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MACROECONOMIC OUTLOOK |
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Volume 00 |
Balance of Trade |
Issue 02 |
There is a lack of economic direction in the U.S., and the problems are beginning to appear in Europe. The Europeans have a lust for imports but they do not have the huge $60 Billion per month Trade Deficit like the United States has. Most European economies have been in the dumps for years with unemployment hovering around 10% in many countries. Germany is having problems getting the country off the dole in the same manner that France is experiencing its' own resistance to change. The socialistic mindset of Europe is beginning to drive them into the sea. The Chinese have entered Europe in a big way. We will explore the potential effects of the Chinese economic invasion of the European countries and the effects on the U.S. economy.
The table below depicts the dramatic change in the trade relations between the Euro-zone countries and their Chinese and United States trading partners.
| European Monthly Import Statistics | ||
| 1992 | 2005 | |
| Imports from the United States | $20 Billion | $12 Billion |
| Imports from China | $4 Billion | $13 Billion |
In simple macroeconomics, China has replaced the United States as the largest trading partner with the European countries. This information was provided by the Wall Street Journal, Eurostat, the U.S. Census Bureau and Barclays Capital as shown in the Journal along with other information. The United States exports to Europe have declined 40% during this time period and the Chinese exports to Europe have increased by approximately 225%. While you were sleeping at the wheel, the Asian Big 4 are obviously tending to their business. It should be apparent by now that the U.S. economy will experience more than a housing slowdown.
The chart below shows the accumulation of the trade deficit since 1991. We are losing our shirts (which were most likely made offshore.) By mid 2008 we will have lost $6 Trillion dollars -- $6,000,000,000,000 since 1991 to the imbalance of trade. The rate of loss is currently around $60 Billion per month in trade deficit.
The Organization of Economic Cooperation and Development is based in Paris, France and provides frequent forecasts for the 12 country Euro-zone economies. The Europeans also have serious economic problems that they refuse to face in a manner similar to the American public. Both groups are in denial about their economic problems and will be forced to confront them in the not-too-distant future.
The 12 nation Euro-zone countries are projected to grow at a rate of 2.7% in 2006 which is a huge increase when compared with their paltry growth rate of the past few years. This is approximately double their growth rate of 2005. Their imports for the first six months of 2006 increased to $871 Billion which is a 18.3% increase over the $736 Billion of imports for the first half of 2005. Imports in the United States increased to $901 Billion in the first half of 2006 which is a 13.6% increase over 2005. Matthew Sharrat, an economist with Bank of America in London, said "We expect that the euro zone will continue to add more to global growth in the near term than it has for a number of years".
The projected growth rate for the euro-zone for 2007 is 2.1% according to the Organization of Economic Cooperation and Development. This is a slow down from 2006 but is still above the lowly 1.4% growth rate of 2005. China has become the big winner in Europe's shopping spree. In July, 2005, China passed up the United States as the largest exporter to Europe. For the first five months of this year, China's exports were up 26% to $69 Billion whereas the United States exports to Europe increased only 8% to $68 Billion. China has replaced the United States as the largest exporter to Europe. This has occurred in spite of the dollars' decline in value compared to the Euro which has made U.S. goods cheaper. Had the dollar not declined in value, the U.S. exports to Europe would have been substantially less.
The Chief Economist for Barclays Capital in London said "There's a sense that the U.S. has been a bit bypassed in terms of trade flows". That is putting it mildly. Everyone but the American public knows what is happening to American companies. They are rapidly losing their export business which will further exacerbate the Trade Deficit and drive you into the hands of your Foreign owners. This destroys the hope that many economists had that the trade flows could be rebalanced. Europe and Japan were expected to buy more American goods which would reduce the difference between U.S. imports and exports. This will not happen and the U.S. is on track to break the 2005 record Trade Deficit of $717 Billion because it is approaching $800 Billion for 2006.
The U.S. will get some benefits from the Chinese exports to Europe because U.S. factories in China will sell some of the exports to the Europeans. The profits from these sales will come back to this country. Most of the components are made in Asia whereas if the goods were produced in this country local workers and suppliers would benefit more and the company could retain more of the profits rather than pay taxes in two countries. As the Chinese products improve and move up to higher valued goods, more U.S. exporters will lose market share in Europe to the Chinese. Frank Vargo, vice president for international affairs for the National Association of Manufacturers, said "China's on a real campaign to upgrade their production." He said they are planning to produce Aircraft and machinery. He further noted that "As they move up the ladder, some of what they make will substitute for American products."
The trade data show that we are rapidly losing market share in Europe. In 1998, we accounted for 15% of the Euro-zone imports whereas today we account for less than 10% of the imports. China and the other members of the Asian Big 4 are replacing us in Europe. The ability of China to export high-value goods is both a threat to the United States and Europe. Shoes and clothing initially lead the army of exports from China into the Euro-zone countries. Now come the more highly valued items like aircraft and machinery that are threatening Europeans manufacturers. China's sales of machinery in May 2006 accounted for about half of the exports to the Euro-zone. China is already the world's number 4 manufacturer of machinery and they are expected to become number one in the next decade. Ralph Wiechers, the chief economist at the German Engineering Federation, said that "Until now, Chinese machinery production was strongly focused on supplying Chinese industry. Now it's competing for international markets, including in Europe". The Germans see the march of the Asian Big 4 economic armies coming rapidly into Europe.
