Celine Hartmanshenn, Global Head of Credit from Stenn Group, an international provider of trade finance, provides her thoughts on the deficit fall.

The trade gap between China and the US is shrinking, reflecting the overall softening of global trade volumes and hinting at the movement of supply chains out of China.

US macro indicators are mixed. Unemployment remains low and prices are in check. But consumer and business spending has cooled, manufacturing output is at its lowest level in a decade, and the services sector – which accounts for 80% of economic activity – is slowing down. The lingering uncertainty stemming from the trade war and sagging global economy has caused the outlook for 2020 to dim, with the expectation of the US limping along at 1-2% GDP growth. It’s not an outright recession, but it’s certainly not a boom either.

There’s no denying that the US-China trade war is a drag on the US economy. The disruption to supply chains is expensive for businesses, the tariffs now cover a wide range of goods, and because financial markets can’t quickly adjust, they are more volatile.

So, what’s the solution? Certainly not a tariff war with the EU. The US will implement its first tariffs on aircraft and agricultural goods in 2 weeks. The EU is likely to retaliate. The aftershocks could easily tip the US into recession.

The world will be watching this month as China and the US go back to the negotiating table. Whether they like it or not, these two economies are interconnected. China is dealing with massive overcapacity, high debt levels and a need for US dollars. And the US relies on China pumping these dollars back into the US to fund its debt.

According to the Independent, many companies are struggling to decide on importing and exporting in light of confusion over the direction Brexit will take businesses.

But what is the current state of the nation’s trading with the wider world? In this article British brand Gola, that is renowned for its classic trainers, take an in-depth look at the UK’s imports and exports, from the items we sell the most of to what we’re buying in, as well as which countries are our top import and export locations.

Terminology rundown

With so much talk in the tabloids and newsrooms about trade and Brexit, you might be wondering what some or all of the terminology springing up means.

Before we delve further into what the UK has to offer in terms of trade, let’s break down some of the terminology:

• Import and export — an easy one to start with, imports are items and goods we buy into the country. Exports are items and goods we sell to other countries.
• Trade deficit and trade surplus — these two terms come under the umbrella of the balance of trade. It is essentially the difference between monetary value of a country’s exports and imports. If a country is importing more goods than it is exporting, then the country has a trade deficit. A trade surplus occurs if a country is exporting more than it is importing. Generally, a trade deficit is considered concerning as it is seen as the country being unable to produce enough goods to supply its people, requiring them to import more.
• “Special relationship” — The oft-cited “special relationship” with the US boils down to our trade relationship. In 2016, the UK exported £100 billion worth of goods and services to the US, running a trade surplus with the US of £34 billion.
• Single market — The European Single Market is a single market that guarantees the free movement of goods, services, capital, and labour within the EU.
• Customs Union — A customs union is where a group of states or countries agree to charge the same import duties to each other.

It is important to note that, regarding the “special relationship” with the US, the UK does export more to the US than any other country. However, when considering the EU as a whole with the same trade laws etc, rather than 27 separate countries, the EU imports more from the UK than the US by far.

What are we exporting?

According to the Observatory of Economic Complexity (OEC), in 2016 the UK’s top export item was cars, which accounted for 12% of the overall $374 billion export value that year. One of example of this is the world renowned Mercedes-Benz, which offer a variety of cars, including the Mercedes Gle.

Other popular UK products were gas turbines (3.5%), packaged medicaments (5.2%), gold (4.0%), crude petroleum (3.4%), and hard liquor (2.1%).

We also export a fair amount of food and drink, with items such as whisky and salmon popular abroad.

The BBC also points out that exports and imports are not just physical goods. In this digital age, it’s easier than ever to offer services as exports too, and the UK does just that, via financial services, IT services, tourism, and more.

Where are we exporting to?

In 2016, our top export destinations were:

1. United States (14%)
2. Germany (9.5%)
3. The Netherlands (6.0%)
4. France (6.0%)
5. Switzerland (5.1%)

China, one of the countries the UK is eyeing up for a potential trade deal after Brexit, accounted for 5%. Again, it is worth considering that Europe as a whole accounted for 55% of our top export destinations.

What are we importing?

We are importing rather similar items as we’re exporting. Top imports into the UK in 2016 included gold (8.2%), packaged medicaments (3.1%), cars (7.8%) and vehicle parts (2.5%).

Where are we importing from?

For 2016, the top origins of the UK’s imported products were:

1. Germany (14%)
2. China (9.8%)
3. United States (7.5%)
4. The Netherlands (7.3%)
5. France (5.8%)

The UK’s trade deficit

Despite our popular products, the nation is sitting with a trade deficit to the EU — we import more from the EU than we sell to the EU. In 2017, we exported £274 billion worth to the EU, and imported £341 billion’s worth from the EU. In fact, the only countries in the EU that bought more from us than we bought from them were Ireland, Sweden, Denmark, and Malta. Our biggest trade deficit is to Germany, who sold us £26 billion more than we sold to them.

The UK also has a trade deficit with Asia, having sold £20 billion less in goods and services than we bought in.

As previously mentioned, we have a trade surplus with the United States, as well as with Africa.

