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Mary Amiti, Mi Dai, Robert C. Feenstra, and John Romalis
Import tariffs are on the rise in the United States, with a long list of new tariffs imposed in the last few months—25 percent on steel imports, 10 percent on aluminum, and 25 percent on $50 billion of goods from China—and possibly more to come. One of the objectives of these new tariffs is to reduce the U.S. trade deficit, which stood at $568.4 billion in 2017 (2.9 percent of GDP). The fact that the United States imports far more than it exports is viewed by some as unfair, so the idea is to try to reduce the amount that the nation imports from the rest of the world. While more costly imports are likely to reduce the quantity and value of imports into the United States, the story does not stop there, because we cannot presume that the value of exports will remain unchanged. In this post, we argue that U.S. exports will also fall, not only because of other countries’ retaliatory tariffs on U.S. exports, but also because the costs for U.S. firms producing goods for export will rise and make U.S. exports less competitive on the world market. The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.
One of the major debates in open economy macroeconomics is the extent to which capital inflows are beneficial for growth. In principle, these flows allow countries to increase their consumption and investment spending beyond their income by enabling them to tap into foreign saving. Periods of such borrowing, however, are associated with large trade deficits, external debt accumulation, and, in some cases, overheating when these economies operate beyond their potential output level for an extended period of time. The relevant question in this context is whether the rate at which a country is taking on external debt has useful predictive information about financial crises.
Mexico runs a trade surplus with the United States owing to oil exports and cross-border supply chains, with imported U.S. components assembled in Mexico and then exported back to the United States. At the same time, Mexico runs a large trade deficit with Asia, the result of a surge of imports from that region over the past two decades. From Mexico’s perspective, this growing deficit with Asia has worked to offset an increasing trade surplus with the United States. More recently, the country’s merchandise balance suffered a substantial deterioration with the collapse of petroleum prices in late 2014. The balance has subsequently staged a modest recovery, as Mexico’s demand for Asian goods in 2016 cooled while the surplus with the United States (excluding petroleum trade) continues to trend higher. These developments have helped Mexico reduce its need to borrow more from the world to make up for lost petroleum export revenues.
Mary Amiti, Caroline Freund, and Tyler Bodine-Smith
Supply chains have become increasingly interlinked across the U.S.-Mexico border. The North American Free Trade Agreement (NAFTA), allowing tariff-free commerce between the United States, Canada, and Mexico, has facilitated this integration. Some critics of NAFTA are concerned about the bilateral trade deficit and have proposed stricter rules of origin (ROO), which would make it more cumbersome for firms to access the zero tariff rates they are entitled to with NAFTA. We argue that measures that make it costlier for U.S. firms to import will also hurt U.S. exports because much of U.S.-Mexican trade is part of global supply chains.
An underappreciated benefit of the North American Free Trade Agreement (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico. U.S. exporters have not only gained greater tariff preferences under NAFTA than Mexican exporters gained in the United States, they have also been exempt from potential tariff hikes facing other exporters. Mexico’s bound tariff rates—the maximum tariff rate a World Trade Organization (WTO) member can impose—are very high and far exceed U.S. bound rates. Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement.
China has been an exporting juggernaut for decades. In the United States, this has meant a dramatic increase in China’s share of imports and a ballooning bilateral trade deficit. Gaining sales in the United States at the expense of other countries, Chinese goods rose from only 2 percent of U.S. non-oil imports in 1990 to 8 percent in 2000 and 17 percent in 2010. But these steady gains in U.S. import share have stopped in recent years, with China even losing ground to other countries in some categories of goods. One explanation for this shift is that Chinese firms now have to directly compete against manufacturers in high-skill developed countries while also fending off competition from lower-wage countries, such as Vietnam. This inability to make additional gains at the expense of other countries means that exports don’t contribute as much to China’s overall growth as they used to.
Sushant Acharya, Ozge Akinci, Julien Bengui, and Bianca De Paoli
Prompted by the U.S. financial crisis and subsequent global recession, policymakers in advanced economies slashed interest rates dramatically, hitting the zero lower bound (ZLB), and then implemented unconventional policies such as large-scale asset purchases. In emerging economies, however, the policy response was more subdued since they were less affected by the financial crisis. As a result, capital flows from advanced to emerging economies increased markedly in response to widening interest rate differentials. Some emerging economies reacted by adopting measures to slow down capital inflows, acting under the presumption that these flows were harmful. This type of policy response has reignited the debate over how to moderate international spillovers.
Monitoring the economic and financial landscape is a difficult task. Part of the challenge stems from simply having access to data. Even if this requirement is met, there is the issue of identifying the key economic data releases and financial variables to focus on among the vast number of available series. It is also critical to be able to interpret movements in the data and to know their implications for the economy. Since last June, New York Fed research economists have been helping on this front, by producing U.S. Economy in a Snapshot, a series of charts and commentary capturing important economic and financial developments. At today’s Economic Press Briefing, we took reporters covering the Federal Reserve through the story of how and why the Snapshot is produced, and how it can be helpful in understanding the U.S. economy.
China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China’s currency.
After a period of stability, oil prices started to decline in mid-2015, and this downward trend continued into early 2016. As we noted in an earlier post, it is important to assess whether these price declines reflect demand shocks or supply shocks, since the two types of shocks have different implications for the U.S. economic outlook. In this post, we again use correlations of weekly oil price changes with a broad array of financial variables to quantify the drivers of oil price movements, finding that the decline since mid-2015 is due to a mix of weaker demand and increased supply. Given strong interest in the drivers of oil prices, the oil price decomposition is information we will be sharing in a new Oil Price Dynamics Report on our public website each Monday starting today. We conclude this post using another model that finds that the higher oil supply boosted U.S. economic activity in 2015, though this impact is expected to wear off in 2016.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
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