November 5, 2019

The trade deficit for September narrowed by $2.6 billion  to 52.5 billion.  The $887 billion trade deficit in goods for 2018 was a record high level.

Trump’s latest round of tariffs on an additional $300 billion of consumer goods from China, the subsequent decline in the value of the Chinese yuan, and then Trump branding China as a currency manipulator has widened the scope of the trade/currency war.  Both Trump and Xi seem to think they have the upper hand in this skirmish.  The reality is that both countries lose although our belief is that the Chinese economy will get hit harder than the U.S.  And while the situation seems bleak at the moment, both leaders can see what is happening in the markets and the potential damage to their own economy.  Thus, our sense is that this may not escalate dramatically and that the market’s fears are overblown.  The reality is that it is in the interest of the U.S., China, and the global economy for some sort of deals to be reached.  But with a U.S. presidential election in November of next year it is possible that a trade agreement will not be reached any time soon.  However, Trump could come up with some sort of an agreement and claim that his extraordinary bargaining skills brought the Chinese to their knees.

And while this trade war will result in slower growth everywhere, particularly in China, Trump is trying to get the Chinese to play by the same rules as other country.  He wants them to stop stealing our technology, stop forcing U.S. companies to share their technology to do business in China, and quit subsidizing their export industries.  But this is the way the Chinese have been doing business forever.  The Chinese will not accept these conditions without at least some concessions from the U.S.

As the trade war got started last year investors around the globe tried to figure out which countries might fare best in a trade war.  Answer:  U.S.  Why?  Because trade is only 10% of the U.S. economy.  It is about 50% of everybody else’s economy.    Everybody loses in a trade war, but the U.S. may lose far less than others.

As other countries began to believe that the U.S. could withstand a trade war better than anybody else,  foreign investors flooded into the U.S. stock and bond markets.  The dollar soared.  That money would be used to create new businesses in the U.S., hire more American workers, and boost our stock and bond markets.  Elsewhere, the opposite was occurring.  Currencies were weakening, stock markets were falling, growth was slowing.  The U.S. was winning, the rest of the world was losing.  That process of dollar strengthening continues in 2019, but not as rapidly as it did last year.

This has been a painful and perhaps scary process to see in action but, in the end, we may end up with both freer and fairer trade than we had initially.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit narrowed by $3.1 billion in September to 82.6 billion.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quintupled from $4.0 billion to $23.0 billion, while real oil imports have fallen from $42.0 billion to $28.0 billion. As a result, the real trade deficit in oil has been cut by about $33.0 billion or 75% in the past several years and is the smallest since the early 1990’s.  The U.S. should run a trade surplus in oil by the end of next year.


.In March of last year the U.S. surpassed Saudi Arabia and Russia  and become the world’s biggest producer of oil.  By the end of the decade it should also become a net exporter of oil.  Very impressive!

The non-oil trade gap has widened by about $8.0 billion  in the past year to about $71.0 billion as non-oil exports have fallen 2.1% while non-oil imports have fallen by 1.1%.

.Stephen Slifer


Charleston, SC