Tuesday, July 12, 2011

U.S. Total Trade Surges to New Record High in May

Today's monthly trade report showing an increase in America's current account deficit to $50.2 billion in May was accompanied by the typical alarming media headlines such as: "U.S. Trade Gap Soars to 31-Month High in May," "U.S. Trade Deficit Jumped in May,"and "U.S. May Trade Gap Widens to $50.2 Billion."  

Here's what probably won't get widely reported:

1.  The total volume of U.S. international trade activity (exports + imports) reached an all-time record high in May (not adjusted for inflation) of almost $400 billion, slightly higher than the previous record of $398 billion in July 2008 (see top chart above).  Compared to the recession-related, cyclical low of $277 billion of total trade activity in May 2009, there has been a 44.5% increase in U.S. trade in just two years, as the U.S. world economies have recovered and our trade level has "surged" and "jumped" to a record high.    

2.  Despite a slight dip in exports from April, the May volume of exports ($174.86 billion) was the second-highest monthly export volume in history (not adjusted for inflation), a further sign that a worldwide economic recovery, along with a cheap dollar, have led to a "surge" and "jump" in demand for U.S. products (see bottom chart above).  

Related: Cato's Dan Griswold recently wrote in a Barron's article about the political and media obsession with the U.S. "trade deficit," and the underlying assumption that imports are "bad" and exports are "good":

"Much of what we import doesn't displace domestic production so much as complement it. Imports fuel American industry by providing the raw materials, intermediate inputs and capital machinery our producers need to compete. Competition from imports spurs innovation, cost containment, and productivity gains. Lower prices for imported consumer goods allow households to spend more on home-grown services. 

The dollars we spend on imports quickly return to buy U.S. assets. In 2010, our trade deficit in goods of $647 billion was exactly offset by our trade surplus in services and investment income and our large capital surplus—the amount of U.S. assets, including Treasury bonds, purchased by foreigners, minus the foreign assets purchased by Americans. The grand balance of U.S. international transactions last year, as in every year, was zero.

Politicians obsessed with the trade balance should give up the goal of promoting exports over imports. The aim of U.S. trade policy should be to maximize the freedom of Americans to buy and sell in global markets for mutual gain, whatever the mix of goods, services and assets we freely choose to trade."


At 7/12/2011 10:51 AM, Blogger Benjamin Cole said...

Interesting post.

And yet, then what explains the extraordinary surge of Far East nations--S. Korea, China, Taiwan--who manage their economies, and practice mercantilism?

And does the fact that China and S. Korea are largely debt-free give them room to maneuver in recessions that we lack?

Projecting out 20 years: Does anyone believe that the USA will have more, or less, global influence and success than China?

George Bush jr. asked, "Is our children working?"

I ask, "Is our system demonstrably better than the Far East systems?"

At 7/12/2011 11:15 AM, Blogger juandos said...

"U.S. Total Trade Surges to New Record High in May"...

Hmmm, did anyone bother to inform Reuters?

Trade gap surges to nearly 3-year high on oil

At 7/12/2011 11:52 AM, Blogger Buddy R Pacifico said...

"The aim of U.S. trade policy should be to maximize the freedom of Americans to buy and sell in global markets for mutual gain, whatever the mix of goods, services and assets we freely choose to trade."

Yes, absolutely yes. Notice the words "sell in global markets". Here is a history of trade with China. There is not much selling by the U.S. to China. Is it because of competition? No, it is because of concessions to Chinese authorities that subverts the aim of selling.

Examples are: pervasive theft of U.S. Intellectual Property; forced joint ventures with national and local communist enterprises; currency manipulation; the entire Chinese government exempt from the WTO; domestic origination iniatives by the government; rolling certification standards for U.S. products in China.

Total trade figures hide these factors.

At 7/12/2011 1:30 PM, Anonymous Anonymous said...

Benjie, let me list some GDP per capita stats of your supposed Eastern champions:

S. Korea - $30,000
China - $7,500
Taiwan - $35,000

USA - $47,000

So the US should copy a country like China, that can barely eke out one-sixth of the production per person of the average US worker? Or maybe we should copy South Korea or Taiwan, who after decades of progress can't even reach 80% of US GDP PPP per capita, even with a much smaller population? Saying we should clone the Eastern nations model is like saying we should imitate the crackhead down the street who finally sobered up and is doing better. He only binge drinks on the weekends now, well, maybe we should binge drink on the weekends too: he's doing better, isn't he? So while there is no reason to clone their dumb mercantilist model, I will note that the Eastern countries that are doing the best, S. Korea and Taiwan, are the ones who are more free market.

