US Watch
Group Economics Macro & Financial Markets Research
23 May 2016
US trade weakness cyclical not structural
The past few years showed a pronounced slowdown in US foreign trade
Cyclical factors, including a strong USD, have been holding down trade
Meanwhile, the US continues to score high in competitiveness surveys,
Maritza Cabezas
suggesting weakness is not structural
Senior Economist Tel: +31 20 343 5618
maritza.cabezas@nl.abnamro.com
We expect trade to improve in the coming years, but we don’t think that it will reach the rapid expansion of the pre-crisis years
However, there are downside risks, trade conflicts will likely take centre stage regardless who wins the US elections
Global trade weakens… Global trade growth has slowed sharply in recent years, while at the same time the political debate favouring protectionism is gaining ground. These trends are raising questions about the future of global trade. Indeed, global trade growth in 2015 was the weakest since the global financial crisis. after four consecutive years of below-average growth. The weakness in global trade in 2015 was the result of the sharp slowdown in emerging markets related to the end of the commodity super cycle and slower growth in China. At the same time, advanced economies have also shown softer growth in domestic demand, which has resulted in weaker import growth. Finally, there might be some structural factors explaining weaker global trade growth. For instance, the process by which a product is manufactured in parts in more and more countries may have matured. ….with pronounced slowdown in US trade Turning to the US, trade volumes weakened considerably in 2015. In volume terms, US export growth fell to -0.6%yoy in Q4 2015 from 2.4% yoy in Q4 2014. Meanwhile growth in import volumes also fell, albeit at a slower pace to 2.9% yoy from 5.4%. However, this weakness has been going on for a while. The US, once the world’s leading trading partner, was surpassed by China in 2011 and although trade in both countries has continued to weaken since then, the US has not been able to win back its leading role.
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US Watch - US trade weakness cy yclical not s structural - 23 2 May 2016 6
US lo ost position a as number on ne world tradiing partner USD trillio on
50 40 30 20 10 0 000 20
2003
2006
2009
US
China
2012
2015
Source: Thomson Reuters D Datastream
cal factors and d a delay in th he trade policy y agenda are p pulling down US U trade Cyclic The do ominant factorss affecting US trade growth in n the past few yyears have bee en the weaker deman strong currency and w nd in the US an nd abroad. Meaanwhile the delay in menting the trad de agenda has s also contributted to weaker ttrade flows. Th his note implem looks at a the cyclical ffactors and the e trend in trade policies and w what these deve elopments mean for US trade po otential. We ex xpect US trade to improve, buut we don’t thin nk that it will wnside risks, including the reach the rapid expa nsion of the prre-crisis years. There are dow rising popular p percep ption that free trade t hurts the US economy. We think that trade t conflic cts will likely takke centre stage e regardless wh ho wins the US S elections. The most recent Bloomberg Po olitics Poll, suggests that 65% % of surveyed aare in favour off more restricttions in trade, w while 22% favo our fewer restrictions. g currency on ne side of the story‌ s Strong The sttrength of the US dollar in trrade weighted terms (USD T TW) had a larger negative impactt on trade flow ws than we exp pected. The US SD TW apprecciated by 23% in the period 2014-2 2015. Since th he start of the year it has weakened w by 55%. It actually y made quite some difference tha at the strongerr USD TW wa as the result oof divergence in monetary policie es and weak co ommodity curre encies and not the result of ggreater US com mpetitiveness and an n improving tra rade balance. Indeed, from a trade perspeective, the boo ost to import as consumers did not reap the benefits oof more affordable imports growth h was limited a resultin ng from a stro onger US dollar. In fact, US consumers c havve been relativ vely cautious despite e the improve ement in their disposable in ncomes, resultting from lowe er oil prices. Meanw while the impa act of a strong g dollar was compounded c bby weak extern nal demand, which resulted in a ssharp decline in export growtth. The good nnews is that a weaker w USD hould give expo ort growth a boost, while the e adjustment foor import grow wth should be TW sh less pa ainful.
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US Watch - US trade weakness w cy yclical not s structural - 23 2 May 2016 6
US S trade weigh hted dollar ra allied in 2015… …
…US export e growth h much weakker than impo ort growth
2013=100
v %yoy mav
20 15 10 5 0 -5 -10 -15 -20
140 130 120 110 100 90 80 70 60 14
13 US
15 Jappan
9 93
16
95
97
00
02
04 4
Import
eurozone
Sou urce: Thomson Re euters Datastream m
07
09
11
14
Export
Source: Thomson T Reuters Datastream
Trad de strategy and d US elections
…wea ak domestic de emand the oth her part of the e story
Dona ald Trump
Anothe er driver of the e US trade slow wdown is relate ed to weak dom mestic demand, which has
Mr Trump has long ma aintained that othe er
resulte ed in weaker im mport growth. However, H we th hink that the caausality is now turning from
countries are taking ad dvantage of the
weake er exports to w weaker investm ment growth. In ndeed the proloonged slowdow wn in export
Unite ed States given that Americans spe end
growth h, is having so me impact on income growth h. This has ledd to weaker US S investment
more e on imported goods than the rest of o
growth h and resulted in weaker impo ort growth, parrticularly of, durrable goods. Since S the end
the world w on American n goods. He has
of 2014, there has be een a sharp fall in US import growth of duraable goods. Me eanwhile, US
prom moted increasing ta ariffs on specific
exports have also e encountered weak w investmen nt growth abrooad. For instance, China’s
categ gories of imports. He mentioned tha at
transition to a consu umption-based d economy has s resulted in a slowdown in the pace of
he would w favour a 45 % tariff on Chinese
investm ment growth an nd the demand d for capital goo ods. .
