U.S. exports surged in the fourth quarter of 2013, accounting for almost half of quarterly GDP growth. Net exports — the value of exports minus the value of imports — improved by almost $50 billion in the quarter on an annualized basis.1
This continues a trend that has seen the U.S. trade deficit drop from a high of $752.4 billion in 2006 to $474.9 billion in 2013 (see chart). The driving force behind this turnaround is increased U.S. energy production and reduced demand for foreign oil.2 However, the deficit in other goods continues to pose a challenge. As an investor, you may want to consider some of the key dynamics behind the U.S. trade deficit.
The China Problem
China is by far the largest source of the trade imbalance, with a deficit of more than $318 billion in 2013 (representing some 45% of the total U.S. deficit in goods). Although the trade gap grew by “only” $3.4 billion in 2013 — held in check by record U.S. exports — it has almost quadrupled since the United States and China normalized relations in 2000.3
It was hoped that normalization would open the huge Chinese market to American goods, but the more immediate impact was the migration of U.S. factory operations to China and an increasing appetite by U.S. consumers for inexpensive Chinese products. At the same time, the fundamental disparity between the two economies — along with protectionist Chinese monetary policies — has made it difficult to develop a Chinese market for U.S. products.4
The good news is that the manufacturing exodus to China has slowed to a trickle, some jobs have returned to the United States, and the Chinese government has begun to loosen monetary controls, though this remains a thorny issue.5 In the long term, a true shift in the U.S.–China trade imbalance may depend on China’s efforts to rebalance its economy away from production and exports toward consumption.6
Of course, China is not the only nation with which the United States is working to improve its trading relationship. The U.S. has trade pacts with 20 countries and is pushing toward the Trans-Pacific Partnership, a major agreement among the United States, Canada, and 10 other nations in Asia and the Americas.7 If completed, the agreement would encompass about 40% of U.S. trade and may put the United States in a stronger position to compete with China in the Pacific region.8 Also under negotiation is a pact with the European Union called the Transatlantic Trade and Investment Partnership.9
Although the outcome of current trade initiatives could take years to come into focus, the next year or two may provide an indication of whether the United States has really turned the corner toward reducing the trade deficit.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Investments, when sold, may be worth more or less than their original cost.
1) U.S. Bureau of Economic Analysis, 2014
2) The Wall Street Journal, January 7, 2014
3) U.S. Census Bureau, 2014
4) Economic Policy Institute, 2013
5) usatoday.com, January 7, 2014
6) Financial Times, July 23, 2013
7, 9) U.S. Department of Commerce, 2014
8) The Washington Post, December 11, 2013
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2015 Emerald Connect, LLC