Wednesday, May 6, 2009

The Data Show A Collapse of US Imports and Exports

There are a number of reasons that i am spending a lot of time in this post on Menzie Chinn's train of thought and his readers' responses via comments.

1. It's extremely fascinating.

2. It indicates a window of opportunity for the US to go about recapturing our valuable manufacturing jobs with their intrinsically high "value added" to the economy. (We still need to cover that more deeply in another post.)

3. Because there are a number of valuable conclusions it supports. These are crucial to a rebuilding of the US economy that will work and become self sustaining. Some of these have been stated by individual comments in Menzie's article. What Does the Collapse of US Imports and Exports Signify?

4. It's exciting to see a number of like minded people who have had similar realizations that the local, state, regional, and national economies can be rebuilt only with the return of a manufacturing base! i first decided this was the case in the eighties when I heard the ridiculous assumption set of the "Chicago Genius Economics School Standard model." It depends on a constant stream of new miracles occurring as often as needed to replace whole industries and their lost jobs with better ones. Belief in the tooth fairy comes to mind. The words "efficient" and "low margin" were freely sprinkled in their assumptions.

Please read the comments at the end of Menzie Chinn's article from Menzie's well informed readers. I have reproduced them below with my highlighting and comments.

Many of his readers strongly support my thesis about the importance of Governmental action to restoring manufacturing jobs in rebuilding the severely damaged, yet HOPEFULLY not totally and irrecoverably destroyed US economy.

This is a rough draft. Not finished, but it will have to do as duty calls.
In his blog, of April 27th, Menzie Chinn showed The Decline in US Imports.

On his blog yesterday, May 4th, Menzie goes much further. He poses the following question: What Does the Collapse of US Imports and Exports Signify?

He calls attention to the very unusual collapse in both US imports and exports for the last two quarters, 2008Q1 and 2009Q2. His observation, based on earlier work, is reinforced with a similar observation using data from the Organisation for Economic Co-operation and Development (OECD)

It shows that "This decline is not restricted to the United States, as noted in an OECD report "Trade flows collapse in Q4 2008 but signs of falls easing in early 2009" released last week (h/t Torsten Slok):" The report states:

"G7 exports fell 9.5% while imports were down 5.6% quarter-on-quarter in the final quarter of 2008. Year-on-year exports dropped 7.9% and imports fell 6.4% in the fourth quarter.

In the United States, export volume growth dropped 7.8% and imports fell 5.1%. Compared with the previous 12 months, exports declined by 2.3% for the first time since the last quarter of 2006. The 8.4% fall in import volumes accelerated the downward trend from the first quarter 2008.

Japan’s exports plunged 19.3% in the fourth quarter 2008, about twice the rate of the G7, while imports fell 4.6%. This pattern was also reflected year-on-year with a 20.1% drop for exports and a 6.8% decline in imports.

German quarter-on-quarter exports dropped by 9.0% and imports by 6.1% in the fourth quarter. On a year-on-year basis exports fell 7.8% while imports were down 1.8%: the first falls for Germany since the fourth quarter 2006.

EU15 Extra-EU quarter-to-quarter exports dropped with 6.3% less sharply than G7 exports, while the fall in imports was more pronounced with 7.3%. This pattern was also reflected year-on-year with a 5.2% decline for exports, while imports were down 5.7%.

Menzie Chin notes a strong, and highly unusual, correlation between imports and exports for the last two quarters. This is not typical of previous recessions. He proposes reasons this may be happening.

Menzie writes about Causes
"So, we come to the question of what is causing this correlated and deep decrease in trade flows. A recent VoxEU post The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz documented the decline in US and European trade flows, arguing that this decline is more likely associated with depressed economic activity and diminished access to credit, rather than to trade protectionism. I agree that thus far, this characterization seems correct. So, this leads to the other possibilities."

Menzie Chinn asks:
"Is it trade financing?
Is it inventory decumulation?
Is it vertical specialization?
(By the way, I don't have a definitive answer; and these explanations are not mutually exclusive)

I think the downturn is in large part due to the lack of trade financing. But box 1.2 in the most recent OECD Economic Outlook Interim Report notes that it is difficult to explain the decline in trade growth using proxy measures for credit problems."

In the above cited article, The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz evaluate the causes: "Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness."

