February 2017 Newsletter
A Tangled Web of Trade
In This Issue
As President Donald Trump settles in to his new role, perhaps one of the most uncertain policy areas of the new administration is that of economic relations with our trading partners. We find that there are often some misconceptions about who we trade with and what we trade, so this month we will examine some of these statistics.
With our consumer focused economy, it is not surprising that the United States is the world’s largest importer, bringing in $2.76 trillion of goods and services in 2015. What is somewhat more surprising is that despite the oft repeated rhetoric that “nothing is made here anymore”, the U.S. is actually also the world’s third largest exporter, after China and the European Union, sending out $2.23 trillion of ‘Made in America’ goods and services. Also contrary to popular notions, these exports don’t include just intellectual property and financial services. In 2015 these exports included $119 billion worth of commercial aircraft, $54 billion worth of industrial machinery, and $86 billion in chemicals. Automobiles accounted for 10% of all goods exported at $152 billion and we exported $55 billion in pharmaceuticals. Services, such as travel services, government and military contracts, and financial services accounted for a third of the $2.23 trillion. (Sources: U.S. Census & CIA World Factbook.)
The import side looks more like what you would expect. More than 80% of U.S. imports are goods. These include $444 billion worth of industrial machinery and equipment, $137 billion in cell phones/televisions, $121 billion in apparel/footwear, and $144 billion in oil and petroleum products. That last category is also an area of frequent misconception. Many pundits would have you believe that the United States is entirely dependent on foreign oil, when in reality the large majority of petroleum products consumed in the U.S. come from the U.S. (Figure 2)
Our top five trading partners are China, Canada, Mexico, Japan, and Germany, with all of which we are running consistent trade deficits. Our total trade deficit for both 2015 and 2016 was approximately $500 billion.
Figure 1: U.S. Trade Deficit 2005-2016
The U.S. trade deficit has risen slightly over the last four years, but has remained steady at around $500 billion, far short of the $750+ billion deficit we ran in 2006.
Figure 2: U.S. Petroleum Consumption & Production Exhibits
With the rise of shale oil production in the U.S., domestic production has almost doubled over the last ten years, and now eclipses imports by more than 5 million barrels per day. In 2015, more than ¾ of domestic petroleum consumption was “fueled” by our own production.
There are valid points on both sides of the free trade argument. On the pro side, these agreements generally allow businesses to streamline operations and gain access to new markets to sell their goods and services. While much ado has been made over the TPP (Trans-Pacific Partnership), much less noise has been made over the TTIP (Transatlantic Trade and Investment Partnership) between the U.S. and the E.U. In the wake of Brexit and the election of President Trump, this deal has a very uncertain future as well, but the initial broad strokes would have allowed drug companies to cut costs by unifying the testing standards between the two markets. The electric car industry would have been able do the same and American farmers may have been able to gain access to European markets if they permitted genetically modified agriculture products. For corporations, and for the global economy as a whole, free trade has been quite beneficial.
Figure 3: Powerful Forces to Resist
The bottom line is that businesses will seek to grow, and with the vast majority of purchasing power, economic growth, and consumers living outside of our borders, it is a difficult force to try and stop. Source: U.S. Chamber of Commerce.
The con (at least from our perspective) has been borne by certain sectors of our domestic labor force. The U.S. generally has one of the highest paid labor forces in the world, so when trade opens up with just about anyone, it will often be cheaper for companies to relocate jobs and production to the other country. This is one of the main arguments against these trade agreements, and the effects can be seen throughout former industrial towns all over the country. It is this sentiment that Donald Trump recognized, tapped in to, and rode all the way through the Republican nomination to the presidency. He has already taken one major step in the protectionist direction by killing the TPP. It will remain to be seen how far he goes to untangle the web of globalization and what the effects of those actions will ultimately be on the economies of the world.
Figure 4: U.S. Industrial Production Growing Despite Sentiment to the Contrary
Nearly 40 million jobs are supported by trade in the U.S. and 1 in every 3 acres of farmland in the U.S. is planted for export. Source: U.S. Chamber of Commerce.
Chart of the Month
A graphic showing the various countries of the world with which we trade and the respective deficit/surplus. In 2015, more than 70% of our total trade deficit of $502 billion was with China.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
Investing involves risk, including possible loss of principal.
Securities offered through LPL Financial, member FINRA/SIPC.
Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and The Philadelphia Group are separate entities from LPL Financial.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
International investing carries with it special risks, including political risk and currency risk.