Corporate America rerouted its supply chain to other countries

By Wolf Richter for WOLF STREET.

The biggest standout in the US trade data released today by the Commerce Department is China (I combined the data for China and Hong Kong because a lot of merchandise is transshipped and/or invoiced via Hong Kong): The US trade deficit with China plunged by 18% from a record of $388 billion in 2018 to $320 billion in 2019, which was where it had been in 2016.

US exports to China fell by $20 billion (to $137 billion) but US imports from China plunged by $89 billion, to $457 billion, the lowest since 2013. This 16% plunge in imports was a result of the threatened and actual US tariffs imposed on imports from China. In response, Corporate America rerouted its supply chains through other countries. In percentage terms, it was the biggest plunge in imports from China in at least three decades. In dollar terms, it was the steepest plunge in US-China trade history:

And the plunge of imports from China had an impact on the overall trade deficit — but not much since Corporate America rerouted its supply chains from China to other countries, and only a small portion was routed back to the US.

Overall, the US goods trade deficit (exports of goods minus imports of goods) improved by 2.4%, or by $21 billion to a slightly less catastrophically huge $866 billion deficit. This was the second-worst annual goods trade deficit ever, after the worst-ever record in 2018 to $887 billion.

The US ran a services trade surplus again, but it declined by 4.0% to $249 billion. All combined, the trade deficit in goods and services improved (got less bad) by 1.7%, to $617 billion, after having jumped by 13.7% in 2018, the worst since 2008. In 2019, it was the second-worst since 2008, but a small step in the right direction:

The Goods Deficit, by Country

US exports of goods fell by $21.3 billion in 2019, to $1.65 trillion. Imports of goods fell by $42.6 billion to $2.52 trillion. Hence the $21-billion improvement of the goods trade deficit. Below are the 14 countries plus the European Union (purple bar) with which the US has the largest trade deficits in goods. Services are not included:

The opaque nature of international trade transactions – transshipments, trade invoicing, tax dodging, etc. – can produce peculiar results. For instance, the US had a trade surplus of $15 billion with Belgium and of $21 billion with the Netherlands, but not because they’re big end-users of US products, but because they have large ports that serve the EU markets. With the EU overall, the US has a huge trade deficit of $178 billion.

Then there is tiny Ireland, with which the US has a surging and huge goods trade deficit, reaching $53 billion in 2019. The US exported only $9 billion in goods to Ireland, but imported $62 billion in goods from Ireland (up from $45 billion in 2016).

Part of the US pharmaceutical industry has set up their headquarters in Ireland via mergers with pharma companies that had already been headquartered in Ireland. This was done for tax-dodge purposes. In addition, Ireland has long had a vibrant pharma industry. It added up: in 2019, pharmaceutical products imports from Ireland rose to a record of $39 billion – about 63% of total imports from Ireland.

The chart below shows US imports (red) and exports (black), in order of the magnitude of the trade deficit with each country. As imports from China plunged, imports from the EU surged 5.5%. The trade bloc that doesn’t shy away from using tariffs to protect key industries and industrial policy to boost exports. It is now the largest source for US imports.

But the massive bilateral trade relationship with Canada in goods alone remains one of the most balanced for the US.

Much of the blame for the now slightly smaller but still gargantuan trade deficit falls on Corporate America that is taking advantage of US incentives to offshore production, and that is chasing after cheap labor and other cost savings available overseas.

Imports and exports matter for the overall economy, and what’s good for corporate earnings per share is not necessarily good for the overall economy: Imports reduce economic activity, and exports increase economic activity. And the US trade deficit, which nets all this out, reduced economic activity, and GDP, by the amount of the trade deficit, namely by $617 billion. Shrinking this trade deficit would be good for the economy though Corporate America would squeal – and that’s why any progress, if it happens at all, will likely be only measured in tiny baby steps.