Joseph G. Carson

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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.
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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

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

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Paul L. Kasriel

For all the talk of a weakening labor market, the wage bill for private nonfarm employees (private nonfarm employees times their average weekly earnings) has risen at annualized rates of 5.85% and 5.91% in October and November, respectively, compared to the median increase of 5.75% in the eleven moths of 2025. _If_ these data are valid, it would seem that labor market earnings are growing relatively fast, especially in light of all the talk of a weak labor market. Why would employers be increasing the labor wage bill so rapidly if labor _demand_ were weak? Perhaps because the labor _supply_ is shrinking.

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How Can The Labor Market Be So Weak When The Wage Bill Is Growing Rapidly?

Sharmila Whelan

We have been overweight Korean equities this year—and it has paid off, handsomely. The allocation decision was anchored in the business-cycle framework: three of five key indicators pointed clearly toward expansion at the start of the year. The cost of capital was supportive, the credit cycle was in a firm upswing, and money-supply growth was accelerating. The corporate profit cycle, though still technically in downturn, was already showing improvement thanks to strong balance sheets. The major drag was the investment cycle, which continued to lag.

What has surprised us is the speed of the profit-cycle recovery, especially against the year’s backdrop. From Trump’s tariff war to domestic political turbulence following the impeachment of President Yoon Suk-yeol and the snap elections in June, one would have expected a more cautious rebound. Instead, the listed sector delivered a solid performance. Return on equity averaged 7% in the first three quarters, up from 5.6% a year earlier and nearly back to the seven-year average of 7.3%. EBITDA cash flow per share, free cash flow per share, and retained earnings all advanced. EBITDA rose almost 20% year-on-year, cash flow per share climbed 29%, and free cash flow per share swung decisively into positive territory.

Central-bank data paint a similarly encouraging picture. Profitability and interest-coverage ratios have improved markedly for large corporates, even as debt-to-capital ratios inched higher. SMEs have seen some deterioration, but the stress is neither systemic nor alarming at this stage.

And yet, despite these solid fundamentals, Korea Inc has continued to err on the side of caution (Figure 1). Companies tightened spending this year and delayed new investment plans. As a result, the investment cycle slid deeper into downturn: real spending on both facilities and construction has contracted for six consecutive quarters. Rather than expand capacity, firms have chosen to run down inventories and utilise existing manufacturing facilities more intensively. Operating rates have increased, allowing companies to meet rising shipments without committing fresh capital.

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Source: Haver Analytics and Westbourne Research

**Weathering Trump’s Tariff War**

Korean exporters have navigated the tariff conflict more effectively than many anticipated. President Lee Jae-myung secured relatively favourable terms in negotiations with the US compared with Japan or Europe. Tariffs on Korean car imports will fall from 25% to 15%. Korea will still invest US$350bn in the US—US$200bn in cash and US$150bn via a shipbuilding partnership—but annual outflows are now capped, and profits will be shared until the initial investment is recouped. This represents a meaningful improvement from the earlier agreement, which allocated 90% of profits to US stakeholders.

The Bank of Korea, however, remains cautious, estimating that tariffs will shave 0.45 percentage points off growth this year and 0.6 points in 2026. Inflation is expected to ease slightly. We are less convinced by the central bank’s pessimism. Export performance shows Korean firms have been resilient—more so than official forecasts imply (Figure 2).

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A closer look reveals why. Exports to the US have dropped sharply, and shipments to China have contracted in nine of the last ten months. Yet overall exports have continued to trend higher. Korean companies moved quickly to diversify into ASEAN and Europe, offsetting losses in traditional markets (Figure 3, Chart 1).

Moreover, exporters have again demonstrated their commercial nimbleness. Historically, Korean firms have not hesitated to discount aggressively when global demand softens, protecting market share at the cost of margins—then recoup those margins by raising prices once demand stabilises. That pattern is repeating. October marked the first month this year in which year-on-year export prices turned positive (Figure 3, Chart 2). Falling import prices and careful cost control have further strengthened profitability.

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With tariff uncertainty largely behind us and the global business cycle turning upward, supported by accommodative global fiscal and monetary settings, We see the conditions forming for Korea’s investment cycle to stabilise and strengthen into next year.

**Construction: Korea’s Weakest Link**

If there is one clear vulnerability in the Korean economy, it is construction. The sector’s problems long predate the tariff war. Construction investment has been in a structural downturn since 2017, following tighter housing-loan regulations and a general tightening of financial conditions. A brief pandemic-era rebound—fuelled by liquidity—quickly faded as construction costs increased, interest rates rose, real-estate prices softened, and project-financing conditions deteriorated. Political uncertainty and headline-grabbing worksite accidents further delayed projects in early 2025.

Non-housing construction, which accounts for about two-thirds of investment, has been especially weak. As a mature economy, Korea has already met many major infrastructure needs. Meanwhile, commercial real estate has been oversupplied due to loose regulation in earlier years, the post-pandemic shift to online consumption, and persistent weakness in the self-employed sector. Retail vacancy rates remain high.

Regional disparities compound the issue. Seoul suffers from chronic undersupply and soaring demand, while many non-Seoul regions face weak demand and large inventories of unsold homes. Price behaviour reflects this divergence: house prices outside Seoul have fallen year-on-year since January 2023, while the Seoul market has already recovered, with November prices rising 6.7%.

