Relevant and even prescient commentary on news, politics and the economy.

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

by Kenneth Thomas

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

The U.S. trade deficit figures heavily in the analysis of Jeff Faux’s new book, The Servant Economy. Faux, the founder of the Economic Policy Institute (EPI), was one of the most important voices speaking out against NAFTA when it was debated and ultimately passed by Congress in 1993.
According to EPI’s 2011 Annual Report,”Presently, the United States’ non-oil deficit alone costs more than five million U.S. jobs.” This underscores the importance of the deficit and what is at stake. In the book, Faux points out that the theoretical benefits of free trade assume full employment, but that is hardly ever the case. Thus, he argues, the trade deficit is indeed a job killer.

Yet, as David Cay Johnston notes, the United States continues to negotiate new trade agreements while government agencies and government officials from the President down, tout them as engines of job creation. Johnston points out that the government predicted that our small pre-NAFTA trade surplus would continue, when instead we quickly went into a deficit that in 2011 reached $64.5 billion. Similarly, he says, the U.S. International Trade Commission predicted that normalizing trade relations with China would lead to a trade deficit of just $1 billion, when in fact it grew by 2011 to $295 billion!

How have these trade agreements performed? At present, according to the U.S. Trade Representative, the U.S. has free trade agreements with 19 other countries, with a 20th (with Panama) approved but not yet implemented. The 19 countries are: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.
   
The U.S. Census Bureau (then click on individual countries) has the answer to this. In 11 cases, the goods trade balance has improved from the year prior to the agreements’ coming into effect through 2011, in one case it’s too soon to tell (Colombia, effective May 15, 2012), and only in seven cases did the trade balance worsen.

Unfortunately, that’s the end of the good news, because our trade with most of these countries is relatively small: in six cases the improvement was under $2 billion dollars, which pales against the country’s overall goods deficit of $727.4 billion in 2011. The biggest gains have been with Singapore ($10.7 billion) and Australia ($9.1 billion).

The losses, on the other hand, have been huge, with the culprits being NAFTA and liberalizing trade with China (not even a full free trade agreement, just making it easier for U.S. firms to offshore their production to China). In the wake of NAFTA, the U.S. goods trade balance with Mexico has worsened by $66.2 billion, while our Canadian goods trade balance has worsened by $23.7 billion. Just since 2001, when China joined the WTO, and 2011, the goods trade deficit has increased from $83 billion to $295 billion. Robert E. Scott of the EPI estimates that this massive deficit has “eliminated or displaced nearly 2.8 million U.S. jobs since 2001.” In addition, our Israel free trade agreement has added about $10 billion more to the deficit.

As Faux argues, the trade deficit reduces demand for U.S. labor, and pushes wages down in the aggregate. Indeed, this is the tendency of trade in general for a labor-scarce country like the United States. Faux’s vision of where this is leading us in the long term is a depressing one, which I will discuss in more detail in a future column.

cross posted with Middle Class Political Economist

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U.S. Trade Deficit Largely Due to "Intra-Firm" Trade

by Kenneth Thomas

U.S. Trade Deficit Largely Due to “Intra-Firm” Trade

The vast majority of the U.S. $727 billion trade deficit in goods for 2011 is due to “intra-firm” or “related party” trade, that is, trade between two units of the same corporation, according to the U.S. Census Bureau. This is significant because such trade is the most open to companies manipulating the prices between subsidiaries to minimize tax liabilities, usually known as abusive transfer pricing. Moreover, as Stuart Holland argued in 1987, intra-firm trade is also less responsive to changes in exchange rates than is trade between independent businesses, since within an individual multinational corporation each subsidiary will have a specific role to play in its supply chain, which won’t be quickly changed.

U.S. goods trade and related party trade (billions of dollars), world and selected countries, 2011:
Country        Exports from US Imports to US Balance
World            $1480.4     $2707.8          – $727.4
World (RP)     $ 365.0      $1056.2          – $691.2
Canada          $ 280.9      $ 315.3            -$  34.5
Canada (RP)   $ 98.1        $ 162.0           – $ 64.1
Ireland           $ 7.6          $ 39.4             – $ 31.7
Ireland (RP)    $ 1.5          $ 34.6             – $ 33.1
Mexico           $ 196.4      $ 262.9            – $ 64.5
Mexico (RP)    $ 60.5        $ 155.7            – $ 95.2

Sources: Total trade, U.S. Census, Trade in Good with World, Not Seasonally Adjusted; Related party (RP) trade, U.S. Census, NAICS Related-Party, select all NAICS2, 2011, all countries, variables “imports related trade” and “exports related trade” and layout by country. Canada, Ireland, and Mexico as linked.

