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2019-10-25Macro `n Cheese

Trade & Tariffs in Context

Your half-time “Trade War” report from Macrobond New York.

US-China Bilateral Relationship

This chart calculates the growth of Chinese exports (upper pane) and imports (lower pane) with both the US and the rest of the world (ROW). We seasonally adjust the data using the Census X-13 program with Macrobond’s Chinese New Year regressor.

 

We can see that although China’s exports have declined overall by -4.4% (with a decline of exports to the US by a whopping -22.5%), its exports to the ROW have actually increased by 0.3%. In contrast, we see a decline of Chinese imports across all groupings—for both US (-19.7%) and ROW ( -10.0%). Such a decline in ROW imports suggests a slowing of Chinese domestic demand more broadly, not just a downshift in bilateral US trade due to tariffs.

But trade is not the only element of the US-China relationship. In particular, China has a record of deploying various tools of statecraft to respond to geopolitical disputes. For example, Beijing used Chinese outbound tourism as a way to apply economic pressure to South Korea in 2018. After South Korea deployed the THAAD missile defense system, Chinese tourism to South Korea declined by 40%

Do we see the same phenomenon occurring with the US?

 

Over 3 million Chinese tourists visit the US each year. Their annual expenditure in the US totals to over USD 30 billion (USD 16 billion of which is spent on education). Using monthly data on Chinese tourist arrivals to the US (seasonally adjusted using the SEATs method and a Chinese New Year regressor) with data on expenditures of Chinese nationals from the US balance of payments, we see the growth of Chinese tourists falling quite dramatically in the lead up to the Trump Administration’s June 15th announcement of 25% tariffs on Chinese goods.

Trade Wars have Consequences

As the “trade war” between the US and China escalates, who are the top “winners” and “losers” of US tariffs and trade threats?

 

Firms can mitigate the effects of tariffs in a variety of ways. Two possibilities are (i) temporary increases in capacity utilization & orders in similar markets or (ii—and surely what US trade “hawks” would prefer) a permanent re-allocation of supply chains away from China. 

Using Macrobond detailed foreign trade data, we examine bilateral US trade data with 227 countries and regional aggregates. We then sort the data and isolate the top 10 and bottom 10 performers in 1 bar chart.

The results show a large decline in US imports from China (USD -35 billion) and a corresponding increase in imports from Mexico (USD 23 billion), Vietnam (USD 12 billion), and Taiwan (USD 7.7 billion). This sum equals approximately 125% of the decline in imports from China over the same period.

The largest decline in US imports from China is in the category of Machinery & Transport Equipment. At USD -31 billion it accounts for 90% of the decline in US imports from China over this period. This has occurred as imports in this goods category of Machinery & Transport Equipment has increased overall (albeit more slowly than in the recent past) by almost USD 19 billion.

 

Looking at the Machinery & Transport category in isolation from some of the top trade “Winners” in the previous chart, we can see which countries have perhaps benefitted from the relative increase in prices of Chinese goods in this category—though of course, there are likely a lot of other factors at play. The increase in imports from Mexico (USD 18 billion), Vietnam (USD 7.4 billion), and Taiwan (USD 6.2 billion) stand out. Together the increase in Machinery & Transport imports from these countries equals 102% of the decline in imports from China over the same period.

What is normal?

As a percentage of federal revenue, tariff receipts are approaching a post-War high. Certain prominent observers have noted the increased revenue collected from tariffs. Indeed, as shown in the chart below, in nominal USD the latest August figure puts tariff revenue at a record USD 69 billion on a trailing 12-month basis.

 

However, looking back at over 150 years of monthly data, the recent uptick in federal receipts from tariffs pales in comparison to the levels seen in the pre-War period and throughout the 19th century. During this period tariffs generated well over 40% of federal revenue, even going as high as 58% of all federal government revenues.

A political pattern also emerges from the data: The varying reliance on tariffs as a source of revenue by major US political party. In the post-War era, both major US political parties have been generally supportive of free trade, with the percent of revenue from tariffs hovering around 1.3% of all federal receipts from 1946 through 2016 for both Democratic and Republican Presidents. This is consistent with the international evidence that tariffs are not a major source of revenue for rich countries.

In contrast, if we look at the period from 1870 through 1945, tariff revenue averaged 24% of federal revenues under Democratic Presidents and over 38% under Republican Presidents.

Perhaps those who believe the next Republican President will return to the Post-War “normal” may want to reconsider.

 

Charts and commentary by: Tarek Saed, Wadsworth Sykes, & Alex Pelle

 

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