, it’s also true that African countries generally rank right at the bottom in terms of GDP (gross domestic product) per capita while Norway ranks at the very top – well above the U.S.  So was he really expressing a preference for wealthy, merit-based based immigrants or a preference for white immigrants over black immigrants?  He has said all along that he wants a more merit-based immigration system.  (By the way, just as an aside, Norway is one of many countries that does not have birthright citizenship, unlike the U.S.  Just being born there doesn’t make you a citizen.  Birthright citizenship is something else I’d like to see Trump address.)

Since the hysteria erupted over the “shithole” epithet, Lindsey Graham has characterized it as a “shithole show,” and has blamed Trump and his staff.  Baloney.  Graham and Durbin are to blame for pushing him over the edge when they tried to sucker him and play him for a fool.  They tried to play the American people for fools, like they always do.  They believe that if you polish a turd shiny enough to make it look like an apple, the American people will swallow anything.  The American people elected Trump to put an end to this crap.

Now they’re trying to back Trump into a corner, threatening a government shutdown if he doesn’t agree to this immigration sham.  I hope he doesn’t.  It’s time to stand firm and force a real change in our out-of-control immigration policy.  Let the government shut down.  If Congress doesn’t want to reform immigration in exchange for Trump’s generous offer to give the DACA kids a path to citizenship, then they don’t really care about the DACA kids.


December Jobs Report Weaker than It Looks

January 12, 2018

https://www.bls.gov/news.release/empsit.nr0.htm

The headline number from the December employment report (link above) was a bit disappointing.  The economy added only 148,000 jobs vs. expectations for approximately 191,000 and vs. 252,000 added in November – especially disappointing considering that this was the peak of the retail shopping season.  Unemployment held steady at 4.1%.  (But not really.)

Look into the details and the report is even weaker.  The employment level, a figure taken from the household survey (vs. the establishment survey, which is where the 148,000 jobs figure comes from) rose by only 103,000.  But that’s not the worst part.  Employment and job creation numbers are meaningless without the context of population.  December is the month when the Census Bureau updates its estimate of population (during non-census years).  This time around it boosted the population by 549,000 (to just under 327 million people) vs. a normal monthly increase of about 170,000.  Of course, the population didn’t jump by that much in December.  It just means that the Census Bureau discovered that it has been underestimating population growth during 2017.  That means that growth in the labor force has been underestimated for the purposes of calculating unemployment.  If the actual size of the labor force was used in the calculation, instead of estimating it based on how many people were looking for work, unemployment actually rose in December by 0.1% to 7.2%, the third consecutive increase in that number.  And per capita employment has fallen for the third consecutive month.  Check the chart:  Per Capita Employment.  And the number of unemployed Americans rose for the third consecutive month to over 12 million.  Here’s the chart:  Unemployed Americans.

Enthusiasm over the Trump administration’s policies will only carry the economy so far.  Without the kind of meaningful trade policy reform that Trump promised during his campaign, it’s going to stall out.  This data may be an indication that that’s beginning to happen.


Another Month, Another Record Trade Deficit

January 6, 2018

Yesterday the U.S. Bureau of Economic Analysis released the international trade data for the month of November:

https://www.bea.gov/newsreleases/international/trade/2018/pdf/trad1117.pdf

The overall deficit rose to $50.5 billion, the worst reading since January of 2012, but not quite a record, thanks to steady, dramatic improvement in the balance of trade in petroleum products which, at one time, used to be the driving force behind the trade deficit.  But no more.  What drives the deficit now is manufactured products, and the deficit in that category hit a new record in November of $65.1 billion, topping the previous record of $64.7 billion set only one month earlier.  Check out this chart:  Manf’d Goods Balance of Trade.  Exports of manufactured goods rose to their highest level since December of 2014, but that rise was swamped by a jump in imports to a new record of $176.8 billion.  Here’s a chart of imports and exports that also shows the goal that Obama had set in January of 2010 to double exports within five years:  Manf’d exports vs. goal.  It never happened.  It never will.

Scrapping existing trade deals and returning to the use of tariffs to restore a balance of trade, bringing manufacturing back to the U.S., was the centerpiece of Trump’s promise to “Make America Great Again.”  So far, all we’ve gotten is the same dithering on trade that we’ve gotten from previous administrations for decades.  This trade data shows that instead of becoming great again – at least in the manufacturing sector of the economy – America is getting worse.  This isn’t what Americans voted for a year ago.

