Born in the USA | 30th June 2014
Why America’s trade policy matters | Last week it was announced that US GDP failed to grow at the rate in Q1 analysts were expecting. To add insult to injury, Gazprom decided it was going to conduct its trade with China in Yuan or Roubles rather than US Dollars. The market reaction was decidedly muted. Does this mean that traders are just so buoyed by sentiment that they are no longer betting on macro indicators at all? Or has the rise of the Yuan already been priced in?
Neither answer seems particularly satisfactory. The clue may rest in the reason why the annualised drop of 2.9% in GDP was so large. The cold winter and health care costs were a significant part of it, but, more importantly, some two-thirds of the drop was accounted for by weaker-than-expected trade performance. Trade, as we might conclude from Obama’s erratic attention to key trade agreements such as TPP with Asia and TTIP with Europe, is apparently less important to the US economy than assets prices, such as housing. A temporary drop in trade won’t do as much damage as a drop in sentiment that might stop people buying things; the US is not returning to recession. So, that’s alright then.
This is an ill-advised, if not downright illogical thought process. Make no mistake about it, trade matters to the US economy. Exports will be worth USD 1.6tn to the US economy in 2014 and imports some USD 2.3tn. Compared to 2001, the US’s trade openness (exports + imports as a percentage of GDP) has grown from 16% to nearly 28%. Delta Economics is forecasting that by 2020, trade will be 36% of GDP on current trends. More than this, as Figure 1 illustrates, trade is also highly correlated with the value of the S&P 500.
Figure 1 | Value of US trade (USDm) versus S&P 500, Last Price Monthly, June 2001-May 2014
Source | DeltaMetrics 2014, Bloomberg
So while traders themselves may not react to macroeconomic or trade-related news, the correlation of above 70% suggests that there are reasons why they should watch trade more closely. And in fact, the correlation with imports is slightly higher, at 71%, not least because of the size of the trade deficit that the US runs.
Much of that trade deficit is with China in particular and Asia-Pacific in general. In fact, the trade with the key global regions where US trade policy has currently stalled constitute 56% of US trade and Asia-Pacific is the most important of these in value terms.
Figure 2 | Value of US trade (USDm) with key trading regions: the EU28, ASEAN and Asia-Pacific
Source | DeltaMetrics 2014
Figure 2 shows clearly is that although trade with Asia-Pacific has grown by 4.5% in the last 12 months, the trajectory for the rest of the year is relatively flat for all regions. Much of this growth was in Q2 2013 for all three regions and year on year 2013-14 growth is likely to be much lower at under 2% for Europe and just above 3% for ASEAN and Asia-Pacific.
Admittedly US exports are growing relatively quickly at above 3% while imports are forecast to fall in 2014 by nearly 1%. But as the S&P 500 is more correlated with imports than it is with exports, this should give policy makers pause for thought: might it be that markets are perhaps more interested in the activities of US-based global supply chains in Asia that import into the US, than they are in the re-shoring of US jobs evidenced through higher levels of export activity?
Source | DeltaMetrics 2014
Figure 3 shows that the US terms of trade (the price of export in terms of the price of imports) are not especially correlated with the value of the Dollar against the Euro but are with the value of the Dollar against the Yen. More than this, although trade with Europe is strongly correlated with the value of the Dollar against the Euro, this may well be because the Euro is a trade currency rather than a speculative currency. What is quite apparent from Figure 3 is that the correlations across the board: with the S&P 500 acting as a proxy for US assets and sentiment more generally, and with the USD versus the Yen are significant with both Europe and Asia, but strongest of all with Asia, reinforcing the view that the TPP and the TTIP talks are vital to US trade, if not directly to US GDP.
Yet China will be excluded from TPP talks. As the US’s third largest export partner and largest import partner this seems odd, and with a trade deficit that the US runs with China is forecast to be some USD 370bn a reminder that actually the US cannot afford to be overly protectionist in its relations with China. The US terms of trade with China are 84% correlated with the S&P 500 underlining the importance of the fact that US companies have strong interests in supply chains that run into and out of China across the Asia-Pacific region.
Figure 4 | US terms of trade with China vs Yen per USD, June 2001-May 2014
Source | DeltaMetrics 2014, Bloomberg
Nowhere is the importance of supply-chain dependency more clear than in the trade competitiveness of US electronics. In 2001, the US had a Normalised Revealed Comparative Advantage (NRCA) in exports of Computers of 0.11 and in semi-conductors of 0.14. By 2006 in the case of computers and 2010 in the case of semi-conductors this comparative advantage had turned into disadvantage of -0.01 and -0.1 respectively. By 2014 the equivalent figures were -0.2 for both sectors. In fact, it is only the US’s increasing self-sufficiency in oil and natural gas that is improving the outlook for US exports with a near 50% improvement in the Revealed Comparative Advantage of mineral fuel exports by 2020. Even if the NRCA figure is still forecast to be mildly negative, this is a vast shift on its 2001 value of -0.62.
The wonder is why anyone should be surprised. From the mid-1990s onwards the globalisation strategy of large US multinationals was to outsource to China (and now the rest of Asia), the automated processes within semi-conductor and computer manufacture that could be done more cheaply but equally as effectively there. That process, now so established across more sectors, is hard to turn around once it has started and explains, to a large extent why US markets are so correlated with both imports and trade with Asia.
The problem was, as the song goes, Born in the USA. Maybe markets should be looking to Springsteen’s lyrics to predict what happens next:
“….Come back home to the refinery,
Hiring man says, “Son if was up to me….”