Major US Trade Issue is Japan, not China
The 2005 trade numbers released last Friday are sure to get the China trade hawks riled up. But if you look behind the numbers, the trade imbalance with Japan is likely larger than China. According to the trade statistics, the trade deficit with China was $201 billion or 28% of America’s total deficit of $726 billion. No doubt these trade numbers capture only a portion of the value traded between countries but nevertheless are rough barometers of trade. Our 2005 trade deficit in petroleum products was an even larger $210 billion but the China number will certainly get the most political attention. If you look at the numbers a bit more closely, however, you will find a surprising result- Japan is likely a bigger trade problem for America than China. Here’s why. China custom data indicate that about 60% of China’s exports come from foreign companies manufacturing and assembling in China. Even if we knock this number down to 50%, this is still equal to $100 billion worth of China’s exports last year. According to research from the think tank ChartwellAmerica, the vast majority of these so-called Chinese exports are controlled by Taiwanese, South Korean, American and Japanese firms. For example, about 75% of manufacturing output by Taiwanese companies takes place in China. Samsung has 23 factories in China and closed down its last notebook plant in South Korea last year. Japan’s Panasonic has 70,000 employees working in China. This why I have been recommending clients have allocations to the Taiwan (EWT), South Korean (EWY), and Japan (EWJ) exchange-traded funds in order to capture this growth in their global portfolios. A major reason for Japan’s economic recovery can be attributed to its booming exports to China of which a major slice goes on to America. China has now replaced America as Japan’s largest trading partner. If we conservatively assume that 25% of $100 billion of foreign-controlled Chinese exports are from Japanese companies in China and add that to Japan’s 2005 trade surplus with America of $82.7 billion, this brings the number to $107.7 billion – higher than China’s number stripped of its foreign company exports. The Japan imbalance is often explained by its weak economy and consumer demand but it is amazing that the deficit has stubbornly persisted and that American firms have still been unable to penetrate the second largest economy in the world. Because of the huge imbalance in wages between China and the U.S., a bilateral trade imbalance seems logical. But why one with Japan when wage levels are roughly comparable? Japan’s weak yen policy is certainly a key issue. Japanese manufacturers are loath to see the yen get stronger as it will put pressure on their pricing advantage. Even if you are skeptical of the trade data, it is hard to argue that more American exports, particularly of manufactured goods, will not raise American growth rates, lessen our dependence on foreign capital (China’s and Japan’s central banks financed 40% of our 2005 deficit) as well as raise wages. Let’s work relentlessly to open new markets and not be shy about using our leverage as the largest consumer market in the world. Rather than bilateral trade pacts with smaller countries that will have only a small impact on our economy, let’s tackle head on the opening China and Japan. Meanwhile, back on the home front, the enactment of a flat tax has to be the top priority. It will work wonders to spur economic growth, innovation, higher levels of savings and investment, less dependence on foreign capital and, yes, higher levels of exports. Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of the the "Chartwell Advisor" newsletter. He served on the executive board of the Asian Development Bank and is the author of "The New Global Investor." For more information go to http://www.chartwelladvisor.com or call 877-221-1496. |
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