Buddy, you are right that we should encourage the Chinese to open their markets more. However, if they want to cut their nose off to spite their face and enrich US consumers in the process, though of course causing some job losses here from the increased competition, there's no reason for us to do the same and impose our own dumb tariffs. Most of the Chinese initiatives you list are primarily bad for the Chinese, I don't know why you are so concerned for their well-being. ;)

At 7/12/2011 1:52 PM, Blogger Benjamin Cole said...


I will state the obvious: Look at the trends. Where were these nations a generation ago?

Where will they be a generation from now?

The USA will almost surely be bankrupt in another 20 years. China, S. Korea and Taiwan will be debt-free.

By then, their per-capita incomes will exceed ours.

Are you sure the American way is the only way?

At 7/12/2011 2:25 PM, Anonymous Anonymous said...

Benjie, where was Japan a couple generations ago? Where is it today? Japan grew from poverty to join the rich world- giving rise to a lot of hype and a Michael Crichton novel about how they would eclipse the US- but it still lags the US by a significant margin to this day, with $35k GDP per capita, surprisingly lagging even Taiwan today. It is easy to pull yourself off the street and get a job, much harder to start competing with the likes of Google. As for debt, here's the stats as a percentage of GDP:

South Korea - 23.7%
China - 17.5%
Taiwan - 33.9%
Japan - 225.8%

USA - 58.9%

None are debt-free as you claim, and the only reason some have less debt is because people don't want to lend as much to poor countries. If you think any of those countries will pass the US in per-capita income in 20 years, you are smoking something. The American way is not the only way, because as that debt figure shows we already have too much govt involvement in the economy. But as long as those Eastern countries copy our worst ideas, ie mercantilism, we have nothing to fear from them.

At 7/12/2011 2:34 PM, Blogger morganovich said...

"And yet, then what explains the extraordinary surge of Far East nations--S. Korea, China, Taiwan--who manage their economies, and practice mercantilism? "

you ask this same foolish question over and over and the answer is still the same:

they have been transitioning from being backward agrarian countries to being manufacturing economies. they have gone from being brutal autocracies to having at least some of the benefits of a free market economy.

it's easy to put up big % growth when you start from a low base.

china is about to hit a wall because they have run out of cheap labor and lack the freedom to move to an information economy.

"I ask, "Is our system demonstrably better than the Far East systems?""

yes, hands down better. would you like to have a standard of living that the chinese consider middle class?

you are misinterpreting the "trends" by assuming they will be linear going forward. it doesn't work like that.

it's easy to make the early gains, but much harder to keep them coming.

there is ZERO evidence that mercatilist behavior drives growth and stacks of evidence that it hurts it.

your whole augment is like saying "hey, it's warm in here and the window is open so it must be the window letting in heat" when it's 30 degrees outside and you are ignoring the bonfire in the middle of the room.

At 7/12/2011 2:36 PM, Blogger morganovich said...

The USA will almost surely be bankrupt in another 20 years. China, S. Korea and Taiwan will be debt-free."

this is a stupid argument.

you are confusing the behavior of a government with that of the rest of the economy. they are not the same thing.

americans will not be BK, our federal government might be.

At 7/12/2011 2:41 PM, Blogger Benjamin Cole said...


Japan committed seppuku by the Bank of Japan, and endlessly tight money. That's why the yen is worth double against the dollar compared to 20 years ago. The tight money has cut Japan asset values by 80 percent--equities and real estate down by that much in last 20 years. Tight money is a miserable failure, as is too much federal borrowing. Investors in Japan have no reason to invest in real estate or equities. Why would they? The downward trends appear secular by now. So, they buy Japanese government bonds at 1 percent, and join the anti-inflation crowd.

Japan=National suicide.

S. Korea and China also own huge financial assets, so I am not sure they are net in debt, as your figures suggest.

Given simple extrapolation of trend lines, S. Korea and China will eclipse the USA in a generation. Things could go another way--wars, for example. Or the trends may accelerate, as they have been.

I do not foresee the more free-wheeling Chinese and S. Korean cultures kow-towing to some anal money gnomes in their central banks. In other words, they properly place growth ahead of fighting inflation.

Sadly, the USA may be doing a Japan. Not only are we running up huge debts, we are also playing with deflation, and an overly timid monetary policy--the Japan model.

Again, I foresee a bankrupt USA in a generation, but huge growth in Far East.

