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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So, Is China Pegging to the Dollar or to a Basket?

Does China manage its currency against the dollar, against a basket, or to whatever is most convenient at any given point time? Cynics have argued that China seems to peg to the dollar when the dollar is going down and the basket when the dollar is going up. The yuan’s moves in March at least raise the question again, even if the signal is relatively weak. The yuan has hewed fairly closely to the dollar over the last few weeks. And in March that meant some modest depreciation against the basket (though the depreciation against the basket was partially reversed in the first week of April when the dollar rose). In other words, had China managed more against a basket, the yuan should have appreciated a bit more against the dollar than it did. Managing the yuan against the dollar is in some ways less risky than managing against a Continue reading "So, Is China Pegging to the Dollar or to a Basket?"

China’s 2016 Reserve Loss Is More Manageable Than It Seems on First Glance

Martin Wolf’s important column does a wonderful job of illustrating the basic risk China poses to the world: at some point China’s savers could lose confidence in China’s increasingly wild financial system. The resulting outflow of private funds would push China’s exchange rate down, and give rise to a big current account surplus—even if the vector moving China’s savings onto global markets wasn’t China’s state. History rhymes rather than repeating. And I agree with Martin Wolf’s argument that so long as China saves far too much to invest productively at home, it basically is always struggling with a trade-off between accepting high levels of credit and the resulting inefficiencies at home, or exporting its spare savings to the world. I never have thought that China naturally would rebalance away from both exports and investment. After 2008, it rebalanced away from exports—but toward investment. There always was a risk that could
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China’s Confusing Trade and Current Account Numbers

Has China’s current account surplus disappeared? Should I declare victory and go home? I always have thought a fast-growing, high investment emerging economy should run a current account deficit, not a surplus— Not yet, I would say. It is always dangerous to try to assess China’s trade and balance of payments data for the first quarter, and even more so to opine on the basis of numbers from the first two months. China’s q4 to q1 seasonality is vicious, and the data distortions from the lunar new year are real. But the numbers out now point to some big swings—swings that are worth highlighting. And some real puzzles. I would love to paint a simple picture. But I do not think there is one. The level of chaos in the balance of payments data that the combination of data revisions and real changes seem to have produced is in fact
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Auto Trade with China

Autos are one of the United States’ most important exports to China—ranking just behind aircraft and soybeans and (at times) non-monetary gold (through Hong Kong). Broadly speaking, the U.S. exports completed autos to China, and imports auto parts. But change is in latest end-use data. U.S. exports of autos to China have stalled after a few years of spectacular growth subsequent to the global crisis, and the U.S. has started to import finished autos from China. GM is now making a Buick for the both the Chinese and the U.S. market in China. U.S. imports of auto parts remain substantial — though the growth in imports in 2016 was modest, consistent with the broader slowdown in imports of all kinds. The net deficit in autos and auto parts increased a bit in 2015 — and remained roughly at that level in 2016 (if you exclude
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Puerto Rico’s Coming Fiscal Adjustment (Still Too Big)

About two weeks ago, Puerto Rico’s oversight board approved Puerto Rico’s revised fiscal plan. The fiscal plan is roughly the equivalent in Puerto Rico’s case of an IMF program—it sets out Puerto Rico’s plan for fiscal adjustment. Hopefully it will make Puerto Rico’s finances a bit easier to understand.* I have been a bit slow to comment on the updated fiscal plan, but wanted to offer my own take: 1) Best I can tell, the new plan has roughly 2 percentage points of GNP in fiscal adjustment in 2018 and 2019, and then a percentage point a year in 2020 and 2021. The total consolidation is close to 6 percent of GNP (using a GNP of around $65 billion, and netting out the impact of replacing Act 154 revenues with new tax)—see page p.10 of the revised plan, and my past posts on Puerto Rico’s fiscal math.
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China’s Estimated Intervention in February

The proxies for Chinese reserve sales show very modest sales in February. Foreign exchange settlement (which includes the state banks) shows $10 billion in sales, and only $2 billion counting forwards. The PBOC’s balance sheet shows similar changes—foreign reserves fell by $8.5 billion and foreign assets fell by $10.6 billion. No wonder the (fx) market is no longer focused on China. The fall off in foreign exchange sales is particularly impressive given that China didn’t have its usual trade surplus in February, for seasonal reasons (China’s trade often swings into deficit during the lunar new year). Modest reserve sales alongside a monthly trade deficit imply that the pace of capital outflows fell. The only analytical problem is that the fall in pressure on the renminbi is a bit over-determined. Controls on outflows were tightened. For real, it seems. That likely helped. And the yuan was stable
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Just How Much Money Should the Border-Adjusted Tax Raise Be Expected To Raise?

