U.S. Trade Deficit Stable in Q1

The U.S. trade deficit did not change much in the first quarter. The real (price adjusted) goods deficit that is. Oil prices were a bit higher in q1 than q4 (they are now back below their q4 levels, but that will impact the June and July data) The quarterly real non-petrol deficit has basically been constant—with a soybean specific story explaining the fall in the Q3 deficit. The non-petrol deficit excluding agriculture hasn’t moved much. Frankly I am a little surprised. I would have expected the lagged impact of the 2014 rise in the dollar (the broad real dollar is up 18 percent since mid 2014) to still be having a bit of an impact on the 2017 data—and also to see an ongoing drag on exports so long as the dollar stays at its current (appreciated) level. But that didn’t obviously happen in the first quarter. Though I Continue reading "U.S. Trade Deficit Stable in Q1"

China’s Q1 Import Surge, Disaggregated

This is a joint post with Cole Frank, a research associate here at the Council on Foreign Relations. One of the challenges China poses is that by the time something shows up cleanly in the numbers, things often have changed. That risk seems acute right now. The latest high frequency indicators (iron ore prices…) suggest China’s economy is now decelerating on the back of what appears to be a significant policy tightening. But the (likely) current deceleration looks to have come after a very significant upturn. The hard numbers for q1 2017 point to substantial acceleration in growth late last year and early this year. The trade numbers for one. In the first quarter of 2017 China’s headline exports totaled $482 billion and its imports $417 billion, up 8 percent and 24 percent, respectively, over the same period last year To be sure, a large part of the
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Using Fiscal Policy to Drive Trade Rebalancing Turns Out To Be Hard

The idea behind “fiscally-driven external rebalancing” is straightforward. If countries with external (e.g. trade) surpluses run expansionary fiscal policies, they will raise their own level of demand and increase their imports. More expansionary fiscal policies would generally lead to tighter monetary policies, which also would raise the value of their currencies. And if countries with external (trade) deficits run tighter fiscal policy, they will restrain their own demand growth and thus limit imports. Firms in the countries with tighter fiscal policies and less demand will start to look to export to countries with looser fiscal policies and more demand. This logic fits well with IMF orthodoxy: the IMF generally finds that fiscal policy has a significant impact on the external balance, unlike trade policy.* But it often encounters opposition, as it implies that the fiscal policy that is right for one country can be wrong for another. Many
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The Story in TIC Data Is That There Is Still No (New) Story

The basic constellation in the post-BoJ QQE, post-ECB QE world marked by large surpluses in Asia and Europe but not the oil-exporters has continued. Inflows from abroad have come into the U.S. corporate debt market—and foreigners have fallen back in love with U.S. Agencies. Bigly. Foreign purchases of Agencies are back at their 05-06 levels in dollar terms (as a share of GDP, they are a bit lower). And Americans are selling foreign bonds and bringing the proceeds home. The TIC data doesn’t tell us what happens once the funds are repatriated. Foreign official accounts (cough, China and Saudi Arabia, judging from the size of the fall in their reserves) have been big sellers of Treasuries over the last two years. As one would expect in a world where emerging market reserves are falling (the IMF alas has stopped breaking out emerging market and advanced economy reserves in
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The Combined Surplus of Asia and Europe Stayed Big in 2016

A long time ago I confessed that I like to read the IMF’s World Economic Outlook (WEO) from back to front. OK, I sometimes skip a few chapters. But I take particular interest in the IMF’s data tables (the World Economic Outlook electronic data set is also very well done, though sadly a bit lacking in balance of payments data).* And the data tables show the combined current account surplus of Europe and the manufacturing heavy parts of Asia—a surplus that reflects Asia’s excess savings and Europe’s relatively weak investment—remained quite big in 2016. China’s surplus dropped a bit in 2016, but that didn’t really bring down the total surplus of the major Asian manufacturing exporters. Much of the fall in China’s surplus was offset by a rise in Japan’s surplus. The WEO data tables suggest that net exports accounted for about half of Japan’s 1 percent 2016 growth—Japan
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When Did China “Manipulate” Its Currency?

There is no single definition of manipulation, to be sure—so no way of definitively answering the question. Over the last ten or so years, manipulation has been equated with “buying foreign exchange in the market to block appreciation.” That definition is certainly built into the criteria laid out in the 2015 Trade Enforcement Act. But “buying reserves to block appreciation” wasn’t hardwired into the 1988 act, which has a much more elastic definition of manipulation. Yet even if the 2015 Trade Enforcement Act isn’t the only possible definition of manipulation, it still provides a bit of guidance – as President Trump implicitly recognized today: “Mr. Trump said the reason he has changed his mind on one of his signature campaign promises is that China hasn’t been manipulating its currency for months.” The thresholds of being called out for “enhanced analysis” that the Treasury was required to set
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Does Currency Pressure Work? The Case of Taiwan

I confess that I probably am the only person in the world who—setting aside the internal politics of the Trump White House—would be excited to write the Treasury’s foreign currency report this quarter. Not because of China. I would say China met the existing 2015 manipulation criteria in the past and I would put the criteria under review (I personally think the bilateral surplus analysis should be complemented with value-added measures, which would reallocate some of China’s surplus to Japan, Korea, Taiwan, and others).* I might even find a way to warn that a country that guides its currency down could meet the 1988 definition manipulation even if it is selling some of its foreign currency reserves to limit the pace of depreciation (a controlled depreciation is hard, and usually requires reserve sales). But not name China now. The U.S. would be completely isolated in naming China now,
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