East Asian Economies Benefit Most From the US Recovery
- By Dominique Dwor-Frecaut
- 2 min read
Since the pandemic, the US trade deficit has nearly doubled. This is largely due to the goods deficit widening, with the services surplus only declining moderately (Chart 1). The widening in the trade deficit partly reflects unusually large gold imports. In 2020, net gold imports represented $14bn, against positive net exports in previous years. The surge reflected concerns over the lack of physical gold to deliver against futures contracts in New York. These contracts led to a 4% gap between COMEX futures and London spot prices and the surge in US imports. Since then, the price difference between New York and London has disappeared, and US gold exports have returned to trend.
The recent decrease suggests the 2020 gold imports were more for financial than industrial use (i.e., more like financial than trade flows). Stripping gold from goods trade makes little difference for the trade deficit, which was $817bn in 2020 ($831bn including gold). But it changes the profile of imports. Excluding gold, imports look less likely to be slowing – or the trade deficit seems about to widen further.
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Summary
- The US trade deficit has nearly doubled since the start of the pandemic, though this partly reflects gold imports that are related more to finance than trade. The deficit will likely increase further.
- Vietnam, Korea and Taiwan are capitalizing most on the US recovery, while China has lost US market share.
- The laggards are Canada, Japan, Germany and Italy.
Market Implications
- Countries’ respective abilities to leverage the US recovery could indicate their post-pandemic competitiveness. The bilateral trade data is positive for KRW and TWD and negative for EUR, JPY and CAD.
The US Trade Deficit Will Likely Increase Further
Since the pandemic, the US trade deficit has nearly doubled. This is largely due to the goods deficit widening, with the services surplus only declining moderately (Chart 1). The widening in the trade deficit partly reflects unusually large gold imports. In 2020, net gold imports represented $14bn, against positive net exports in previous years. The surge reflected concerns over the lack of physical gold to deliver against futures contracts in New York. These contracts led to a 4% gap between COMEX futures and London spot prices and the surge in US imports. Since then, the price difference between New York and London has disappeared, and US gold exports have returned to trend.
The recent decrease suggests the 2020 gold imports were more for financial than industrial use (i.e., more like financial than trade flows). Stripping gold from goods trade makes little difference for the trade deficit, which was $817bn in 2020 ($831bn including gold). But it changes the profile of imports. Excluding gold, imports look less likely to be slowing – or the trade deficit seems about to widen further.
China’s Share of the US Trade Deficit Is Shrinking
Switzerland is the biggest winner from the wider US trade deficit, both in absolute increase and share of the US deficit. But the increase is unsustainble, as reflected largely by the surge in gold imports.
The second group of winners is Vietnam, China, Taiwan and Korea. However, while China’s surplus with the US has increased in dollar terms, its share has declined by more than 4ppt of the total US trade deficit. Vietnam stands out for its increased surplus with the US, both in dollars and percentage points of the US trade deficit.
The laggards are advanced economies. Germany, Japan, Italy and Canada saw both a decline in their bilateral trade surplus and their share of the overall US trade deficit. Canada, Italy and Germany’s limited dynamism likely reflects their handling of the pandemic and still-strong restrictions on businesses. In Germany, limited government support could be compounding these difficulties. Japan’s underperformance is more mysterious, since until recently it had only very few cases, and government support has been among the most generous.
Market Consequences
Countries’ respective abilities to benefit from the US recovery could indicate their competitiveness exiting the pandemic. China’s loss of US market share could be a harbinger of broader difficulties stemming from reputational issues around the treatment of Hong Kong, the Uyghurs or the lack of transparency on the origins of the virus. Vietnam comes across as the up-and-coming economy of East Asia, while Korea and Taiwan seem to be holding their own. By contrast, older industrial economies seem to be laggards. This could be positive for KRW and TWD and negative for EUR, JPY and CAD.
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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)