Global Courant
NEW YORK – The bad news is that America hasn’t invested much in manufacturing in the last 20 years. The worse news is that most of the capital goods America uses for manufacturing come from imports.
Not only does the US have a $1 trillion trade deficit, but about $300 billion of that deficit comes from imports of capital goods, namely goods that make other goods.
Federal subsidies for chip manufacturing plants and green energy have recently boosted plant construction, but orders for capital equipment remain low. The grant-driven increases in factory construction help explain a huge surge in U.S. capital goods imports.
America’s dependence on foreign capital goods will hit an all-time high in 2022, as imports of capital goods exceed domestic production of home capital goods, according to Global Courant calculations.
To reduce the $1 trillion trade deficit, the US would need to invest in capital goods. But it would need to import most of these capital goods, meaning the trade deficit would need to increase in the short term to shrink in the long run.
That precludes a broad “decoupling” from China, which accounts for the bulk of the US trade deficit. Decoupling has become a shibboleth in US politics, and calls for a trade freeze with China will become increasingly sharper as the 2024 presidential election approaches.
But proponents of broad decoupling are challenged mathematically: America’s atrophied capital goods industry cannot meet the needs of existing manufacturing.
Instead of trying to decouple existing industries from China at prohibitive costs, America should focus its investment resources on leadership in the key technologies of the Fourth Industrial Revolution and make China leapfrog in strategic industries.
The US now imports as much capital goods as it produces for domestic customers at home. That is, imports of nearly $900 billion in capital goods now equal US manufacturers’ annual orders for non-defense capital goods (excluding aircraft).
Nearly $500 billion of capital goods made in the United States are exported (again excluding aircraft), so the net supply of capital goods to domestic users (domestic production minus exports) is about $300 billion. That is roughly equivalent to the trade deficit in capital goods.
“Orders excluding exports” in the diagram above means the production of domestic non-defensive capital goods (ex-aircraft) for domestic use, i.e. excluding exports. This is now less than the volume of imports of capital goods (ex-aircraft).
It’s important to note that the figures shown in nominal dollars in the charts above look much smaller when inflation is taken into account. The chart below shows U.S. manufacturers’ orders for non-defense capital goods (again excluding aircraft) in constant 1982 dollars (based on the Producer Price Index for Private Investment Goods).
Deflated, year-over-year order volume is $450 billion, down 30% from 2013 levels. Most of that decline reflects the rise and fall of fracking.
Capital spending by industrial companies in the S&P 500 has also fallen significantly from previous peaks.
China is one of America’s largest suppliers of capital goods, including everything from industrial machinery to printed circuit boards.
Mexico exports many semi-finished products to the US that fall under the heading of capital goods. However, a growing share of Mexican exports to the US consists of re-exports of Chinese goods to Mexico.
Global Courant showed in an April 6, 2023 study (“The Great Re-Shoring Charade”) that Mexico, Vietnam, India and other friend-shoring locations are increasing their imports from China in line with their exports to the United States increased.
A detailed analysis of individual industries would be necessary to specify America’s degree of dependence on Chinese imports. Last year, China exported nearly $140 billion worth of electronic devices and equipment to the US, as well as $125 billion worth of industrial machinery, boilers, and power plant equipment.
Thus, a halt to Chinese imports would lead to immediate and devastating supply shortages across a wide range of US industries.
Follow David P Goldman on Twitter at @davidpgoldman
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