Sightlines Bulletin

China Trade & Tariffs: First the goods

This is a dense post but there is a lot of data here and it’s worth knowing.

President Trump in his trade war with China has fixated narrowly on the U.S. – China imbalance between the export and import of goods between the two nations. The Census Bureau maintains a trade in goods by country dataset that includes import and export amounts in nominal dollars back to 1985. The chart below shows the trade in goods deficit with China from 1985 through 2017 in both nominal (blue) and real (red) dollars.

In 1985 the goods trade between the United States and China was about equal. By 2000, the nominal trade in goods deficit grew to $83.3 billion. From 1985 to 2000, U.S. goods exports to China rose from $3.9 billion to $16.2 billion, or by $12.3 billion (319.8%). Over the same period, U.S. goods imports from China increased from $3.9 billion to $100.0 billion, or by $96.1 billion (2,490.0%).

As large as the increase in Chinese exports to the United States was from 1985 to 2000, that growth has been eclipsed by the growth since 2001, when China was admitted to the World Trade Organization (WTO). From 2001 through 2017 Chinese goods exported to the United States jumped from $102.3 billion to $505.5 billion, or by $403.2 billion (394.2%). Over the same years U.S. goods exports to China grew from $19.2 billion to $129.9 billion, or by $110.7 billion (577.2%).

Over the entire period from 1985 through 2017 nominal goods exports from the U.S. to China grew by $126.0 billion (3,268.9%). Goods imports from China over this period grew by $501.6 billion (12,989.3%). The nominal value of the trade in goods deficit rose from $6.0 million in 1985 to $375.6 billion in 2017. Adjusted for inflation the trade in goods deficit in 2017 (in $1985) equaled $188.1 billion.
Although there has been a very large increase in the U.S. trade in goods deficit with China, the year-to-year change in the trade deficit has fluctuated a great deal. As shown in the following chart, the year-to-year changes appear to have stabilized and even decreased over the past seven years.

Another way of looking at the trade in goods relationship between the U.S. and China is the ratio of U.S. – China goods imports to exports. As shown below, this ratio hit a peak at 6.2 in 1999 and has moved lower since then. The ratio now stands at about 4.

Us china imports to exports ratio
So, what has happened since the trade war began earlier this year? First, it needs to be said that tariffs do not directly address the major complaints the United States has regarding Chinese trade practices. These complaints have to do with China’s failure to live up to free market reforms promised when it joined the WTO, expropriation of trade secrets from U.S. companies doing business in China, and industrial espionage. Thus, tariffs simply represent a warning shot and they may provide a means of getting China to address more substantive issues. In the mean time they are having disruptive effects on many U.S. businesses and they will likely cause price increases for many consumer goods. It has only been about six months since the first tariffs were announced, but trade and price statistics are starting to show some of the impacts.

The Bureau of Economic Analysis (BEA) issues quarterly bilateral trade reports. So far data exists only for the first two quarters of 2018. The following table shows year-to-year changes in U.S. – China exports, imports and trade balances for eight goods categories.

Year-to Year U.S. – China Goods Trade Changes, First and Second Quarter of 2018

In response to U.S. tariff increases, China has imposed reciprocating tariffs on a number of agricultural commodities. The BEA statistics do show a decline during both the first and second quarters in the value of food, feed and beverage exports. Even though the China tariffs on U.S. agricultural commodities did not take effect until the second quarter, it began stockpiling some commodities earlier in the year.

Soybean exports have been particularly hard hit. A recent American Farm Bureau report (October 23, 2018) indicated that during the first seven weeks of the 2018/2019 market year (September 1 through August 31) that soybean exports to China declined by 97 percent compared to the prior year. Since peaking on March 5th at $10.77 per bushel, the cash price for soybeans has dropped to $8.93 per bushel on November 30th, which equals a 17 percent decrease.

The BEA data also shows a decline in exports to China of autos, auto parts and engines. During June, July and August U.S. motor vehicle exports to China decreased by $506.3 million (50.3%), $296.2 million (46.7%), and $599.3 million (55.7%), respectively (Forbes, October 25, 2018). A third category of U.S. exports that has declined since the imposing of tariffs is consumer goods.

On the import side of the trade ledger, U.S. tariffs seem to be having the greatest impact on food, feed and beverages and on consumer goods. However, since most of the new U.S. tariffs on Chinese produced consumer goods only took effect in mid-September prices for items such as apparel, footwear, toys, computers, and other electronics have not yet been passed on to U.S. consumers. Where price impacts seem to be showing up are for goods, such as motor vehicle parts and for steel products. Since the tariffs on steel and aluminum were the first ones imposed back in March the prices of domestically produced goods with high steel or aluminum content have begun to increase. Examples of year-over-year price changes for selected goods are presented in the following table.

Year-over-Year Price Changes for Selected Consumer and Producer Goods, January – October 2018

Finally, the balance of trade for goods between the United States and China appears to show some impact of the tariffs. Although the trade in goods deficit with China increased during both the first and second quarters of 2018, the increase in the deficit during the second quarter was only about one-fifth of the size of the increase during the first quarter. The greatest change occurred in the consumer goods category. During the first quarter the U.S. consumer goods deficit with China grew by $6.1 billion, but during the second quarter the deficit shrank by $93 million. There was also a large change in the industrial supplies and materials category. During the first quarter the trade deficit with China in this category increased by $494 million, while during the second quarter the deficit declined by $854 million compared to the prior year.

Quarterly bilateral trade statistics for the third quarter will be released by the BEA in mid-December. These should provide a clearer picture of the impact of tariffs on the trade in goods flows between the United States and China.