expo orts to the US. Hillary Clinton
Weak k trade less s spending from m firms on inv vestment
Hillarry Clinton’s vision for America doess
%
not mention m trade. Ho owever, during herr camp paign she has bee en distancing hersself from the Trans Pacific Partnership. She menttioned that any tra ade deal has to produ uce jobs, raise wa ages and increase e prosp perity. Bern nie Sanders Mr Sanders has been fighting free trade e agree ements over the p past three decades.
4 3 2 1 0 -1 -2 -3
-3 -2 -1 0 1 2 19 980
1985
19 990
1995
2 2000
2005
Investmeent (rhs inverted)
2 2010
2015
Net trad de (lhs)
He th hinks that the top priority in any trad de deal should be to help American workerrs.
Source: Thomson T Reuters Daatastream
Rega arding NAFTA, Sa anders has shown a stron ng opposition. With h respect to trade
Policy y-related issue es weighing on trade
with China, Sanders has warned that
US trade is being lim mited by some structural s slowd down in world ttrade, as well as a by the
Perm manent Normal Tra ade Relations with h
more difficult d environ nment to put in place trade de eals. In the passt few years, there has
China would help multtinational
been some s delay in tthe US trade policy. Lately the trade agendaa seems to be moving
corpo orations at the exp pense of workers.
forward. The Trans-P Pacific Partners ship has been completed, butt the full benefits will not
He is s also negative ab bout the Trans-Paccific
be see en for many yea ars. The reaso on is that tariffs are set to be loowered only grradually, the
Partn nership,. He thinkss it lacks safeguarrds
benefitts will be mode est in the near term. There are other initiativves that are on the cards,
to pro otect American jobs.
including a free trade e agreement be etween the US and the EU annd the restoration of the gotiations. “fast trrack” trade neg
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US Watch - US trade weakness w cy yclical not s structural - 23 2 May 2016 6
Howev ver, it is too ea rly to assess th he trade strateg gy that will be aadopted after the t US electio ons. The tone la ately is of incre easing scepticis sm regarding thhe achievemen nts of globaliisation and eve en of reversing certain trade deals. d At this ppoint it is mainly y a political debate e on trade.
US S far more co ompetitive tha an China…
…but hourly wages in US manu ufacturing mu uch higher In US dollars
ATION INNOVA BUSINESS SOPHISTICATION
INSTITUTIONSS 7 6 5 4 3 2 1 0
MARKET SIZE
TECHNOLOGICAL READINESS FINANCIAL ARKET DEV. MA
INFRASTRUCTURE
MACROECO ONOMIC US HEALTTH & PRIM.EDU UCATION
GOODS MARKEET LA ABOR MARKET EFFICIENCY
Sou urce: Global Comp petitive Index
Chinaa
60 50 40 30 20 10 0
Norway N Belgium Denmark Germany Sweden Austria Australia Finland United States France Netherlands Ireland Italy U it d Kingdom United Ki d Canada Singapore Spain Japan New Zealand South Korea Brazil China Mexico
Value
Source: Conference C Board
…but the US contin nues to score quite high in global g compeetitiveness On top p of low tariffs a and a weak currency, compettitiveness also matters for US S trade. The US ran nks third in the Global Compe etitiveness Inde ex of the Worldd Economic Forum. Much higherr than the majo or trading partne ers, including China. C This sugggests that the e US export underp performance iss more cyclical than structural. The structuraal components of compe etitiveness, inclluding labour market m efficienc cy, financial maarket developm ments, innova ation capacity a and market size e are ranked quite high. Meannwhile, factors that could improv ve productivity, including health and education are relativeely weak. In fac ct, an inadeq quate educated d work force is cited as one of the most probblematic factors in doing busine ess. In our view w, well targeted d infrastructure spending and investment in education are necessary to sup pport US and global trade gro owth. On balancce we expect trade t growth to improve in the com ming years as cyclical c factors fade and tradee conflicts remain manag geable. We don n’t think that it will w reach the rapid r expansionn of the pre-crisis years, given weak w global tra ade growth tho ough.
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