 


Family immigration plunged in 2017

January 5, 2018

https://www.reuters.com/article/us-trump-effect-immigration/fewer-family-visas-approved-as-trump-toughens-vetting-of-immigrants-reuters-review-idUSKBN1ET15I

The above-linked article appeared on Reuters yesterday, reporting that in 2017, family-based immigration dropped dramatically.  But it’s not as though few visas are being approved.  The charts embedded in the article also paint a picture of just how out-of-control immigration had gotten since 2000.  Virtually all U.S. population growth is due to immigration, both legal and illegal, and family-based immigration accounts for at least half of that growth.  In 2015, over one million family, fiance and “other relative” visas were approved.  But in 2017:

  1. Family visas fell to 541,000 vs. 755,000 in 2015, a drop of 28%.
  2. “Other relative” visas fell to 62,000 in 2017 vs. 254,000 in 2015, a drop of 76%.
  3. Fiance visas fell to 33,000 in 2017 vs. 54,000 in 2015, a drop of 39%.

In addition, the Trump administration is seeking even more drastic cuts as a condition for allowing DACA immigrants (children brought here illegally by their parents) to remain permanently in the U.S.

And, based upon monthly border arrest data, illegal immigration declined in 2017 by about 40% – roughly equivalent to 400,000 people.

Add all this up and U.S. immigration in 2017 was cut almost in half, by over one million people.

It’s also important to note that, contrary to the dire predictions of economic decline by immigration advocates who claim that immigration is critical to providing needed skills and entrepreneurship, the decline in immigration in 2017 has been accompanied by a surging economy.

Trump should be applauded for doing a fantastic job of following through on his campaign promise to rein in out-of-control immigration.


Trade Deficit in Manufactured Goods At Record High

December 7, 2017

The trade deficit in manufactured products* rose to a record high of $64.6 billion in October, surpassing the previous record of $63.3 billion set in March of 2015.  Take a look at this chart of our monthly deficit in manufactured goods:  Manf’d Goods Balance of Trade. Exports of manufactured goods haven’t risen since September of 2011 (in spite of Obama’s laughable proclamation in 2010 that we would double exports in five years).  In the meantime, imports have soared by almost $30 billion.  It’s a dubious distinction for President Trump who, during his inaugural address in January, spoke of “…rusted-out factories scattered like tombstones across the landscape of our nation…” and proclaimed that “This American carnage stops right here and right now.”

To be fair, Trump didn’t mean that it would happen on the spot.  His administration has been taking steps to address our trade problem, trying to renegotiate NAFTA (the North American Free Trade Agreement with Mexico and Canada), imposing tariffs on some products and, most recently, blocking China from rising to “market economy” status with the World Trade Organization.  Aside from the work on NAFTA, which may conclude soon with the U.S. walking away from that ill-conceived agreement, the rest amounts to little more than the token steps taken by previous administrations.  The net result is that the plight of the manufacturing sector of our economy grows steadily worse.

Enough is enough.  It’s time to walk away from both NAFTA and the World Trade Organization and begin implementing tariffs.  Any tariffs would be better than our current trade policy, but smart tariffs that address the real cause of our trade deficit – attempting to trade freely with badly overpopulated nations characterized by bloated labor forces and anemic markets – would be much more effective.  As an example, it was reported yesterday that Canada, angered by their treatment in the NAFTA negotiations, has canceled an order for Boeing-made fighter planes.  Why are we treating Canada this way?  Sure, we have a trade deficit with Canada, but it’s due entirely to oil.  In 2016, our biggest trade surplus in manufactured goods, by far, was with Canada – $44 billion, more than double any other country.  Canada is our best trading partner.  Why anger them?  Why not tell Canada that our beef is with Mexico, with whom we had a trade deficit in manufactured goods of almost $68 billion in 2016 – our third worst behind China and Japan – and that they’ll get just as good a deal from the U.S. without NAFTA?  Slap the tariffs on Mexico, not Canada.

We could completely wipe out our trade deficit in manufactured goods by applying tariffs to only ten countries – China, Japan, Mexico, Germany, Ireland, Vietnam, South Korea, Italy, India and Malaysia.  These ten countries, all more densely populated than the U.S. (all but Ireland are many times more densely populated), account for all of our trade deficit in manufactured goods.  While we have defiicts with others, they are much smaller and are offset by surpluses with the rest of the world.  The point is, we don’t have to anger the entire world with tariffs – just ten out of the more than 220 countries in the world.  So let’s be smart about how we do it, but the time has come, Mr. President.  Stop delaying the inevitable.  Do what you know needs to be done.

* The trade deficit in manufactured products is calculated by subtracting services, trade in petroleum products, and trade in foods, feeds and beverages from total trade, as reported by the Bureau of Economic Analysis in its monthly reporting of international trade.