As we can see, related party trade (which can mean trade within either a U.S. or foreign multinational corporation) is 27.6% of goods trade, but it represents a whopping 95.0% of the trade deficit. Moreover, in

countries where the U.S. has heavy foreign direct investment, such as Canada, Ireland, and Mexico, the trade deficit for intra-firm trade actually exceeds the country’s overall trade deficit.
In fact, virtually all U.S. imports from Ireland take the form of intra-firm trade. This is no doubt due to Ireland’s status as a tax haven and low corporate income tax rate of 12.5%.

These data suggest that much of the U.S. trade deficit is due to U.S. corporations offshoring production and exporting the products back home. As the related-party data does not distinguish between U.S. and foreign multinationals, there is no way to know exactly how big the share of U.S. multinationals is in intra-firm, but is surely much more than half. Moreover, not counted in the data are imports that come from subcontractors (Wal-Mart’s many suppliers, Foxconn producing Apple products, etc.).

The bottom line is that we need to reverse the incentives in the tax code that encourage the offshoring of jobs. (Why does Apple have $64 billion in cash abroad?) However, to emphasize the point I made last time about what Americans want out of tax reform and the “reform” that has actually happened, it’s worth pointing out that Robert Gilpin of Princeton University, author of the seminal U.S. Power and the Multinational Corporation (1975), made the same policy recommendation almost 40 years ago, and it hasn’t happened yet. We’ve got our work cut out for us.

UPDATE: Following the Mitt George Romney rule (“one year might be a fluke”), I went back and collected the data for all years back to 2002 (the earliest for which the related party trade info was available). While 2009-11 were all 95%, previous years were generally between 70% and 80%. I’m not sure yet what to make of that.

cross posted with Middle class Political Economist

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Retaliating Against Currency Manipulation: A Primer

Kash at The Streetlight points us to other aspects of the world, touching upon the WTO and the IMF roles in global trade and China in particular:

Retaliating Against Currency Manipulation: A Primer

You’ve probably heard that this week the US Congress has been addressing the issue of how China controls its exchange rate with the US dollar. In particular, many have argued that China’s policy of only allowing the yuan (CNY) to appreciate very gradually against the dollar has kept Chinese products unreasonably cheap to American consumers, and American products unreasonably expensive to Chinese consumers. (See for example Paul Krugman’s column on Monday.)

And indicates a source worth reading:

if you’re interested in more details regarding the legal options and implications of possible US retaliation against Chinese currency manipulation, you can’t do better than this paper by Jonathan Sanford of the Congressional Research Service: “Currency Manipulation: The IMF and WTO“.

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The re-balancing of trade within the Euro area: some improvement but not enough

I thought that the whole point of fiscal austerity was to turn the balance of trade and capital flow within the Euro area: debtors becoming savers and capital flows out of the Periphery and into to the core. We’re seeing the outset of such a shift; but it’s probably too slow in the making.

The chart below illustrates the trade balance (exports minus imports) within the Euro area (17) for key austerity – Ireland, Greece, Spain, and Italy – and core – Germany, France, and the Netherlands – countries. The data span the last six months and are normalized by the European Commission’s 2010 GDP estimate for each country (listed on the Eurostat website).

(Let me be clear here: the trade balances illustrated below include only trade flows within the Euro area.)

It should be noted that this is an incomplete picture, since there are 17 Euro area countries. However, the following point is worth noting: the balance of trade is arduously improving in Spain and Greece at the cost of just a small share of surplus in the core. To me, policy makers are grasping at straws when they stick to the ‘exports will grow the Periphery out of their debt problems’ story.

