Bilal’s Macroscope: Three Critical Trends Revealed by US Trade Flows
- By Bilal Hafeez
- 3 min read
At around -3% of GDP, the US trade balance has improved from the depths of March 2022 when it reached -4.5% of GDP – its lowest level since 2008 (Chart 1). In absolute terms, the trade balance improved sharply in Q2 2022 and since then has been choppily improving (Chart 2).
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At around -3% of GDP, the US trade balance has improved from the depths of March 2022 when it reached -4.5% of GDP – its lowest level since 2008 (Chart 1). In absolute terms, the trade balance improved sharply in Q2 2022 and since then has been choppily improving (Chart 2).
But underneath the hood, we find three key trends:
1. Fewer Goods Imports Are Making a Difference
The trade balance comprises both goods and services. The US runs a large goods deficit but a services surplus. However, given the size and cyclicality of the goods balance, it is the goods side that makes the difference in the near-term trend in the trade balance (Chart 3).
We can clearly see that the goods trade balance has improved since early 2022. Splitting into exports and imports, we find a meaningful decline in goods imports and a modest decline in US exports. Given US growth has generally been stronger than the rest of the world, this is even more impressive. Typically, stronger US growth would lead to more imports. Admittedly, some of this could be due to aggressive inventory building last year and so less need for imports this year. But it could also suggest structural changes in US onshore production.
2. The US Is Moving Away From China Imports
On the import side, the US imports the most from China, Euro-area, Mexico and Canada. Recent trends reveal a drop in imports from China, which stands out compared with its other trade partners. Imports from the Euro-area and Mexico have held steady (Chart 4).
Comparing imports to 2016 when Trump was elected, we find US imports are up between 50% and 60% from the largest trade partners, but down 20% from China. Also, imports from Vietnam have surged by 140% (Chart 5). This suggests a potential structural shift away from China.
3. Euro Slowdown More Important Than China for Exports
On the export side, the US exports most from Canada, Euro-area and Mexico (Chart 6). China is less important for the US. The US exports almost three times as much to the Euro-area as to China.
Moreover, over the past two years, US exports have grown most to the Euro-area – up 45% (Chart 7). That is more than the 20% to Mexico or Canada. This suggests that Euro-area rather than China growth weakness could be more of an impact on US growth.
Market Implications
Overall, there are three key market implications:
- An improving US trade balance is less of a medium-term negative for the US dollar. This suggests caution in being too bearish on the dollar.
- China weakness should not have much impact on US risk markets. There does appear to be a de-linking, and financial linkages are reduced too.
- A European slowdown could eventually hurt the US. The most obvious channel could be through less energy demand and hence less LNG exports from the US – this could weigh on energy markets. More generally, this suggests US growth will have to remain domestically driven.