What did his clearly knowledgable readers have to say about Menzies article? See the article and loook for the comments at the end. I have singed aout a few that resonate with me...

My Favorite Comments

"So, we come to the question of what is causing this correlated and deep decrease in trade flows."
Is it TOO MUCH CONSUMER DEBT on the lower and middle class in the high wage countries because they are trying to make up for negative real earnings growth due to a globally oversupplied labor market?

Chicbee adds: "Negative real earnings growth" can be corrected by bringing the manufacturing jobs back to the Good Old USA

Is the money supply mix out of whack too?

Did something similar happen right before or during the Great Depression?

Are central bankers to blame for too much debt?

Other Brad Setser articles:

Posted by: Get Rid of the Fed at May 4, 2009 11:54 PM
Chicbee adds: This type of actual observation and counting is worth its weight in platinum. I would prefer a real sit down and count exercise, to establish trends, as exemplified by my hardware store counting of inventory to see what's made in the US.

I watch trains, to evidence the vitality of the export/import trade with Canada. Lately, I've noticed trains are tending to be full, though shorter heading north and often empty heading south. Reasons by priority of impact:
1) American consumer demand (low to middle class) is a freefall, no relief for 48 to 60 mos.
2) Credit is tight, even for the imort/export folks
3) Inventories are being burned off due to lack of demand and ability to get credit for restock.

I also watch the shelves at the local stores. The inventory level in some stores has reached the point where there are empty spots between products and in some cases, for the first time in my life, age 52, product is not in stock.
Chicbee adds: Excellent job!!!

Real world thus suggests America's chickens have in fact come to roost. The good news is we are now saving at an astounding rate!!

Posted by: Steve at May 5, 2009 07:02 AM
Since the Asian mercantilists refuse to trade, wanting only to export and refusing to import, and to enforce that state manipulate their exchange rates such that goods from other nations cannot be exported to them at competitive prices, consumers in other nations can buy the Asian exports only if they themselves, or their governments on their behalf, are willing to go evermore into debt to the Asians.
Chicbee adds: Excellent point... Yes, they control imports, why can't we learn from them?

As credit-worthy Western consumers have more debt than they want, and the mechanisms of the housing bubble for lending to un-credit-worthy consumers have ceased to function, the only entities left to do the borrowing are Western governments. Clearly, those governments have not stepped up to the plate. Unless they do, it's over.

We are not going to return to the status quo ante in which Western consumers' debt loads rose every year, seemingly without limit.

There was a limit. Western consumers not only reached but went over it, and are now deleveraging back down to it.

Posted by: jm at May 5, 2009 07:41 AM
So much for the myth of "free trade," That is only practiced by the US in favor of other nations.

My first inclination was to go with Joseph - its just nobody's buying. The data disagree.

Imports as a share of personal consumption expenditures declines by 6 percentage points between third quarter 2008 and first quarter 2009 (from 25% to 19%).

When we compare goods imports to goods consumed by personal sector it is even worse. 16 point decline in goods imports as a share of personal consumption of goods. Goes from 55% (I checked these numbers twice) to 40%.

I realize that maybe a third of imports go to production rather than consumption, nevertheless, imports are suffering.

I think fear and panic has a lot to do with this. Imports have a long lead time. US companies that import goods did not want to be caught with a lot of goods in transit while the economy was still in freefall.
Chicbee adds: Excellent point

There must be a silver lining in every cloud. I hope that problem will remain unsolved long enough to jumpstart production in the U.S. Maybe being able to get some goods in a hurry, if need be, will become more important than costs and the trade deficit will remain low.
Chicbee adds: Excellent point

My personal bias is for the U.S. government to reject free trade and use its power to reduce imports to a level near exports - PERMANENTLY.
Chicbee adds: Excellent point

Posted by: ReformerRay at May 5, 2009 03:30 PM
Perhaps lending credence to the argument that there is a shortage of trade credits, I have noticed that for some time the DOW futures market has been below the spot, and by significant margins (20-40 points). Arbitrage flows should reverse this gap.

Posted by: don at May 5, 2009 05:16 PM
For some time neocons have been, under the guise of so called free trade which is really one way trade with jobs only going the other way, taking $50K chunks out of world economic demand and replacing them with $0 - thereby shrinking the basis for global economic demand and the global economic pie by $50K increments.

