Monday, February 13, 2012

Why China trade is bad for America

I've argued for a while that free trade with China has been a disaster for the US.  The US has been running massive trade deficits with China for years. We are told that Americans need to work harder or study more to improve our competitiveness. We are told that China's trade surplus is due to very low wages, and that low skilled jobs will inevitably move there. We are told that globalization is inevitable.

What the defenders of free trade miss is that US - China trade is abnormally unbalanced. For 2011 the ratio of imports from China to exports to China was 3.8:1  I don't believe this is the result of lazy American workers or cheap Chinese wages. The charts below cover countries which account for 78% of US imports.  Many of our trade relationships are reasonably close to balance, but something is very wrong with China and Russia. They simply don't buy American goods. These are both former centrally planned economies, and I believe their trade surpluses are the result of deliberate government policy.

Some people claim that China's surpluses are the result of low wages. However, India also has very low wages, and our trade with the Indians is far more balanced.

When I started this, I thought that Venezuela and Saudi Arabia's surpluses were simply the result of high oil prices. Oil prices have risen enormously in the past ten years, so I thought that if I went back to 2001 I would find that Venezuela and Saudi were running trade deficits with the US. Here is the same chart with 2001 data.

That's odd! Venezuela and Saudi Arabia were running trade surpluses with the US even when oil prices were far lower.  Most of export ratios don't seem to have changed very much. Brazil was still the only country with which we had a trade surplus, and China was still dreadful. What happens if I go back another ten years to 1991?

Well, the data series for Russia and the European Union don't go back that far. The other ratios have changed far less than I would have expected. Canada, Mexico, Brazil and South Korea have all kept their trade with the US close to balance.  China was a dreadful trade partner 20 years ago, and that hasn't changed even as the volume of trade has swelled 20-fold.

I personally find it very surprising that the ratio of imports to exports for most countries has stayed relatively constant  over the past 20 years even though the volume of trade has expanded enormously. My economics textbook says that imbalances in trade should be corrected by shifts in exchange rates. The surplus country's currency is supposed to rise, making its exports more expensive and eliminating its trade surplus. Unfortunately for my textbook, this never seems to happen in the real world.

What if textbook economics is wrong? A trade deficit has to be financed by borrowing.  If it goes on long enough, debt levels will eventually become unsustainable and a massive financial crisis will result. This is what has happened to Greece.  Will the same thing eventually happen to America?


China and Russia's trade surpluses with the US in 2011 are so far out of balance that I think they must be the result of deliberate government planning. Both are former Communist economies and I think that enough of the old central planning machinery has survived to allow both nations to 'manage' their trade with the US. Manipulation of their currency is a key element of this. Introducing a broad based tariff on all of their exports is the only way for the US to restore balanced trade.

However I also fear that our modern system of globalisation and free trade may contain the seeds of its own destruction. Trade imbalances seem to be baked into the structure of the global economy. They don't seem to correct in the way that economists say they should. In the long run a widespread abandonment of free trade might be necessary to avoid a global debt crisis.

Sunday, February 12, 2012

Why the opponents of Keystone XL are wrong

I believe the fight against the Keystone XL pipeline is one of the dumbest environmental causes to come along in a long time. What is most shocking to me is how badly informed the opponents of the project are. There seem to be three main arguments against the project.

Spills from the pipeline represent an environmental hazard?

As this graphic shows, the US is already covered by thousands of miles of crude oil pipelines. They were mostly built to carry Texas and Rocky Mountain oil to the Midwest.

Kinder-Morgan's Platte pipeline already moves 145,000 bbl a day across Nebraska, right across the Ogallala aquifer. Somebody has given the environmentalists the idea that an oil pipeline would present a huge threat to the aquifer. They seem to be totally unaware that there has been an oil pipeline operating trouble free in the region for over 60 years.

The oil will all be exported?

This is wrong. As of 2010, the US was a net importer of petroleum products, to the tune of 269,000 barrels a day, which represents 1.4% of domestic demand. It is true that US refineries, particularly those on the Gulf Coast, do export some products like diesel.   The graphic shows the nine largest net buyers of oil products from the US. It turns out that a lot of US net products exports are going back to the countries that sold us the crude oil in the first place.

 The US has many of the world's most sophisticated refineries, and they can handle heavy, high sulfur and/or acidic crude oils which most refineries won't touch. Mexico in particular produces a lot of high sulfur heavy crude from their Cantarell field. They send it to the US for refining, and then buy back some of the gasoline, diesel and jet fuel produced. Why don't the Mexicans build their own refineries? Because producing oil is far more profitable than refining it!

What about places like Singapore? It turns out almost all of their purchases are fuel oil. This is a nasty substance which is only used by power plants and large ships. Our electricity generators are moving away from it because natural gas is now much cheaper.

80% of what Japan buys is petroleum coke. This is a coal-like byproduct of the refining process, which the Japanese use in cement furnaces. Almost all of what Holland imports is diesel. These exports are offset by imports of gasoline from other parts of Europe. Diesel cars are very popular in Europe, so they have a surplus of gasoline.

That leaves Panama and Chile as the only regions actually taking energy out of the US market. Both countries have strong trade links with the US and neither has any oil of their own.

In the past year US product exports has gone up, and in November 2011 the US had net exports of  778,000 barrels/day, or 4% of domestic demand. This was due to surging fuel demand from Latin America, especially Mexico. China also started importing our petroleum coke, which they will use as a coal substitute.

The bottom line here is that very little of the gasoline, diesel and jet fuel produced from the oil delivered by Keystone XL is likely to be exported. US product exports are mostly either exports of refining services or of low value products that we don't need.

We need to stop the pipeline in order to stop tar sands development?

Is this likely to work? No! With oil at $100 / barrel, the Canadians have many export options. They can build pipelines to the west or east, or they can ship by rail. What makes Keystone XL unique, is that it sends the oil and the benefits to the US. The tar sands oil is very similar to the crude that Mexico produces from Cantarell. The Cantarell field is in steep decline, and Mexican exports to the US have declined by half a million barrels/day over the past 6 years. This decline is expected to continue. Keystone XL will provide a replacement for the Mexican oil.

What about global warming?

While researching this issue I noticed something else. US consumption of oil products fell nearly 8% between 2005 and 2010, a reduction of 1.6 million barrels a day. Some of that is due to the recession, but I think that there is a real efficiency improvement as well.

Environmentalists and the Obama Administration have pushed through steep increases in auto fuel efficiency standards, so this decline is likely to continue. US coal consumption is also down about 10% over the same period. As a result, US greenhouse gas emissions are slowly moving in the right direction.

If people want to reduce greenhouse gas emissions, they need to focus on things that might work. Stopping Keystone XL will hurt the US while doing absolutely nothing to stop global warming. The Keystone XL fight is a waste of time and money for the environmental movement. Global warming is a global problem and needs a global effort lead by the US and China.

Environmentalists need to work out how to move both countries away from coal, which is cheap but has many disadvantages as a fuel. Low US natural gas prices offer an opportunity here. Enormous budget deficits in the US may offer an opportunity for introducing a carbon tax. Environmental groups also need to do a far better job of defending the science against politically motivated attack.

EIA US net imports by country and product
Lincoln, Nebraska newspaper article about the existing oil pipeline crossing Nebraska
Energy blogger Rob Rapier's case for Keystone XL
Nocera column one
Nocera column two