Monday, November 14, 2011

Trade facts show contagion risk is small

This is an important chart to keep in mind when thinking about possible contagion effects from abroad (e.g., fallout from an economic collapse of the Eurozone and China). Total U.S. exports account for about 13.4% of GDP, while total imports account for 16.4%.  U.S. foreign trade—both imports and exports—has been expanding more or less steadily and impressively for many decades, but it is still relatively small compared to the size of our economy.

U.S. exports to China account for just under 1% of GDP, and exports to the Eurozone countries account for about 2.4% of GDP. Even if we were to lose all sales to China and the Eurozone effective tomorrow—an almost impossible assumption—that would only represent a loss of about 3% of GDP. And if we include the loss of exports to all Pacific Rim and Eurozone countries—truly unimaginable and essentially apocalyptic—that would represent a loss of only 5.7% of GDP. In a more realistic worst-case scenario, if Eurozone and Pac Rim purchases of U.S. goods and services declined by 20%, this would subtract only 1.1% from U.S. GDP. In short, the U.S. economy is not very vulnerable to foreign disturbances.

To make this point even clearer, a recent study by the San Francisco Federal Reserve demonstrates (rather dramatically, compared to the popular perception that almost everything we buy these days comes from China) that:

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the "Made in China" label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending.

Once again, the facts show that what goes on in the rest of the world has a relatively small direct impact on the U.S. economy. Even if China were to dramatically revalue its currency—bearing in mind that the yuan has already appreciated 37% vs. the dollar since 1994, and has appreciated 65% in real terms against a currency basket of its trading partners (see chart below)—the adverse impact on U.S. consumers would be modest at best. The reality is that the rest of the world is much more dependent on the health of the U.S. economy than we are on theirs. As the popular refrain reminds us, "when the U.S. economy sneezes, the rest of the world catches a cold."

For those who worry about our "trade gap," the U.S. trade deficit is now only 3% of GDP, which is only marginally higher than the 2% it has averaged since 1970, and only half of what it was at its peak in 2006. But this is still a relatively meaningless figure, since the difference between imports and exports—if negative—represents a capital inflow from abroad: whatever portion of their sales to the U.S. that aren't spent by other countries on U.S. goods and services, must be invested in U.S. bank deposits, real estate, equities, or bonds. If foreign countries suddenly ceased buying anything from us, but we continued on our merry, import-loving way, our exports would certainly suffer significantly, as would our GDP, but we would find a virtual avalanche of foreign capital inundating our financial and property markets.

HT: Brian Wesbury


brodero said...

Guess which 2 states has the greatest exposure to Europe export wise as a % of GDP...Utah and South

Free Trader said...

2% is 33% less than 3%. That is not a marginal difference. That claim is being loose with the facts.