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Supply Chain News: First Half US Trade Deficits in Goods with China, Mexico Remain Large


MAPI's Ernie Preeg, in Final Report on the Deficit, Warns of Coming Time Bomb if Action Not Taken

Sept. 13, 2016
SCDigest Editorial Staff

US trade policy has of course become a key 2016 election issue. Data out in August from the Census Bureau for the US balance of trade through the first half of the year should provide some additional fodder for the debate.

Supply Chain Digest Says...

"In short, the Bretton Woods balanced, rules-based trading system has broken down across the Pacific."


Ernie Preeg

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Ernie Preeg has been following US manufacturing trade numbers for many years for MAPI – The Manufacturing Alliance, and he recently wrote his last report on US trade, as he is retiring. Below, we summarize his final effort.

On a global basis, the US and China obviously experience far different results in trade in manufacturing goods, as shown in the table below, where through the first six months of the year the US had a total trade deficit in goods with the rest of the world of $304 billion, while China had a $441 billion surplus.


US, China Global Trade in Manufactured Goods 1H 2016

(in $Billions)




Note also that total Chinese exports of manufactured goods was 68% greater than that of the US, $935 billion versus $555 billion.

Preeg observes that "This contrast is especially striking considering that in 2000, US manufactured exports were three times larger than Chinese exports." That seems almost hard to believe today.

Preeg then looked specifically at the balance of trade for the US with China and Mexico individually.

As can be seen in the table below, the US trade deficit with China during the first half of 2016 was $168 billion, or 55% of the global US deficit - and was therefore responsible for 55% of the trade-related loss of manufacturing jobs.

US Bilateral Trade Balances in Goods with China and Mexico 1H 2016
(in $Billions)



The $30 billion deficit with Mexico, in contrast, is a much smaller 10% of the global US deficit.

(Article Continued Below)


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Additionally, Preeg notes that the deficit with China was 4.4 times larger than the meager $38 billion of US. manufactured exports to China, while US manufactured exports to Mexico were a lower 2.4 times larger than the deficit. That also means the $91 billion of US manufactured exports to Mexico were actually 2.4 times larger than the $38 billion of U.S. exports to China.

"The highly lopsided US-China bilateral trade account has been rapidly rising for more than a dozen years, principally as a result of the abandonment of the balanced, rules-based multilateral economic system created at Bretton Woods in 1944, which centered on the integration of trade and exchange rate policies in view of the high price, and therefore exchange rate, sensitivity of trade in manufactures," Preeg writes.

Preeg adds that "Since 2000, however, China and other Asian exporters have become the major export competitors for manufactures, in large part through pegging greatly undervalued currencies to the dollar, often including currency manipulation, in gross violation of their IMF [International Monetary Fund] obligations. "

He also believes that in parallel, import restrictions and export subsidies are rampant in many countries trading with the US.

"In short, the Bretton Woods balanced, rules-based trading system has broken down across the Pacific, and a policy decision for the United States is whether and how, in concert with like-minded trading partners, to restore a balanced, rules-based multilateral trade and financial system. To say this would be very difficult and controversial is an understatement," Preeg forcefully concludes.

As for Mexico, Preeg says that the US response should be to press the country to open its internal markets more fully to US exports, phase out no longer warranted domestic subsidies, and permit the market-based peso to rise to the dollar, all of which would work to reduce the bilateral US deficit, with mutual gains from trade for both nations.

If these moves are made, "highly protectionist actions by the United States that could destroy NAFTA should be avoided," Preeg says.

Preeg concludes on a dark note, referencing other recent research he has done on what he says is $15 trillion (that's with a "T") US foreign debt.

"The rapid growth of this official foreign debt, about half held by central banks and the other half by commercial creditors, is principally the result of the protracted, extremely large US. trade deficit in manufactures and the resulting half-trillion-dollar annual current account deficit," Preeg says. "Over the next two to four years, as interest rates rise on the $15 trillion foreign debt, there is likely to be serious trade disruption within what will be a post-dollar, multi-key currency financial world, and I recommend that the economic team of whoever wins the election give this report a serious read."

That is called going out with a blaze.

Any reaction to Preeg's analysis? Let us know your thoughts at the Feedback section below.


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