Tag Archives: trade deficit

Euro Area`s main import partners are the United Kingdom with 10% and China with 12% of total imports

A no-deal Brexit is not only bad for the United Kingdom but also for the Euro Area. They will both loose on it and that`s why a win-win should be a goal for them both. Populist-Italy is already into a recession, and other Euro Area-countries can follow.

Main imports in Euro Area are energy, manufactured goods and machinery. Main import partners are China with 12 percent of total imports and United Kingdom with 10 percent. Imports rose 1,9 percent in December 2018, while exports fell 2,5 percent in the same period.

According to Comtrade`s database, United Kingdom take most of their imports from Germany. 14 percent of their import comes from Germany and a no-deal Brexit means less German cars sold in the U.K. Total value of German imports came in at $89.23B in 2017.

9,5 percent of the import comes from China and 9,4 percent comes from the United States. Both of them outside of the Euro Area. The value of the import from China was 59,78B, and 59,75B from the U.S in 2017.

When it comes to export, the U.K`s biggest trading country is the United States which account for 14 percent. Second is Germany with 11 percent with France on third with 7,6 percent. Total value of exports to the U.S is $59,09B. Germany; $46,64B.

As you can see, the U.K are in balance with the U.S but when it comes to Germany they buy twice as much as the sell to the Germans. In other words they have a trade deficit with Germany. A no-deal Brexit can end up with less BMW and WV cars and more Tesla`s in the U.K.

German factories will lose money and market shares while other brands and countries will prosper. We will face a radical shift in the trade balance.

56 percent of the U.K exports goes to Europe while 40 percent goes to Asia and America. The economy is slowing down and the British economy grew by 0,2 percent on quarter in the three months to December last year. In comparison; the U.S economy advanced an annualized 3,4 percent.

The U.K trade deficit decreased to GBP 0,32 billion in December of 2018. Imports declined 1,6 percent to GBP 55,85 billion and exports fell at a slower 1 percent to GBP 52,62 billion. Balance of trade reached an all time low of -5749 GBP million in October of 2013.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

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Are China and the United States dependent on each other?

Both China and the United States should be happy with a strong dollar and a weak RMB or Yuan. Americans are happy because they can buy cheap products from China right now. Chinese people should also be happy because they are a export-driven economy.

This is the opposite of what the U.S stands for. The United States are not a export-driven economy, so the business relationship is profitable for them both. But what will happen if a conflict between those two destroy this business relationship?

 

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First of all; the exporters in China sell goods to the U.S and receive U.S dollars in return. But that is a problem for China in the long run because of an increasing imbalance between U.S dollars and Yuan. China need to do something.

When China sell goods to the U.S, they receive too much U.S dollars, so they must sell their dollars through exports to get RMB because their workers want to get paid with Renminbi, and that again will increase the USD supply and raise the demand for RMB.

PBOC (People`s Bank of China) carried out active interventions to prevent this imbalance between the U.S dollar and Yuan. PBOC buys the available excess U.S dollars from their own exporters and gives them the required Yuan.

They can print as much as they want but their intervention creates a scarcity of U.S dollars which keeps the USD rates higher. China hence accumulates USD as forex reserves. So, what is really going on between them?

Normally, a country in international trading will get paid in their own currency. If your country buy products more than they sell, the mechanism of those two currencies is self-correcting. People sending you goods will get paid in your own currency, which means the supply of your currency will increase.

The value of your currency will depreciate in value against other currencies, and if you sell more than you sell, you can start exporting more and import less to come back in balance again. This is how it is self-correcting with no intervention from any authority, but the U.S and China business is different.

We know that China do everything they can to keep their own currency low. This is how they are competitive in the international market. If the RMB appreciates, China`s export business will be hit and their unemployment will increase.

Therefore, China requires RMB in order to continue to have a lower currency than the USD, and thus offer cheaper prices. If they stops interfering in the previously described manner, the RMB would self-correct and appreciate in value. That is not China`s strategy.

So why doesnt other countries do the same? Its not so easy. The biggest challenge is that this strategy leads to high inflation. But China are able to control that. They have a tight, state-dominated control on its economy and is able to manage inflation through other measures like subsidies and price controls.

China can withstand any political pressure from other importing nations, which is not feasible in the case of other countries. In the 1980s, Japan had to give in to the U.Ss demands when it tried to curb JPY rates against the USD, so China is a strong nation.

4 trillion dollars of U.S reserves is what China have had since 2014, and they have found the U.S treasury securities to offer the safest investment destination for Chinese forex reserves. China also have a lot of Euro, and they need to invest such huge stockpiles to earn at least the risk-free rate.

Forex reserve money is not money you can gamble away in risky stocks. Real estate and other countries treasuries are also too risky, compared to U.S debt.

The huge U.S deficit trade with China gives China a reason to continue to buy treasury securities. The gigantic size of the monthly deficit is around $30 billion, so treasuries are among the best available option for China.

Buying U.S treasuries enhances China`s money supply and creditworthiness. Selling or swapping such treasuries would reverse these advantages.

U.S debt offers the safest heaven for Chinese forex reserves, which effectively means that China offers loans to the U.S so that the U.S can keep buyng goods China produces.

The more surplus China have with the U.S, the more U.S dollar and U.S debt the want.

What China is really doing is to loan to the U.S (purchase US debt) and that again enable the U.S to buy Chinese products, which is a win-win situation. Both benefit and are locked in a state of inter-dependency, and a conflict between them is a huge lose-lose strategy.

Some people are worried about China`s surplus with the U.S and what will happen if they are dumping its U.S forex reserves? We know what happened with GBP during the World War II. Other countries sold GBP reserves and UK faced a currency crisis.

Its economy deteriorated due to the excess supply of its currency, leading to high interest rates. This will not happen if China start to dump USD because the U.S reserves will either return back to the U.S or end up in other nations.

Not only that. It will be worse for China. An excess supply of U.S dollars would lead to a decline in USD rates, which in return will make RMB valuations higher. That will lead to more expensive products from China, and make them lose their competitiveness.

China won`t do that.

If they do, the U.S can start to print money which will reduce the value of the USD and increase inflation, and that will work in favor of U.S debt. That will be good for the U.S but very bad for the creditor China.

 

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

 

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