Export Doldrums: The Little Engines that Couldn't

Americans earn income when they produce things and get paid for the production. Our nation produces lots of things. Pfizer has been in the news lately because they are merging with another company. Pfizer makes Viagra. That makes a lot of people happy but I won’t go into that because some of our readers might take offense. We also make guns and houses and the list goes on and on. We also produce services. In fact the majority of what the nation produces is classified as a service. If you work at Macy’s you get paid the minimum wage or less to perform the sales function. If you are an Uber driver you get paid each time you deposit someone at a desired location like LaTorre’s Mexican Restaurant. If you sell tickets for cruise ship voyages you receive income so that people can gain about 50 pounds and see the shorelines of very interesting places.

In 2014 USA National Output or GDP was $17.4 trillion dollars. Wow. That is a pile of stuff! Of that amount $7.9 trillion was for consumer services and pretty much the rest was for goods sold to consumers and goods and services purchased by businesses and governments. In 2014 we imported goods and services of about $2.8 trillion and we exported $2.3 trillion.

It is those exports that I want to focus on today. Look at it this way – we produce stuff at home and sell it to people both here and outside the country. Let’s call the local buyers Pete and those offshore buyers Charlie. If we are US policymakers we want Pete and Charlie to buy a lot of US stuff. When they do that all kinds of good things rise – output, profits, jobs, wages, and so on. Please, no Viagra jokes. We have problems in the USA presently because neither Pete nor Charlie are on a spending spree. So the economy limps along.

I will pick on Pete another day but the question today is what happened to Charlie? And that’s what the next 117 pages are about. If you are in Colorado or Washington light up your favorite smoke and hold on. Otherwise JD works well. 

The first thing to keep in mind is that the US, unlike some other countries, is not dominated by export sales. That $2.3 trillion of foreign sales is only about 13.2 percent of GDP. If that figure was half of GDP then what I am about to say below would be alarming. But since export sales are 13.2% of GDP that means what foreign buyers do is important but it also means the 86.8% of local buyers are much more important.

But we talk about local buyers all the time so let’s spend a little time investigating foreign sales or exports.

Who buys our crap? Mostly people who are close by – Canada and Mexico are the two top foreign destinations for US goods and services. Together they bought $646 billion in 2014. That amounts to 28% of all US exports. Next in line were China and the UK. Below are the top 12 destinations for US goods and services. Together these 12 countries purchased in 2014 $1.4 trillion or a little over 60% of US total exports to the world.

            

            Canada

            Mexico         

            China

            United Kingdom

            Japan

            Germany

            Brazil

            South Korea

            France

            India

            Saudi Arabia

            Italy

If the US economy has been slowing down because Charlie is not buying as usual, then we should be able to see this in the data. So I compared two 8 year time periods for evidence of change: 2000 to 2007 and 2007 to 2014. It turns out that exports grew much slower in the latter period compared to the former. The next table shows the increase during 01 to 07, the increase during 08 to 14, and the differences. Data are from www.bea.gov 

  

US Export Sales to the World from 2000 to 2014.

                               0 to 7  7 to 14  Diff

Canada                   2297  1802     -495

Mexico                   1515  1068     -447

China                        897     345    -552

United Kingdom       773     645    -128

Japan                         760     735     - 25 

Germany                   531     421    -110

Brazil                        415     178    -237

South Korea              404     291    -113

France                        333    268      -65

India                           225      93    -132

Saudi Arabia              154      75      -79

Italy                            171    143      -28

   Total                      8474   6064  -2410

0-7 is the sum of US exports during the years 2000 through 2007

7-14 is the sum of US exports during the years 2007 through 2014

Diff is the difference between the first two columns

A negative number for Diff means lower export sales in 2007 to 2014

Numbers are in billions of dollars

The key point is that US exports have slowed dramatically. From 2000 to 2007 the US exported a total of $8.5 trillion in goods and services to the top 12 country destinations. From 2007 to 2014 we exported less, $6.1 trillion. The difference is not small -- $2.4 trillion! That is a 28 percent reduction.

While China explained about one-fifth of that seven year decline – notice that US exports slowed to every one of the top 12 country destinations. All 12!  Between our NAFTA partners Canada and Mexico we explain almost a trillion of the decline.

These declines do not come from one country or one part of the world. Economic problems in Europe, Asia, South America and even the Middle East all contributed to weakness in US sales abroad. As these countries suffer economic recessions and slow growth, their people are able to buy less. They buy less at home and they buy less from other countries, including the USA.

Next we turn to economic projections for these 12 countries. Expectations of stronger growth abroad would translate into a stronger demands for US goods and services. Below is a table I generated using economic growth data from the IMF World Economic Outlook (October 2015) Tables A2 and A4.

                    97-06  07-15  16-20
Canada          3.4     1.6       1.9
Mexico          3.3     2.1       3.1
China             9.4     9.1       6.3
UK                 3.1     1.0       2.2
Japan              0.9     0.4       0.9
Germany        1.5     1.1       1.5
Brazil             2.7     2.7       0.8
S. Korea         4.9     3.4       3.4
France            2.4     0.7       1.7
India               6.6     7.3       7.6
Saudi Arabia  3.9     5.0       2.7
Italy                1.5   -0.8       1.2
Average          3.7    2.8       2.8

           

Column 1 is the average annual growth rate of  Real GDP for each country from 1997 to 2006. The second column has average growth rates from 2007 to 2015 (the 2015 number is a projection for the year made in October of this year) and the third column averages the predictions for the IMF for the years 2016 and 2020. 

We see two things from this above table. First, the economic growth rate of the main US trading partners declined significantly after 2006. Every country except for India and Saudi Arabia (Brazil's growth rate did not change) slowed considerably in the 2007 to 2015 time period. This helps to explain the major reductions in US exports during those years. Incomes of our trading partners slowed or declined --- and they purchased less from the USA. 

Second, the IMF is not expecting things to improve in the next five years. The 12 country group's average GDP growth will not improve at all. Looking at our top three destinations only we see a big improvement expected in Mexico, a small gain for Canada, and a continued decline in China. India is expected to grow faster while Brazil and Saudi Arabia will suffer continued growth problems. 

Exports are not everything to the USA -- but they are important. If we believe the IMF's economic growth forecasts it is difficult to see any real hope for an export led resurgence of growth in the USA. As I wrote last week -- free trade agreements are the right thing to do but in this slow global growth environment it is difficult to believe that countries will approve a strong agreement and even with such an agreement, income problems will swamp any gains that might come from trade-opening agreements. The world needs a locomotive but it is unclear who will play that role.  

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.

Table

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)

Destination            

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)