* The Netherlands’ intra-Euro area trade surplus increased near 2 pps to 22.6%.
* Italy’s intra-Euro area trade deficit hovered at just under -1% of GDP.
* Spain’s trade deficit improved somewhat, falling roughly 50 basis points to -0.5% of GDP – probably nothing to write home about, given that the economy’s facing a 20%+ unemployment rate.
* The Greek trade deficit improved 90 bps to -5.3% of GDP.
* Ireland remains as open as ever.
* The German surplus dropped 15 bps to 1.3% of GDP.

It is true, that the re-balancing will take time. Some will argue that it’s extra-euro area trade that will provide the impetus for growth in some of these countries (Spain, Ireland, Greece, the usual suspects). However, while exports to the extra-Euro area market have played an important role in some growth trajectories – Spain, for example – intra-Euro area trade is critical. Below I list the average share of total export income derived from within the Euro area:

Average share of exports (source: Eurostat and Angry Bear calcs)
40.9% 38.8% 41.5% 55.7% 48.6% 43.8% 62.0%
Germany Ireland Greece Spain France Italy Netherlands

How much more austerity and ‘competitiveness’ will it take to turn the tide here? Probably more than some are willing to give. A nominal devaluation is needed. Without that, it’s ultimately ‘bailout’ or ‘default’, or both.

A side note: it would have really helped if the ECB allowed prices in Germany, for example, to overshoot the 2% Euro area inflation target.

Rebecca Wilder

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Initial Claims for Unemployment Insurance and the Trade Deficit Both Increase

Mark Thoma at Maximum Utility has conclusions on the figures for creation of jobs and trend in trade deficits: (reposted with permission of the author)

Figures on the trade balance and new claims for unemployment insurance are out this morning, and the news isn’t as good as hoped. First, initial claims increased:

In the week ending March 5, the advance figure for seasonally adjusted initial claims was 397,000, an increase of 26,000 from the previous week’s revised figure of 371,000. The 4-week moving average was 392,250, an increase of 3,000 from the previous week’s revised average of 389,250.

This level of claims, around 400,000, is near the breakeven point between a job market that is creating jobs, and one where jobs are being lost. Thus, these figures, combined with the figures over the last several releases embedded in the four-week average show a job market that is struggling to provide enough jobs just to keep up with population growth, let alone recover the millions of jobs lost during the recession. The trend for claims is in the right direction, and more generally job markets do appear to be improving, but the improvement is frustratingly slow. We need the recovery to accelerate substantially if we are going to get back to full employment in a reasonable amount of time.

Second, the trade deficit increased to $46.3 billion in January, an increase of around $6 billion:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total January exports of $167.7 billion and imports of $214.1 billion resulted in a goods and services deficit of $46.3 billion, up from $40.3 billion in December, revised. January exports were $4.4 billion more than December exports of $163.3 billion. January imports were $10.5 billion more than December imports of $203.6 billion.

The jump in the trade deficit exceeded expectations, and was partly due to higher energy prices. In addition, the trade deficit with China increased by 12.5% to a little over $23 billion.

Some have pointed to increased exports and a reduction in the trade balance as one of the keys to recovery. A reduction in the deficit at the end of the last year provided some hope that this was happening, but this report throws cold water on those hopes. And, to make it worse, if energy prices go up any further the foreign sector is likely to pose a drag on an already much too slow recovery.

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Trade policies, stimulus, and tax cuts

Both parties promise ‘economic growth’ in this debate as the way out of our troubles for unemployment and federal deficits. Left out of the discussion currently is the way to actually accomplish this growth in a way that delivers more specifically to voters other than some vague notion of trickle down from a ‘global free market’.

Andrea Hayley writes: Chinese State-Controlled Market Policies Increasingly Unfavorable to the U.S. in The Epoch Times

Deeply concerned about an unsustainable trade deficit with China, the chair and commissioner of the U.S.-China Economic and Security Review Commission (USCC) say that in order to compete with China’s state-controlled economic policies, the U.S. government needs to significantly shift its current market-based approach.

“A lot of our major competitors have game plans. The United States doesn’t have a game plan, and our people are suffering,” said Patrick A. Mulloy last Friday at the Center for National Policy.

Mulloy, a USCC commissioner, and Daniel Slane, chairman of the commission, were keynote speakers of a talk, “Competing with China: How the U.S. Can Create Jobs in the 21st Century.”

The commissioners both said the U.S. free market system is at a disadvantage in our trading relationship with China, and that the government needs to take action to protect American interests at home and abroad.