I have a new paper out with David Kamin of New York University Law School—it will be formally out in Tax Notes in a couple of weeks, but given that there is a live debate on the topic, we are posting it in draft form now—and the New York Times had a related editorial linking to it earlier this week. So this is a joint post with David Kamin. Our paper makes two arguments. 1) Even with fairly optimistic assumptions about long-term growth and long-term interest rates and the persistence of “excess returns” from U.S. direct investment abroad, the U.S. cannot sustain trade deficits of approaching 3 percent of GDP over the long-run. The CBO’s estimates for long-run growth and the long-run nominal interest rate on the U.S. debt stock imply a sustainable long-run trade deficit of about 1 percent of GDP. That would generate maybe 20
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Capital Is No Longer Flowing Uphill

So report Emine Boz, Luis Cubeddu, and Maurice Obstfeld of the IMF —the net financial outflow from emerging markets that characterized the pre-crisis global economy is no more. Capital isn’t exactly flowing downhill, e.g. from rich, advanced economies to poorer emerging economies. The aggregate current account of the emerging world is close to balance. But the basic flow of funds is not from one set of advanced economies (Europe, Japan, the Asian NIEs) to another set of advanced economies (U.S., UK, Canada, Australia). It is no longer uphill. In my view, there is both more and less than meets the eye here. Less, because Asia’s surplus hasn’t actually changed much from the pre-crisis period. China’s surplus is a bit smaller after its 2016 stimulus. But the surplus of the NIEs is bigger than it was before the crisis (I do not quite understand how the NIEs can
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On the Cost of Holding Reserves. Sometimes It Is Not That High

A few quick reactions to Tony Fratto’s argument that the cost of holding foreign exchange reserves acts as a natural limit on exchange rate manipulation. The cost of holding reserves is the cost of so-called sterilization—issuing short-term domestic currency debt to offset (in technical monetary policy sense) or to fund (in a financial sense) the purchase of a typical reserve portfolio of say 3 to 5 year Treasuries and similar euro-denominated assets. 1) The cost of holding reserves is often the highest in the countries that need reserves the most. They tend to have high domestic interest rates, so the “negative carry” on reserves is significant. Turkey for example. Or Brazil (though Brazil’s central bank has made money on the appreciation of the dollar against the real from 2014 on, with the capital gain on its dollar reserves offsetting some of the negative carry). The high apparent cost of reserves
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Getting Puerto Rico’s Fiscal Baseline Right

Developments in Puerto Rico are accelerating. The long-run fiscal plan is really a critical component of PROMESA—as it is intended to be a guide both for Puerto Rico’s annual budget and for any debt restructuring. I want to offer a few quick comments on the Ernst & Young report, and the most recent letter Puerto Rico’s oversight board sent the governor:

1) Puerto Rico probably isn’t going into (over?) its pension cliff and the health care cliff with a $1 billion primary fiscal surplus (the primary fiscal balance is the revenues minus non-debt expenditures). The Ernst and Young report suggests that spending is likely understated (unlike in past years, when the standard problem was that tax revenues were typically overstated). The oversight board seems to agree: “the Board has concluded that the Government’s FY17 expenditures could be understated by an amount ranging from $60 to $510 million, Continue reading "Getting Puerto Rico’s Fiscal Baseline Right"

The January U.S. Trade Data

Over the last year, U.S. import growth stalled. Capital goods imports did nothing—in part because of weakness in non-residential investment. And consumer goods imports were flat.

That appears to have changed. Real consumer goods imports were up 9 percent year over year in January. Real capital goods imports were up 7 percent (table 10 in the trade data release).

To be sure, the January trade data can be a bit funky. As Bill McBride of Calculated Risk notes, the timing of China’s lunar new year plays havoc on the United States’ own seasonal adjustment. But the ISM import index suggests February won’t be much different.

Of course, there are different ways to interpret the recent strength in imports.

Import growth can reflect an acceleration in demand growth that is also supporting strong growth in domestic activity (China right now?).

Or it can mean that more of a

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Puerto Rico’s Daunting Fiscal Math (My View)

An applied economics question: A country with no independent monetary policy, undergoing a ten-year slump that has reduced its real GDP on average by over a percentage point a year, needs to do a fiscal consolidation of roughly 10 percentage points of its GDP. How much does output fall? The example is not entirely hypothetical. Puerto Rico isn’t a country, but rather a territory of the United States. It is a part of the U.S. monetary and currency union—though it isn’t completely a part of the U.S. fiscal union (Puerto Ricans—and firms based in Puerto Rico—generally do not pay federal income tax). Puerto Rico’s gross national product (GNP) is down more than 14 percent since 2006 (the last data point is 2015, and the Government Development Banks’s high frequency indicator shows a further decline in 2016). GNP is the relevant measure—GDP is clearly inflated by the tax games Continue reading "Puerto Rico’s Daunting Fiscal Math (My View)"

U.S. Manufacturing Exports—Excluding NAFTA—Are Surprisingly Small

Take out U.S. exports of manufactures to Canada and Mexico, and the United States manufacturing exports to the world are about 3 percent of U.S. GDP.* Non-NAFTA manufacturing imports are over 7 percent of U.S. GDP. These calculations are based on the North American Industry Classification System (NAICS) data for manufacturing trade, but exclude refined petrol. I cannot bring myself to count “product” as a manufacture. The division between the petrol and the non-petrol balance has long been central to my understanding of trade. Within NAFTA manufacturing exports and imports are roughly balanced—about 2.5 percent of GDP in both directions.** This supports Greg Ip’s view that China’s entry into the WTO—viewing WTO entry as short-hand for China’s increased integration into the global economy—in the 2000s had a materially different impact on the U.S. economy than NAFTA. By all measures, U.S.
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