We will have Detroit and the Seventh Fleet. China is already the largest trading partner of every nation in the Far east and SE Asia, and that will only get more pronounced.

At 7/12/2011 2:47 PM, Blogger PeakTrader said...

Sprewell, your China GDP per capita is an estimate based on PPP, which doesn't take into account quality and consumption pattern differences.

China’s employment and compensation costs in manufacturing through 2008

"China’s hourly compensation costs remain far below those of many of its East Asian neighbors like Japan [$27.80] and Taiwan [$8.68], but are roughly on par with those of others like the Philippines [$1.68].

Inflation in China has been substantial. Consumer prices in urban areas increased an average of 3.3 percent annually from 2005 through 2008. Consumer prices in rural areas increased even more rapidly, at an average annual rate of 3.9 percent.

Yearly compensation per employee (98.46 million in manufacturing)

2008 21,593 yuans ($3,108)

Despite large increases in recent years, hourly compensation costs in China’s manufacturing sector remained only 4 percent of those in the United States in 2008; that year, hourly compensation costs rose to $1.36."

At 7/12/2011 3:03 PM, Blogger PeakTrader said...

Over the past 10 years, China's consumption fell from 45% to 36% of GDP (U.S. consumption is 70% of GDP and E.U. consumption is 60% of GDP).

There seems to be few bargains in China and more saving.

At 7/12/2011 3:09 PM, Anonymous Anonymous said...

Benjie, an economy is a complex thing, as Morganovich keeps pointing out. Did Japan sputter out because of tight money or because of that huge debt figure and all the govt regulation it entails? That experiment has been run many times in many countries and all the evidence is that oversized govt is the real killer, not tight money. The US also has huge financial assets, much larger than South Korea or China, so a straight apples-to-apples comparison would only compare govt debt to GDP, which is what I gave. If one can simply extrapolate the trend lines, why hasn't Japan eclipsed the US? Because you can't just extrapolate, you have to consider how much harder it is to compete with the big boys, once you've worked yourself out of abject poverty.

Yes, we are copying Japan in many stupid ways nowadays, though nowhere near as bad as them. Sony CEO Howard Stringer said that he couldn't fire Japanese engineers a couple years ago when they were retrenching, he had to "retrain" them and put them elsewhere by law. Thankfully, we haven't gone that far yet in the US. Of course, there will be huge growth in the Far East: when you are making $1.50/hour, moving up to $3/hour is huge growth, 100%, but so what? That's so far behind the US, it's not even worth considering. Detroit? We'll be lucky if we can ditch that rat trap. :) Of course China is the largest trading partner of most Eastern countries, that's because it's right next to them. Why do you think Canada is our largest trading partner and Mexico is third?

Peak, are you saying that the Chinese are poorer that my figures would suggest? Not sure it matters either way, as my figures show them as plenty poor enough. ;)

At 7/12/2011 3:19 PM, Blogger Benjamin Cole said...


Name one country that had tight money--tight enough to maintain prolonged mild deflation--and prospered.

At 7/12/2011 3:23 PM, Blogger PeakTrader said...

The Republicans could learned from the Chinese:

"Every battle is won before it is fought....." - Sun Tzu, The Art of War.

The Republicans should've began their position with a $400 billion spending cut, a $400 billion tax cut (for all workers and Social Security recipients), and extensive deregulation, over a year, to raise the debt limit.

They would've taken the initiative, about stimulating the economy and creating jobs, and could've compromised.

Instead, they gave the initiative to Obama, to reduce debt, and will look uncompromising trying to get spending cuts without tax hikes.

At 7/12/2011 3:43 PM, Blogger PeakTrader said...

Sprewell, excluding PPP, China's per capita GDP is less than $3,500. However, $7,500 PPP seems too high based on China's GDP before 1980.

Also, China exports a huge percent of its GDP, imports goods to produce those exports (e.g. capital goods, raw materials, energy, etc.), and households consume little.

At 7/12/2011 3:58 PM, Anonymous Anonymous said...

Benjie, easy, you're looking at it. :) The US grew to a world power in the 40 years after the civil war while there was prolonged and moderate deflation. That paper notes that deflation has often been accompanied by such positive growth, it's only hyper-deflation that can be destabilizing, just like hyper-inflation. Apparently Bernanke thought that mild deflation was still a mild negative, but nowhere near the killer you make it out to be.

Peak, I'm well aware that Chinese stats are exaggerated, but even without consumption, they are still saving, so consumption could always go up later.