We have been unemploying the champion consumers of all time , N. American middle class workers making roughly $50K/yr, and replacing them with 1.5 Asian subsistence slave wage workers hardly capable of feeding and clothing themselves never mind contributing to global economic demand - $0 addition to world economic demand.

Chicbee adds: Excellent point

How can anyone expect N. American economic recovery when the neocons have gotten us to think that exporting all of our manufacturing jobs is a good thing? It also sucks for China because they are destroying the consumers responsible for their economic growth - they are busy killing the goose that has laid the golden egg.
Chicbee adds: Excellent point.

How, under this neocon trade regime, can either N. America or Asia ever recover economically? Even if we develop new 'green' products and technology, under current conditions the manufacturing jobs will go to Asia and the subsistence workers and N. American workers will continue to be unemployed!

Chicbee adds: Excellent point. However its not just "neocons," but all who have been convinced by the ideology of the Chicago School Economics Standard Model. It's all politicians of the left and right persuasion. (;-)

Posted by: Michael Warhurst at May 5, 2009 05:17 PM
Related to Ray's point, given that trade is collapsing at such a level, does it become more sensible now to put up some barriers to encourage level standards of trade and keep the manufacturing sector from completely slipping out of sight in the U.S.?
Chicbee adds: Yes it does seem eminently sensible.

The damage from any kind of trade war would be extremely small compared to a few years ago, and the groundwork could be laid to keep trade imbalances from springing up once (if?) the economy picks up again. The higher standards and wages can combine with dollar depreciation to keep export-driven businesses afloat for a time when they will be needed in recovery.
Chicbee adds: Excellent point.

A lot of these trade problems are due to lack of demand world-wide, so wouldn't maintaining higher wages (albeit artificially) more than offset the cosmetic gains from lower prices (the alleged "gains from trade")? And couldn't the raised demand from maintaining wages spark the need for more production in industries that are sorely lacking in the U.S. right now?
Chicbee adds: Excellent point. This provides the kernel of a viable approach to keeping manufacturing and other jobs here, and rebuilding the middle class that in many communities is dependent on a local base of stable manufacturing industries

Posted by: J. Miller at May 5, 2009 05:17 PM
Speaking of inventory, I went to the outdoor shop last week and they were completely out of 9mm ammo of any and all types.

Posted by: mrrunangun at May 5, 2009 08:59 PM
DickF wrote:

I agree with you that the change in imports/exports is not due to protectionism.


I would like to qualify this statement a little. Prior to Nixon pulling us off of the gold standard it was much more difficult to manipulate currencies. Protectionism was almost totally engaged through tariff policy and so was easy to detect.

Nixon pulled us off of the gold standard primarily to allow the US to engage in monetary battles against Japan under the theory that by manipulating the value of the dollar we could counter their economic gains.

Today China has taken the place of Japan in out monetary attacks, but the US monetary authorities also engage others in monetary battles. This has created a condition that greatly hinders international trade. This is especially true in a country appreciating its currency.

That said, US currency manipulation has been used to attack China, then congress threatens trade war against the Chinese for pegging their currency to the dollar. This is in fact protectionism. The rhetoric has slowed recently - even though one of Geithner's first announcements attacked the Chinese monetary authorities as has Sec. of State Clinton - so I believe that international protectionism has slowed. But do not be deceived. Protectionism no longer resides in tariffs but in currency maniputlation.
Chicbee adds: Excellent point

Posted by: DickF at May 6, 2009 08:41 AM
"Murky Protectionism" is the use of subsidies of all kinds (in the U.S., France and other nations), tax policy (Germany and most other European countries) and well trained customs agents who can delay imports indefinitely, to reduce imports into a country. Everybody should know that Murky Protectionism is widespread. However, less imports will go to poor countries, regardless of the degree and kind of protectionism.

I would like to see all nations agree on this matter. Rather than trying to root out protectionism, which is impossible, we should all just agree that our goal, for every nation, is equal trade and that EACH NATIION SHOULD ADOPT EXPLICITY POLICIES WHICH LEAD THAT NATION TOWARD EQUAL TRADE.
Chicbee adds: Excellent point

There is no reason why a trade deficit country should be ashamed to adopt actions which move the imports toward a balance with exports sold. I want the U.S. to be explicit, up front with import restrictions. If every nation adopted the same kind of import restrictions, all the nations of the world would benefit, not just the U.S.
Chicbee adds: Excellent point

"protectionism" is a scare word, to stop people from thinking.

