Tuesday, September 8, 2015

Lesson 9 US Exports of Goods and Services to the World

I was annoyed by the stock market last week but was unprepared for the Indiana Hoosiers football team giving up 47 points to the Salukis of Southern Illinois. Yes, they did win in the last seconds but even that was mostly the result of divine intervention. So it was not easy choosing a topic for the blog this week.

What I should write about is Cari Ray. I had the outstanding privilege of watching her perform Saturday night after the football game and came away thinking this genius woman must be a combination of Bob Dylan, Janis Joplin, Linda Ronstadt, and possibly Carol King. Her song words make you cry and laugh and her voice is like peppered velvet. Okay I had a JD or two – but if you don’t believe me click on this link and make up your own mind. https://www.reverbnation.com/cariray

Instead I decided to move on to Lesson 9 and exports. I have written on that topic several times usually trying to explain why it is so hard to use trade as a way to grow the economy. The post today follows that tradition and uses recent events to underscore the main lesson. Despite having enough holes to sink a battleship, the US economy is not really the story. Today we cast our eyes offshore to identify the sources of US economic problems. Donald Trump likes to castigate China. According to the Donald, China either cheats or it tries to irritate us by going into a recession. How dare they annoy us by going through a recession! But it isn’t just China. Look the other direction and watch how slowly Europe is growing. How insensitive of them to grow so slowly. And then – while I am on a roll – all those emerging markets have their nerve encountering government corruption and the predicted results of having one-horse (commodity) economies.

Do you get my drift? We wonderful US citizens are being saddled by the rest of the world. Our little Engine that Could is being held back by all those foreigners. This post today is to try to put some of that into a perspective. I focus on one part of the story – the part that seems compelling to many people. These problems in the rest of the world hit us in the USA because we export goods and services to them. We are kind and generous and we sell our pots and pans and ipods and banking services to people in China, Vietnam, and S. Korea. Now they have the audacity to have wounded economies. Never mind that these economic problems cause severe dislocation and poverty in those countries – what we focus on is the audacity they have in buying less from the USA. We cannot use our own errant monetary and fiscal policies to prop up the economies of our trading partners – so we mostly complain, accuse, and advance trade policies (like exchange rate manipulation and free trade agreements) that have a zero chance of being effective in today's global economic environment.

For our lesson today I went to bea.gov and found some US export data. Here are some things I learned. In 2014 US exports of goods and services to the world equaled about $2.3 trillion. Most of it – 69% was goods and the remainder was services (travel, banking, etc). The $2.3 trillion amounted to 13.5% of GDP that year.  Despite slow global growth, that share has generally increased from about 9% in 2002 to more than 13% each year since 2011.  So exports have been a healthy component of the US economy. But while healthy – they are clearly not the dominant force. Spending on domestically produced goods and services (consumer and business goods and services) averages about 70% of GDP (assuming we net out imported goods from domestic sales).

Result – export sales are a relatively small but important and growing part of US sales.
Despite growing faster than GDP, US exports sales to the world have slowed. In the five years between 2009 and 2014, exports of goods and services increased by 47%, slower than the 66% growth between 2002 and 2007 (pre-global recession).

The table below shows the geographical sources of the decline. But first, some facts from the table.

The 29 countries that make up the European Union bought the most of any destination -- $498 billion in 2014.

The largest EU buyers were the UK, Germany, France and Italy – the four of them totaled $273 billion in 2014.

The largest single-country buyers of US products in 2014 were our NAFTA partners. Canada bought $375 billion and Mexico purchased another $241 billion.

China ($167 billion) and Japan ($114 billion) were the next largest buyers of US goods and services followed by Brazil, S. Korea, India and Saudi Arabia. None of the remaining countries bought more than $26 billion goods and services from the US in 2014.

The heavy-weight countries when it comes to buying US goods and services, therefore are Canada, Mexico, China, the UK, Japan, Germany, Brazil, France, and S. Korea.

Finally consider how things have changed. I offer two rates of growth of export sales in the table below. The first number is the percentage change before the world recession – from 2002 to 2007. The second number is after the recession between 2009 to 2014. Both are five year time periods.

These numbers show that growth to these key destinations for US goods in services fell to every destination except for Mexico and Japan. In the earlier time period exports to Mexico rose by 40% only to rise by 78% in the five years from 2009 to 2014. Exports to Japan were basically slow in  both time periods but picked up marginally.

If you want to see the problem areas for US exports, look at the rest of the key destinations. Our biggest trading destination, the EU, was the main culprit with sales growing only 24% between 2009 and 2014 after increasing  by 77% in the earlier time period.

China is an interesting case. While export sales to China grew at a blistering pace of 175% in the earlier period, they were still growing by 91% in the final five years. So China helps explain some of the US export slowdown but it is hard to scold China when they are still buying US goods and services faster than anyone on the chart. At that rate our exports to China would double every five years.

So let’s get real. The rest of the world does not want to grow more slowly. The rest of the world hurts more than we do when they cannot find ways to increase income. Whether it is China or Germany of Canada – there is a little the US can gain by sticking a finger in the eyes of trading partners. Politicians like to simplify. But none of this is simple. Rather, Us policymakers should spend time working on our own real deficiencies. Last week I discussed how our policy makers are out of the traditional bullets but there is much we can do at home. Perhaps we could do better at world trade if we focused on what makes US companies more powerful and competitive.

US Exports in billions of dollars
Numbers in parentheses are five year percentage changes in export sales to each destination (from 2002 to 2007/from 2009 to 2014)

United Kingdom     $118              (69/21)        
Germany                     78              (76/14)
France                         51              (41/18)
Italy                            26               (54/23)
Rest of EU                273                  (na)
European Union             $498       (77/24)
Canada                             375       (57/51)
Mexico                             271       (40/78)
China                               167        (175/91)
Japan                               114        (23/26)
Brazil                                 71        (93/78)
S. Korea                             67        (62/56)
India                                   37        (224/43)
Saudi Arabia                      27        (100/57)


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