A Leipzip, Germany company which is an engineering company that specializes in mining and materials handling equipment stopped making cranes for the port operators because the Chinese undercut their business. MAN Takraf Fordertechnik GMBH is the company that now produces tailor-made equipment for certain applications because the Chinese have taken over their mass production business. Rainer Kahrger, the company's CEO, said "We expect the Chinese to make more progress in high-volume products, and we will lose more market share here". The company has recognized that the Chinese are slowly taking over their business in Germany and Europe.
The Chinese drive to move up the value chain in Europe will help the U.S. economy in the short-run by promoting trade, economic growth and imports. Businesses are calling on the European Union to deal with what are perceived to be the two drivers of the Chinese march through Europe. The first is the currency problem in which the Chinese fix the rate of exchange between the Yuan and the Euro. Does that sound familiar to you? The Europeans have the same problem that the do-nothing American administration has with the Chinese. The other problem is that the Chinese provide economic support to those industries that export to Europe. That also is an American contention that remains unresolved.
Adrian van den Hoven, the director of international relations at the European business federation Unice, said "We're calling for a much more resolute European position vis-à-vis China to deal with these issues". Mr. Hoven is confronted with the same problems that the United States is dealing with. A huge trade deficit with China and their refusal to let their currency float like the others in the marketplace. While higher energy prices account for some of Europe's trade deficit, it has not risen to the level that it has in this country. The Arab partners of the Asian Big 4 provide most of the energy for Europe. What you may not realize is that the French oil companies have strong ties with Iraq which explains their opposition to the war in Iraq. The English oil companies have strong ties with Iran which explains their unique relationship. Having worked in the European/Middle Eastern oil business, we are aware of how trade and money are more important than philosophies.
The Europeans are headed down the same track that we are traversing. They have different problems in that their economic growth has been much slower than ours over the last decade. The Asian Big 4 are making big inroads in Europe and they will feel the financial squeeze much sooner than we will. Their economies are much more fragile than ours and if they return to their slow growth rates then the Asian Big 4 will focus even more on the U.S. economy as the place for them to purchase more assets. The Euro-zone countries are only partially willing to change their ways which leaves them vulnerable to the economic assault of the Asian Big 4. They will realize sooner than the American public that the Asian Big 4 is coming to take-over financial control of Europe. They are slowly knocking-off one industry at a time and have the surplus cash to purchase whatever assets they want in the European countries.
The declining U.S. exports to Europe does not bode well for many American companies. We have experienced excellent trade with Europe for many decades and it is now rapidly vanishing. The Asian Big 4 are rapidly moving in to replace the American presence. With the shrinking of the European market for U.S. exports and the vanishing of domestic manufacturing companies, the U.S. trade deficit could reach over $100 Billion per month in a relatively short-period of time. As foreign companies take control of the U.S. economy, the wealth in the form of profits and stock ownership is being transferred to foreign countries.
Did you know that another segment of the American economy is in decline? Wall Street has lost 24 of the last 25 IPO deals to foreign investment bankers and foreign exchanges. Get used to it folks, the foreigners will take over the money markets in the next decade as evidenced by their recent successes. Wall Street does not have a clue as to what is wrong with the economy anymore than the American public does. They both live in a Fantasy world, wallowing in free trade that costs them over $70 Billion per month while escaping reality by ignoring the dynamics of International Trade. There is an International Trade War being conducted by the Asian Big 4 and they are close to winning it. Americans don't realize that because the media are too obsessed with entertainment such as sports, reality TV, and other forms of escape. We urge you to look into investments in companies in the Asian Big 4 countries. More American companies have or will file for bankruptcy so most of them should be avoided in terms of investment for a long time!!
How can we live without the following physical goods each month? 1. Autos, 2. Electronics, 3. Clothes, 4. Furniture and many other physical things that are manufactured. We simply cannot export enough services to offset the importing of manufactured goods. We already import $69 BILLION OF GOODS MORE than we export each month. More service jobs will not solve the problem. Once again, we have 12% of the workforce engaged in manufacturing and China and Japan have around 24%. They "Manage Trade" and have huge trade surpluses. We practice "Free Trade" and have huge trade deficits. What's wrong with this picture? The top 1% income group created this mess and may not care but the remaining 99% is being affected by a reduced standard of living. This is just another major reason why the funding of retiree healthcare and social security is being exacerbated by the economy's exporting of jobs and technology and the massive American corporate bankruptcies. Do you still trust either political party?????
Now you know why YOU have a $60 Billion per month trade deficit. You are getting your gluteus maximus kicked around the world while Frick and Frack, the Democrats and Republicans, do not even discuss this matter with you. A global macroeconomic perspective is what is needed from leaders today. There are no American leaders today. We are sorry to disappoint you but you are being lead into your own economic decline and no one really cares. Remember, foreigners already own over 50% of the debt of the Federal Government and the $70 Billion Trade Deficit you incur each month is driving you right into their economic control. The fascinating point is that countries are like corporations. They do not tend to their financial and economic affairs until the disaster has unfolded and then it is often too late.
© 2008, This document is copyrighted by the Foundation For Fiscal Reform, Inc. and all rights are reserved.