Over the last nine years since China ascended to the World Trade Organization (WTO), it has amassed a $1.76 trillion trade surplus with the United States. The most common reason cited for the imbalance is China’s undervaluation of their currency, the RMB (yuan).

The House acted this September to pass a resolution raising the threat of import tariffs should China fail to raise the value of its currency to an appropriate level.

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While the currency issue is important, Mulloy said he doesn’t think it is the silver bullet. “I think the problem is a little deeper than that,” he said.

Mulloy is more concerned about the cumulative result of Chinese policies that require U.S. companies to exchange technology and know-how in exchange for access to their markets.

China’s industrial policies lure foreign companies to outsource production with offers of incentives, subsidies, and lower labor costs, and in order to take advantage of these lucrative offers, U.S. companies are required to transfer technology and know-how to the Chinese. This has been going on for years.

But recently, China has started asserting its economic muscle, and its companies are increasingly directly competing with U.S. companies, with China’s government policies granting domestic manufacturers the upper hand.

For example, China has started manufacturing commercial airplanes.

“China is going to make its own aircraft, and China is going to buy its own aircraft,” said Mulloy.

Recently, China’s indigenous policy has changed the playing field. Referred to in the USCC report as a “profound change,” the policy explicitly favors domestic companies over foreign firms for government procurement contracts.

One of the positive effects of China’s ascendance to the WTO, the ability of U.S. companies to make profits selling to China’s rising middle class, is not likely to pan out.

Slane sees current U.S. trade policy as a recipe for disaster. He recommends changes, such as replacing corporate income tax with a value added tax (VAT), an increase in research and development funding, and stronger patent protections with the goal of supporting U.S. manufacturing to balance the trade deficit.

Slane acknowledges that such changes would be “deeply disruptive to global commerce,” and lead to higher costs on goods purchased in the United States, but maintains it is a price Americans should be willing to pay.

“If we want to bring back manufacturing our government must acknowledge it is a new day in which other governments are practicing state-controlled capitalism, while we practice free market capitalism. It should be obvious that this is not a level playing field,” said Slane.

(hat tip Stormy)

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Dual mandate of national trade policy

Purpose of trade policy in the summary Congressional Rsearch Service paper March 24 2010 caught my attention.

U.S. trade policy is at a cross-roads as the Obama Administration and the 111th Congress face a range of policy issues and challenges. The future direction of trade policy and how the issues will be addressed are unclear at this time and the subject of sharp debate within Congress, the Administration, and the trade policy community at large. While a number of issues are related to trade policy, the fundamental question that is the subject of this debate is which trade policy, if any, will maximize the benefits of trade and boost U.S. living standards.

(bolding mine)

In a simple statement of what has and can happen, the disconnect implied in the quote is striking. The benefits of trade are obvious to many, but the winners and losers in such trade is not at all obvious to many in the big picture.

If the ‘economy’ was the driver for this election, meaning I assume the perceptions each voter carried with him or her to the voting booth, then understanding our economy is better for us all.

One thing voters need to keep in mind is that trade is global in scope, and what is good for a trans-national monopoly is not the same as good for the voters. Maximixing benefits of trade may have little to do with maximizing US standards of living for most.

The idea of smaller government may be popular right now, but if you expect anyone else to protect overall voter interests, I see no other institution willing to do so other than the federal government if you can steer policy that way. Any other institution I am forgetting about??

In a second post to come involving Michael Pettis, Spencer England, and Paul Krugman, how this plays out is explored.

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REAL TRADE BALANCE


The real trade deficit collapsed in June — plunging from -$45,992 million to -$54,136 billion ( 2005 $). I have not done the calculation, but this will generate a significant downward revision of the second quarter real GDP report. Remember, BEA does not have this data when they do the first GDP report.

The plunge was driven by a 5.2% jump in real nonpetroleum imports although petroleum imports also rose 1.9%. Since the May 2009 bottom, real nonpetroleum imports have risen some 31.9%. Real petroleum imports are up 8.9% over the same period. Real exports fell 1.6% and as the charts makes obvious they have been flat in recent months — they are actually down 1.5% from their March 2010 peak. This should force forecasters to significantly revise their growth forecast down as what looked like a strong rebound in exports late last year now appears to be faltering.



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