The future of trade
EDITOR'S NOTE
Nearly lost in the news shuffle yesterday was the fact that our trade deficit hit a 14-year high.
The $67 billion deficit the U.S. ran in August puts us on track to run a more than $600 billion trade deficit with the rest of the world this year, the highest since 2008. That also means the trade gap is wider now than when President Trump took office.
There is a "good news" aspect to the widening gap, at least in the short term; a strengthening U.S. economy. Imports jumped in August to $239 billion, up from less than $200 billion at their nadir in May. Pre-pandemic, imports were averaging just shy of $260 billion a month last year, so we're at least closing in on more normal demand levels.
And this would appear to be the "good kind" of import demand lately, as opposed to the spike in gold imports earlier this year that Trade Rep. Lighthizer yesterday said was one reason the trade deficit in goods hasn't narrowed more this year. (He specifically called out out "risk-hedging strategies during the pandemic.")
Still, the sluggish rebound in exports is problematic for the U.S. economy, and the trade gap overall is expected to cut nearly three percentage-points from GDP growth in the third quarter, according to J.P. Morgan. Foreign demand for our goods and services has rebounded more slowly as other nations' recoveries lag ours.
Some of the numbers are pretty shocking. Greece's economy, for instance, is expected to shrink 9.5% this year--and it's already in an IMF relief program dating back to the European debt crisis! (Remember, "Grexit" was the original "Brexit," except that it never actually happened.) The IMF thinks the country's long-term potential growth rate is only 1% as it is, so the pandemic has basically set it back another decade*. The moribund French economy, meanwhile, is expected to shrink 9%.
China is another story. Their economy might even manage slightly positive growth this year, and will likely be first of the major nations to return to its pre-pandemic size, as Jim O'Neill discussed the other day. That's both good and bad for the U.S. On the one hand, we need their demand, especially as other nations lag; and the "Phase One" trade deal is supposed to have China buying an extra $200 billion of our goods and services by the end of next year, and yet its good purchases are currently running about 13% below year-ago levels.
On the other hand, a strengthened China poses a strategic threat to the U.S., too, as we talked to Fred Kempe of the Atlantic Council about yesterday. As he's written, "Chinese leaders now see 2020, burnished by their role as the first major economy to return to growth after Covid-19, as a chance to accelerate the global shift of power and influence in their direction."
Can the U.S. force China's hand on trade without a strengthening economy to back it up? There's even more at stake for our recovery when you take the global view, and even more reason investors think D.C. will probably deliver one way or another on more Covid relief.
See you at 1 p.m!
Kelly
*I happen to be reading the deliciously excellent H.D.F. Kitto book, "The Greeks," right now, and highly recommend it. It's short, readable, funny even! Some current favorite bits include his comparison of how Cleon and Diodotus made their rhetorical appeals to Athens during the Peloponnesian War, and Demosthenes' warning about Philip of Macedonia, which has parallels to any "strong man" obsession of our times.
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