At 7/12/2011 4:01 PM, Blogger Benjamin Cole said...


This link shows that China has huge sovereign wealth funds, with assets exceeding $1 trillion. I would say the nation has debt well under control, given its huge assets.

Again, the rise of China may or may nor continue. I think it will.

Still, consider this: China carries little debt, and the USA will likely default on its debt in 20 years, even while our private sector remains heavily indebted (the Chinese, in contrast are huge savers).

Morgan is right; thh USA defaulting does not mean private sector debt-owers will. But likely there will be widespread defaults down the line. Like the last couple of years, btw.

Hard to see how being a pauper nation will enhance the USA role in the world, economically, culturally or militarily.

There is a bright note: Argentina has boomed since it defaulted n its debt and devalued it currency.

Maybe we will soon be called "The Banana States of America."

Run by the "Banana Republicans."

But, like I said, we will have Detroit and aircraft carriers, even in 20 years.

At 7/12/2011 4:21 PM, Blogger Junkyard_hawg1985 said...

"Name one country that had tight money--tight enough to maintain prolonged mild deflation--and prospered."

Sprewell beat me to it, but in the United States, consumer prices dropped by 50% between 1800 and 1900. During this time, the ecomony grew on an inflation adjusted basis by a factor of 80!

As for China, their per capita GDP matches the U.S. in 1878.

At 7/12/2011 4:34 PM, Blogger PeakTrader said...

Junkyard_hawg1985, small economies can grow faster, and deflationary growth may not necessarily be the fastest growth.

At 7/12/2011 4:34 PM, Blogger Benjamin Cole said...

Junkyard and Sprewell-

Okay, good find, and my hat is off my bald head to you.

But really a bit dated. The economy then is nothing like the global one we have now, with instant transfer of capital across borders.

Name any modern economy that has thrived with deflation.

I can name a modern economy that has entered the twilight zone with deflation: Japan.

At 7/12/2011 4:37 PM, Anonymous Anonymous said...

Benjie, $1 trillion is nice, but nowhere near $55 trillion in US household wealth. That link notes that China, at $16.5 trillion, is still behind Japan, at $21 trillion. If you adjust per capita, they fall even further behind, from less than a third to a tenth of US levels. Debt is not a killer right away, only because nobody wants to lend to you while you're poor, but as Japan showed, having so much govt involvement eventually leads to runaway debt. Everyone agrees that the rise of China will continue, as they are still unimaginably poor by US standards: the question is how far they will go? I think they'd be lucky to get to Japanese levels, which is still poorer than most US states, including what we consider a backwards state like South Carolina.

The US may have more debt that it can afford, but the private sector is paying it down now. It's the govt debt that's the real issue, hence the Tea Party rising to take that on. If savings alone were enough, China would be much farther along, obviously it isn't. I'd rather have a spate of defaults in a rich country like the US, rather than being stuck perpetually in poverty then, if the Chinese are lucky, growing to Japanese mediocrity. As my links and stats show, it is the Chinese and Japanese that are the paupers, not the US. Argentina is a joke that has problems borrowing to this day, as a result of their default. Perhaps the US will devolve like you say, but if it does, it will be because it embraces the silly economic policies from Japan and China that you are extolling.

At 7/12/2011 5:16 PM, Blogger Benjamin Cole said...


Good points you make.

Yet what are USA assets worth? Today, and in 10 years?
In Japan asset values have fallen by 80 percent in the last 20 years.

Given our Fed, and our debt, that will likely happen to us also.

The relatively unindebted China will keep getting richer. S Korea even more so.

I advise migrating assets to SE Asia.

I cannot imagine the US political parties we have ever balancing the budget.

At 7/13/2011 7:54 AM, Blogger morganovich said...

"In Japan asset values have fallen by 80 percent in the last 20 years.

Given our Fed, and our debt, that will likely happen to us also. "

you are thinking nominally.

if you have $100 saved and prices drop 10%, it's worth more in real terms, which is what matters.

printing money recklessly is destroying the real wealth in the US.

At 7/13/2011 8:50 AM, Blogger Junkyard_hawg1985 said...

"Name any modern economy that has thrived with deflation."

Name any modern economy that has sound money and not a fiat currency.

At 7/13/2011 6:10 PM, Blogger Ron H. said...

Junk: "Name any modern economy that has sound money and not a fiat currency."


At 7/13/2011 7:06 PM, Blogger PeakTrader said...

Sound money and modern economy may be a contradiction.

I'm sure there's an island using stones as money, with its people rolling them up to the hut-store.


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