Joseph G. Carson

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 


The US and China just concluded another round of lower ranking official trade negotiations. The next step is more formal talks with senior officials and there is great anticipation that a trade deal will be struck between China and the US before the next round of tariffs hit on March 1.

Yet, no matter the final terms of any trade agreement the US must face a simple fact about trade economics; that is, if a country does not produce goods its consumer want or what the world marketplace demands it will run a trade deficit.

In the past 20 years, the US has lost over 85,000 manufacturing establishments and with it an enormous amount of productive capacity. Once the productive infrastructure is hollowed, abandoned or even transferred offshore, new trade deals don't have the “bang” of yesteryear since the capacity to produce is no longer present. As a result, the solution to the massive US merchandise trade imbalance goes well beyond opening new markets and brokering freer trade deals.

The US has been running trade deficits almost every year since 1970, and in most years the swings in the scale of the trade imbalance was dictated by the price of oil as the US relied heavily on foreign oil to offset its domestic shortfall. Yet, since 2000 the US trade imbalance has morphed into a structural imbalance, as domestic production, especially for consumer goods, has been replaced with an ever-rising amount of imports.

Indeed, since 2000 imports of consumer goods have doubled in size (from $480 billion to over $1 trillion today), and the resulting deficit in consumer goods accounts for nearly three-fourths of this year's nearly $900 billion merchandise trade imbalance. Part of the reason why the trade deficit in consumer goods has widened so much is because in many instances domestic production of consumer goods has been slashed or idled, due to relentless competitive pressures.

For example, consumer goods industries, such as appliances, furniture, apparel and paper industries, experienced production declines of 50% or more since 2000 due to firm failures, plant closings and the transfer of production to offshore affiliates. Domestic production of motor vehicle and parts did post a marginal increase, but that gain was due to foreign producers (mainly from Europe) establishing production facilities in the US, while US firms closed a number of assembly and parts plants. Nonetheless, even with the small gains in the vehicle sector, the overall domestic consumer goods sector has shown no output growth since 2000, or nearly 20 years, which is grim reminder of how deep-rooted the competitive problems have proven to be for many consumer industries.

The US has also lost standing in the capital goods area. Prior to 2000, the US consistently ran trade surpluses in the capital goods sector and now capital goods imports exceed US exports by nearly $200 billion a year. Over half of the capital goods deficit is centered in the technology segment.

The US has made important gains in the energy area as dramatic increases in domestic production have reduced imports and increased exports resulting a much smaller deficit in overall energy trade. At the same time, the US has widened its large trade surplus in business services-- finance, insurance, telecommunications, computer and information---to nearly $300 billion. But despite those gains the US overall trade deficit in goods and services will still total $600 billion in 2018, a new record high for this economic cycle.

The US still needs to pursue the trade talks with the urgency that it has, but in order maximize the benefits of “freer trade” the US needs a larger manufacturing base. To be sure, an export-oriented growth strategy needs three pillars; first, a corporate tax structure that is close to the average of its competitors (v); second, a cheap and abundant supply of oil and natural gas (v); and third, a productive and expansive physical manufacturing infrastructure (?). The US is still missing the third peg so the economic gains from new trade deals will be positive, but limited in scope.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
</html>

The US and China just concluded another round of lower ranking official trade negotiations. The next step is more formal talks with senior officials and there is great anticipation that a trade deal will be struck between China and [...]

America's Trade and Production Problem

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

Our global data offering is unparalleled in terms of coverage, quality, and organization. We offer 290+ databases from 2500 government and private sources, a wealth of key survey and forecast data covering the world’s economies, and a robust offering of archive databases that drive machine learning for big data applications.

Optimized for precision analytics, our data is seamlessly integrated with Microsoft Office and all leading statistical packages through our DLX® software and platform independent HaverView™ website. We further offer direct database feeds, client server or cloud-based delivery, and RESTful API.


Privacy Policy

Disclaimer

Contact us

A premier time series data platform for the global strategy, research, and quant communities. 

New York

London

Singapore

Tokyo

Economy in Brief

Viewpoints

Contact Us

Our Data

Our Products

What We Do

Our Authors

About Us

Data News

Resources

Release Calendars

Training Center

Webinars

Newsletters

Download Software

For Clients

Live Updates

Andrew Cates

The US dollar has rapidly become the central focal point for investors grappling with the fallout from recent US trade policy shifts. As markets absorb the economic and geopolitical implications of a more confrontational US trade stance, attention has turned squarely to the dollar—not just as a barometer of financial sentiment, but as a potential transmission channel for broader global instability. Its role at the heart of the international monetary system, coupled with the scale of the US current account deficit and reliance on capital inflows, makes any significant shift in dollar dynamics a matter of systemic importance. With yield differentials, trade balances, and competitiveness all now under scrutiny, the dollar is increasingly where macro fundamentals, policy risk, and global capital flows converge.

This shift, moreover, carries profound implications. When trade policy becomes a source of financial volatility rather than a tool for economic rebalancing, it raises the risk of destabilizing the very capital flows that sustain the US external position. As the world's primary reserve currency, the dollar is embedded in the global financial plumbing—from trade invoicing to cross-border lending and portfolio flows. Sudden policy-driven movements in the dollar can reverberate far beyond US borders, tightening financial conditions in emerging markets, disrupting asset allocation globally, and undermining confidence in the predictability of the international monetary system. In this context, US trade wars are no longer just bilateral disputes—they are global macro events, with the dollar serving as the principal shock absorber.

Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But the April US tariff actions—the dollar has weakened markedly even as the yield spread between the US and Germany has widened – see first chart below. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

250501AC1.jpg

A second – more historical - dynamic, captured in the next chart, reveals an extraordinary correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area. This raises the question: has dollar strength in recent years merely been a reflection of US growth leadership—or were capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. But the danger now is that the trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

250501AC2.jpg

Together, the first two charts offer a portrait of a dollar that has been propped up by relative growth leadership and yield advantages—but which now finds itself increasingly exposed to policy risk and a shifting investment calculus. If the dollar has been supported by flows into the US as the world’s best-performing developed market, the prospect of unilateral and escalating trade actions introduces a destabilizing new variable. This evolving pressure on the dollar intersects with a second, longer-term vulnerability: the deterioration in relative competitiveness. It is to this issue that we now turn.

The next chart examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests at face value, and from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff policy tweaks. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

250501AC3.jpg

This point is reinforced by the final chart below, which shows average monthly wages across countries. US labour remains dramatically more expensive than in peer or emerging economies. Even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies have been re accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

250501AC4.jpg

At the macro level, these developments highlight the fragility of the US external position. The country runs a persistent current account deficit, financed by a capital account surplus. That surplus reflects foreign appetite for US assets, from Treasuries to equities to real estate. However, protectionist trade actions, if perceived as arbitrary or destabilizing, may eventually erode that confidence. The Trump administration’s April 2025 moves have already prompted questions about retaliatory measures, potential capital controls, and the role of the US dollar in a multipolar world. If investors begin to question the reliability of US policy—or the openness of US markets—capital inflows could further falter, and with them, the ability to fund the trade deficit smoothly.

The Dollar Under Strain: The US Trade War and Structural Fragilities

Paul L. Kasriel

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act was signed into federal law on August 9, 2022. The CHIPS Act provides various subsidies for the production of semiconductors in the US. Semiconductors are an integral component in numerous kinds of equipment, including defense equipment. A major impetus for passing the CHIPS Act was national security.

The encouragement of domestic semiconductor production seems to be coming to fruition. In the advance estimate of Q1:2025 real GDP, released on April 30, 2025, the annualized change in the production of real information processing equipment skyrocketed to 69.3%, as shown in Chart 1.

250430X1.jpg

Those who are in the economic forecasting “profession” likely had penciled in a large increase in their forecast of Q1:2025 information processing equipment in that there was a large increase (29% annualized)  in the production of semiconductors in the Federal Reserve’s Q1:2025 industrial production report (see Chart 2). The Federal Reserve also provides monthly data on the production of semiconductors. The monthly annualized percent changes in semiconductors are plotted in Chart 3. As you can observe, in both Q1:2024 and Q1:2025, the surges in semiconductor production were “front loaded” in the sense that January increases were much larger than the subsequent February and March increases. (I’ll leave it to reader(s) as to why I am highlighting the January 2025 increase.)

250430X2.jpg

250430X3.jpg

So, we might say “mission accomplished” in terms of the CHIPS Act stimulating the domestic production of semiconductors. But the current presidential administration has indicated that it wants to scrap the CHIPS Act and replace it with tariffs on imported semiconductors. If it ain’t broke, why fix it? Subsidies or tariffs – which one would be better for aggregate economic welfare? Tariffs on semiconductors would penalize all of the consumers of the end products in which semiconductors are a component. Moreover, domestic producers of semiconductors would have an incentive to raise their prices under the umbrella of higher-priced imports subject to the tariff. Government subsidies to semiconductor producers are not free. Current or future taxpayers will bear the cost of the subsidies. But should not the cost of national security be “socialized”? My bet is the cost of the government subsidizing the semiconductor sector is less than the cost of imposing tariffs on imported semiconductors. Hmm, this might apply to other things deemed important for national security such as steel and aluminum.

Good Bye Mr. CHIPS?

Charles Steindel

The Federal Reserve Bank of Philadelphia’s state coincident indexes in March were a touch firmer than in February, but not robust. In the one-month changes, West Virginia was on top with a .77 percent gain, while South Dakota, Indiana, Montana, and South Carolina were also up more than .5 percent. Nine states were down, with Connecticut’s .23 percent drop being the largest. Over the three months ending in March, five states were down, with Massachusetts off .48 percent (Connecticut and Rhode Island also showed declines, obviously suggesting some softness in southern New England). West Virginia was up 2.06 percent, and South Carolina, Montana, Indiana, and South Dakota also rising more than 1 percent. Over the last twelve months, Iowa and Michigan were down, and twelve others saw increases of less than one percent. No state had an increase higher than four percent, and only four were at or higher than three percent. Utah’s index rose 3.33 percent, while Michigan was down 1.48 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 2.44 percent. Both measures appear to be a bit weaker than the state numbers.

State Coincident Indexes in March 2025

Viewpoints: 2019

Jump to:

America's Trade and Production Problem