Permitting and construction-start data remain bleak (Figure 4). Yet there are glimmers of hope: the nationwide home-supply ratio has fallen sharply since its pandemic peak, and the home-ownership rate remains low at 57%. Housing sentiment has improved as mortgage rates come down and affordability increases. Still, the recovery will be slow and patchy. The government introduced new measures in June targeting the Seoul market, including tighter loan caps, restrictions on multiple-home mortgages, and reduced loan-to-value ratios for first-time buyers. Given this backdrop, we remain underweight construction, real estate, and consumer durables.

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**Credit Conditions, Broad Money, and the BoK**

The credit cycle remains in an upswing (Figure 5), supported by household credit demand even as corporate borrowing slows. However, given the weak backdrop in construction and housing, we recommend remaining underweight banks until investment spending shows clearer signs of recovery.

251205SW5.jpg

Broad money growth—a key leading indicator—is accelerating at a healthy rate that supports economic activity without stoking inflation. Importantly, there are no signs of credit-cycle overheating.

The Bank of Korea has cut rates by 100 bps since last October but is expected to hold policy steady for the remainder of 2025. Despite subdued demand and lower oil prices, which should keep inflation near target, the BoK remains concerned about the won’s exchange rate and elevated household credit demand.

Real lending rates—the difference between corporate borrowing costs and nominal GDP growth—are a more relevant indicator for investment behaviour. When real rates fall below –2%, firms have strong incentives to invest aggressively; when above +2%, borrowing is discouraged. Korea’s two-year real lending rate remains comfortably within normal ranges, suggesting no structural barrier to investment once confidence returns.

**Where to Invest**

We maintain an overweight stance in Korean equities.

The profit cycle is nearing an upswing and has held up strongly through geopolitical turbulence. Healthy balance sheets support the view that investment will begin turning next year. Inventory-shipment dynamics and rising operating rates strengthen the argument. The credit cycle remains supportive, real lending rates are accommodative, and broad money growth is improving—implying economic growth will follow with a lag.

Korea (Republic of)

Korea Holds Back—but Builds Strength

Monetary policy mistakes are often self-inflicted. Sometimes, policymakers cling to an official policy for too long, necessitating a swift and sharp reversal to mitigate economic harm. At other times, they try to address or reduce economic imbalances that aren't caused by monetary policy. That's when policy mistakes happen, and it seems that policymakers are about to make another mistake soon if they react to recent job data. Policymakers are tasked with an employment and inflation mandate, yet they are not mandated to correct or counteract the "stupidity" or "misguided" decisions of fiscal policy.

Several policymakers have publicly expressed concern that the weakness in labor markets, particularly the sharp slowdown in job growth, justifies another official rate cut at the upcoming FOMC meeting in December. However, before deciding to change its monetary policy stance, policymakers should investigate whether the weakness in the job market is connected to their official interest rate stance or to other factors beyond their control, which could result in a policy mistake.

For the week ending November 22, jobless claims fell to 216,000, the lowest level since April. The long history of jobless claims shows that this weekly indicator is a reliable leading indicator of labor market activity. This low number of claims suggests that the limited job creation is not due to weak business activity or restrictive monetary policy. If that were the case, jobless claims would be much higher, possibly double.

Small businesses, which are responsible for most of the new job creation, have experienced negative job growth throughout most of 2025. A major factor contributing to this is the uncertainty and increased costs associated with Trump's tariff policy. The increasing "cost of doing" business and the uncertainty about whether tariffs will rise or be eliminated ultimately pose substantial challenges for small businesses with thin profit margins.

The retail trade sector, one of the largest private employers and primarily consisting of small businesses, has been both directly and indirectly affected by tariffs on imported goods. This sector has seen nearly 100,000 job cuts in the first nine months of 2025. Tariff-related?

Since the tariff policy was announced in April, the unemployment rate, which is one part of the Fed's dual mandate, has risen from 4.2% to 4.4%, a relatively small increase. In response to this slight rise, the Fed has reduced overall official rates twice, totaling 50 basis points.

However, Trump's tariff policy has a more direct effect on inflation, which is the other half of the Fed's dual mandate. Since April, CPI inflation has increased to 3%, up from the 2.3% rate that existed before the tariff announcement. The Fed targets a 2% inflation rate, and despite current inflation rising considerably above this target since tariffs were introduced, policymakers have not considered changing their policy approach to tackle the increase.

If businesses are reluctant to hire due to the tariff policy under Trump's administration and inflation is moving higher due to the imposition of tariffs, and further away from the Fed's target, why should monetary policy address one part of its mandate, which is unrelated to its official rate stance, while ignoring the second part of its mandate? A dual mandate is effective only when policymakers address both sides equally.

A growing number of the current generation of Fed policymakers appear to be considerably more political in their approach to monetary policy, disregarding data and their mandates. According to public statements, this group of policymakers intends to vote for another official rate in December, despite job and price data suggesting that another rate cut is unnecessary.

The political dynamics of the Fed are likely to become more divided as President Trump is set to announce a new chair to succeed Fed Chair Powell in May 2026. A policy error in December 2025 might quickly lead to additional mistakes in 2026, making bond yields and the dollar more volatile and unpredictable factors for investors.

Monetary Policy Mistakes

Viewpoints: 2019

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America's Trade and Production Problem