Next the services….

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Protected: US employment & wage detail, productivity, and cynicism

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Diesel Fuel Details

The big story during August and September was Hurricane Harvey. At its worst, Harvey knocked about 20% of U.S. refining capacity knocked offline. As a result the average price of regular gasoline jumped by 34-cents per gallon (15%) between the end of July to the week of September 11th, when it peaked at $2.61 per gallon. The price of diesel increased also rose by 27-cents per gallon (10.7%).

Crude oil prices actually fell as the storm hit Houston. During August the WTI price dropped from $50.21 per bbl to $45.96 per bbl. But since the beginning of September the WTI price has recovered, hitting $49.88 on the 18th. Going along with the crude oil price fluctuations, the U.S. crude oil inventory dropped by 19.8 million barrels (1.7%) during August, but risen since the beginning of September by 11.6 million barrels.

During August the price of Brent crude rose slightly from $51.99 to $52.69 per bbl. Data on domestic oil production and imports are only available through June. That month domestic producers accounted for 53.2% of the U.S. oil supply, and domestic production averaged 9.1 bbl per day. Shale oil accounted for 52.5% of domestic production.

Turning to domestic motor fuel consumption, for which the most current data is from last April, gasoline consumption totaled 12.0 billion gallons, up 206.5 million gallons (1.7%) from the prior April. This is a notable increase&mdashover the most recent three months gasoline consumption had declined by 0.2%.

diesel-fuel

Diesel fuel consumption in April totaled 3.4 billion gallons, up 153.2 million gallons (4.7%) from April 2016. During the prior 3-, 6- and 12-month diesel fuel consumption grew by 3.7%, 4.3% and 3.6%, compared to the same periods in the prior year.

Regionally, over the three months from February&mdashApril the strongest growth occurred in New England states (18.3%) followed by the Southwest states (9.7%). States in the Southeast, Great Lakes and Far West regions also experienced some growth, but below 5.0% in all cases. The greatest decline occurred in the Mideast states (-3.9%). Other regions where diesel fuel consumption decreased included the Plains (-2.0%) and the Rocky Mountains (-0.8%). The states of the Rocky Mountain region have experienced year-over-year declines during the most recent 3-, 6- and 12-month periods.

diesel-emp

As shown on the above graph, the relationship between the 3-month moving average of diesel fuel sales and manufacturing employment continues to hold. However, the number of months by which changes in the diesel series leads the manufacturing employment series does fluctuate. The diesel series started becoming increasingly positive in March 2016, while the growth rate for manufacturing employment stayed negative until February 2017. Manufacturing employment growth has stayed positive and has continued to increase over the past seven months with a large jump from July (0.6%) to August (1.1%). If the relationship continues to hold, the year-over-year manufacturing employment growth rate will likely level off at about 1.3% for the remainder of 2017.

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Protected: The Housing Crisis Rethought, and a Long Road Ahead

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State-level GDP: Down on the Farm with Energy Rising

During first quarter of 2017, economic growth declined in five of the seven Plains states. Within this region, only Missouri and North Dakota saw their economies grow during the quarter. North Dakota’s growth came from a reviving energy sector that contributed 1.7pp and offset almost the entire 1.9pp drop in its agriculture sector. Missouri’s agriculture sector declined by 0.8pp, but this was offset by relatively strong growth in durable goods manufacturing and wholesale trade.

The states that experienced the greatest declines in output were Nebraska (-4.0%), South Dakota (-3.8%), and Iowa (-3.2%). Lower prices for row crops likely explain the decline. During the first quarter of 2017 corn prices averaged 4.4% below the prior year and wheat prices were down 11.7%. Soybean prices were up somewhat compared to 2016 but were trending lower.

Nationwide the agriculture, forestry, fishing and hunting sector subtracted 0.41pp from the overall annualized growth, which totaled 1.1%. As the accompanying chart shows, absent the agriculture sector national GDP grew by 1.6% during the first quarter.

The fasted growing sector in Q1 was mining, which includes oil extraction. It was up 0.3%. As shown in the accompanying chart, excluding the mining sector national GDP would have only increased by 0.8%.

gdp-xag-xmin

Texas 3.9% gain was the strongest. Its mining sector increased by 2.1pp. West Virginia experienced the second highest rate of overall growth at 3.0% and its mining sector contributed 3.2pp. New Mexico had the third highest growth rate at 2.8% with its mining sector contributing 1.8pp. Other energy states also experienced increased growth. Oklahoma’s 1.9% growth in output ranked 11th and noisy Alaska’s 1.8% growth ranked 14th. (A revenue estimator from the state told us they basically don’t even try to forecast revenue growth in the state because the economy is so volatile.)

But other energy states did not fare as well. Lousiana’s economy grew by only 1.0% (ranked 28th). Growth in Wyoming clocked at just 0.9% (32nd), and Montana saw a 0.5% decline (45th)

Finally, a couple of standout states for the quarter were Washington and Wisconsin. Washington continued a pattern of strong performance from 2016 when it took the blue ribbon. Its economy grew at an annualized rate of 2.7% during the first quarter and by 3.8% for all of 2016. This growth was driven by its information sector, which accounted for 1.7pp, and durable goods manufacturing, which accounted for 0.7pp, of the overall growth. Wisconsin’s 2.1% annualized growth for the first quarter represents a reversal of fortune from 2016 during, when its economy grew by only 0.9%. The sectors that contributed the most to its first quarter 2017 growth were real estate (0.6pp), durable goods manufacturing (0.4pp) and nondurable goods manufacturing (0.4pp).

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