A Surplus of Deficient Thinking

Global trade data came in fast and furious last week, as did media interpretations. As we’ve written, the absolute balance of trade is a flawed reflection of economic activity. A trade surplus isn’t necessarily an economic panacea, and a deficit needn’t signal a failing economy. In that regard, total trade is a far better indication of overall economic activity and health.

France began the data blitz, reporting 2011’s annual trade deficit reached a record high—a development nearly immediately decried as “underscoring the loss of competitiveness of the country’s national production.” In fact, this discussion even has a chart of France’s trade gap titled, “Suffering.”

Yet data underpinning France’s 2011 trade don’t seemingly suggest the vast damage these opinions imply. 2011 imports rose to €498.4 billion—an 11.7% increase over 2010. Yet exports also rose, growing 8.6% to €428.8 billion. So yes, more goods were imported than exported. But that implies consumers and businesses chose to buy more goods. Be they of foreign or domestic origin, that’s increased demand. And those rising exports? They’d suggest demand for French goods increased globally—which seemingly doesn’t support the notion France is “suffering” from a “loss of competitiveness” tied to the balance of trade.

British December trade data received the opposite welcome. The trade deficit shrank to £1.1 billion—the lowest monthly read since April 2003. Many commentators hailed the figure as one of the nation’s few Q4 economic bright spots. Hurrah! But wait.

Underlying data showed the deficit shrank because goods imports fell -4.6% while exports grew +0.9%. Adding the two, total trade fell in the month—not a great sign. Now, one shouldn’t make too much of this one data point as UK exports rose nicely in Q4 as a whole and imports were rather flat. But either way, the economic reality and media interpretation seem far apart.

Friday, the US reported December trade data. In the month, total trade rose to a new record $406.3 billion—and the year logged a new annual record as well. Both exports and imports rose in December (0.7% and 1.3%, respectively), and even exports to Europe—which many presumed would hamper US growth—grew 7.2% in the month. For 2011, US exports rose 14.5% and imports 13.8%. All in all, a fairly strong report—yet most seemingly harped on the fact the trade gap widened.

Across the Pacific, China also reported trade data for January 2012 on Friday. This month held China’s week-long Lunar New Year festivities—an event that typically negatively skews economic data. And that seemed at work in January’s trade report. Imports sharply fell -15.3% y/y, and exports fell -0.5% y/y. Now, many analysts do anticipate the holiday’s effect—so exports’ decline actually beat estimates. But imports still widely missed, another point implying China’s government will likely loosen monetary policy this year in an effort to stoke growth. Yet many in the media focused on a different reported point: 2011’s trade surplus fell to an eight-year low, before widening in January—with a variety of interpretations of this all-too-short-term and likely quite skewed data.

Ultimately, folks globally seem inundated with a surplus of deficient thinking on trade—and the media isn’t all to blame. After all, if one believes GDP is directly equivalent to economic growth (wrongly, in our view), then we can understand why they might think imports are bad: GDP’s calculations tally net exports—imports detract. And then there are politicians, who often lean on trade-deficit rhetoric during political campaigns, scapegoating imports for a host of economic ills. And with a bevy of elections this year globally, expect more politicized trade rhetoric ahead. But as the year progresses, one way to help separate spin from fact is to look beyond narrow views of trade focusing solely on deficits or surpluses.