US: Trade deficit has encouraged hard stance - Rabobank

The US trade deficit has encouraged President Trump to take a hard stance towards trade with countries such as China, Mexico and Germany, according to Hugo Erken, Senior Economist at Rabobank.

Key Quotes

“Examining gross export and import data, however, misses out on the complexity that lies underneath these flows.”

“US firms are highly dependent on imports of intermediate goods produced abroad and, vice versa, foreign firms exporting to the US use American manufactured intermediates in their final products. The larger the integration of US firm within global value chains, the more difficult it becomes to implement protectionist trade measures, as these measures would harm US firms directly as well.”

“Global value chain integration of US firms is most prominent in three Mexican industries: motor vehicles (18.1%), electronic equipment (17.2%) and electrical machinery (16.7%). For example, for the Mexican motor vehicles industry, this means that 18.1% of final exports to the US consists of American value added. Outside Mexico, the most integrated sector in the three remaining countries that we have examined is the Chinese electronic equipment industry (5.5%), which is already quite low.”

“Canada, Mexico, China, Germany and Japan are the most important suppliers of intermediate goods to US firms. American export of motor vehicles, petroleum and fuel products, and basic metals depends the most on foreign intermediates. In case of a disruption of global value chains, US firms can decide to substitute intermediates from countries being hit by protectionist measures. However, these adaptations tend to be time consuming and will involve transaction costs, as other suppliers often do not instantly meet proper requirements and know-how.”