Chicbee adds: Excellent point

I am torn between being ashamed that I keep harping on this same theme, which is really tangential to the topic of the day and proud that I am one of the people who can see clearly where the U.S. has gone wrong and what should be done about it.

Posted by: ReformerRay at May 6, 2009 11:52 AM

Monday, May 4, 2009

Flat, But Clearly Tilted Offshore: Slowing and Reversing The Rush to Export US Jobs

Different societies, nations, regions have very different economies. Duh. That's pretty obvious right? Given modern communications, many people would like to change or shape their economies to support a Western Industrialized way of life. The only way I am aware that this can be accomplished on a large scale, and not just for a city state with a relatively small population, is to industrialize. That generally means to manufacture items to sell to that culture's, or economic unit's own people. And, the possibility to export quickly surfaces. If the economic unit's population is "large," exports are not absolutely necessary, but they definitely speed up the transition process to a Western Industrialized model economy. We can discuss this at length, but let's, for the moment, assume its validity.

Problems and frictions arise when the different economies attempt to export the same manufactured goods to each other. The resulting competition can be good if the competition is only between different designs, quality, and intellectual properties. This serves to increase the overall quality of goods and services. However, as is frequently the case, the cost of production in different countries differs due to historical processes, and on the ground facts. That provides an unhealthy and unfair competition that does not take these accidental and temporary realities into account. Accidental, because they are accidents of history. Temporary, because as the industrialization continues, costs to manufacture, including labor costs, change. It makes no sense for the United States, to allow an existing manufacturer in the US, with strong and stable local ties to a community of loyal workers, to be driven out of business because of an accidental and temporary advantage held by a manufacturer in another industrializing society. It makes no sense to encourage the US manufacturer to move his production "offshore." It makes super duper no sense at all to grant him a reduction in taxes to do so. If you are a supply sider, such as Jack Kemp, you know that lowering taxes is a compelling way to encourage behaviors, just as is raising taxes. It pays to change taxes carefully and wisely with specific local consequences in mind.

I will be adding to this blog entry today and over the course of next few days.

Sunday, May 3, 2009

Should We Expose Everyone To The H1N1 Flu Virus Right Away?

I just read an article about the University of Pennsylvania's separate graduation for Education Majors who had done practice teaching in Mexico. The selflessness of the students who agreed to this was wonderful. They put the welfare of their classmates above their own desires to graduate together.

However, I am beginning to wonder if we shouldn't try to expose everyone possible to the H1N1 flu virus now, since this strain appears to be quite mild in the US, and in the world as a whole. That might well include Mexico, since Mexico has not revealed their full exposure, only the deaths, so it could have been a mild flu there too. That is beginning to appear increasingly likely.

When the N1H1 virus returns to the northern hemisphere during our usual flu season around next October, it might have mutated in countries in the southern hemisphere to a more virulent form, possibly via transmission to and from an animal vector. Having been exposed previously to a milder form could then prove to be a blessing.

In an article in the Dallas morning News titled John M. Barry: What's next for swine flu? John M. Barry points out: "What's important to keep in mind in assessing the threat of the current outbreak is that all four of the well-known pandemics seem to have come in waves. The 1918 virus surfaced by March and set in motion a spring and summer wave that hit some communities and skipped others. This first wave was extremely mild, more so even than ordinary influenza: Of the 10,313 sailors in the British Grand Fleet who became ill, for example, only four died. But autumn brought a second, more lethal wave, which was followed by a less severe third wave in early 1919."

"The first wave in 1918 was relatively mild, many experts speculate, because the virus had not fully adapted to humans. And as it did adapt, it also became more lethal. However, there is very good evidence that people who were exposed during the first wave developed immunity – much as people get protection from a modern vaccine."

Later in his article, Barry points out:
"In all four instances, the gap between the time the virus was first recognized and a second, more dangerous wave swelled was about six months. It will take a minimum of four months to produce vaccine in any volume, possibly longer, and much longer than that to produce enough vaccine to protect most Americans. The race has begun."

That might argue for the wisdom of encouraging exposure to this "first wave."