A trade deficit is generally viewed in a poor light, as it is basically another form of debt: the UK imported $88.4 billion from Germany in 2016. Germany imported $35.5 billion from the UK, making a difference of $52.9 billion owed by the UK to Germany.

With uncertainty abound about the impact of Brexit on imports and exports, it remains to be seen how UK businesses will continue to trade abroad, and if focuses will shift.

Sources:

https://atlas.media.mit.edu/en/profile/country/gbr/

https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/articles/whodoestheuktradewith/2017-02-21

https://www.bbc.co.uk/news/business-41413558

https://www.independent.co.uk/news/business/news/brexit-uk-imports-exports-uncertainty-british-import-export-business-a8589796.html

https://www.investopedia.com/articles/investing/051515/pros-cons-trade-deficit.asp

https://fullfact.org/europe/what-trade-deficit-and-do-we-have-one-eu/

https://www.dw.com/en/is-germanys-big-export-surplus-a-problem/a-18365722

With current trade ‘talks’ with China, the US in a not in a great position money wise. According to Congressional Budget Office the US is heading for an annual budget deficit of more than $1 trillion (£707bn) by 2020, on the back of tax cuts and higher public spending.

Although these measures may bring ease to the current economic climate, it’s predicted they will exacerbate long term debt. The Congressional Budget Office believes such debt could amount to similar historical depths, such as World War II and the financial crisis.

This week Finance Monthly asked the experts Your Thoughts on the prospects of long-term debt in the US, and here’s what you had to say.

Andy Scott, leading UK serial entrepreneur and property developer:

With growth and confidence at record highs, unemployment low, and at best guess being mid-point through the economic cycle, Trump should be fixing the roof of his house while the sun is shining for the benefit of his children's generation and beyond. The temptation to focus on voter incentives to win a second term in November 2020 and to try out his unproven trickle-down policies for the few, seems short sighted from the President.

With a trade war underway, it appears banking on increased growth and mass job creations from tax cuts, whilst not tightening the already loose belt elsewhere, and not paying as you go, seems at best optimistic and at worst, reckless.

Deficits are nothing new, having run one every year since 2002. However, what should concern those of us with hopefully 30-40 years left on planet Earth is that even the most upbeat forecasts - taking into account no impact from any external factors (which seems highly unlikely given the confrontational leadership style) - show that not only are we heading for the trillion dollar deficits, but they are likely here to stay, and become the norm over the next decade. A legacy surely no one wants to be remembered by?

The US should think more long term otherwise the next generation will be burdened with more debt meaning lower growth, more tax, reduced services, higher inflation and ultimately fewer employment opportunities.

Josh Saul, Investment Manager, The Pure Gold Company:

Whilst there are clear and obvious benefits to having tax cuts with higher spending such as driving economic growth over the short-term, the question we should ask is, at what cost? the problem is that we are kicking the can down the road.

The Pure Gold Company has seen a 74% increase in US nationals investing in gold this year compared to the same period last year citing fears that escalating US debt will in the long run make the US and it’s economy vulnerable to fiscal shock. Our clients are concerned that given the high debt to GDP ratio, the US may have problems paying back its loans and this could increase the interest that the US will have to pay for the amplified possibility of default. The issue here is that the US having to pay more interest further accelerates the debt problem and with the dollar in the firing line – repeat problems like the current trade war with China put the US on the back foot. Our clients who are currently purchasing gold are concerned that over the next 20 years the social security trust fund won’t cover retirement benefits and the US will have to raise taxes and curtail benefits in order to cover various short-term monetary requirements. Incidentally this notion of escalated debt has doubled since 1988 and if you look at the gold price – that’s increased by 200%.

Our clients do not necessarily look at their investment having grown by 200% but instead it takes more currency to purchase the same ounce of gold. Therefore, our clients purchase gold to maintain their dollar’s purchasing power and with the US debt being the highest in the world they are not merely looking at the next 4 years but instead the next 10 – 20 years.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

As anticipation for President Donald J. Trump's first budget release in the next few weeks reaches a crescendo, there is much debate about whether cutting the deficit should be a priority for the administration. Apparently most American voters think it should be. In a unique survey in which respondents made up their own Federal budget, majorities proposed a combination of spending cuts and revenue increases that would reduce the deficit for 2018 by at least $211 billion. There were partisan differences, but Republicans and Democrats did agree on $86 billion in deficit reductions.

In the survey, which was conducted by the University of Maryland's Program for Public Consultation (PPC), a representative sample of 1,817 voters were presented discretionary spending for FY 2017 (broken into 31 line items), and sources of general revenues, actual and proposed. They were then given the opportunity to modify both spending and revenues, getting feedback as they went along about the effect of their choices on the projected deficit. Respondents were not instructed to reduce the deficit, and were able to both increase or decrease spending or revenues.

Overall, majorities cut spending a net of $57 billion. While both Democratic and Republican members of Congress are planning for increases in spending on national defense for 2018, this was the area that received the biggest cut from the public-- majorities cut it by $39 billion. Other significant cuts were for subsidies to agricultural corporations ($5 billion), intelligence agencies ($4 billion), homeland security ($2 billion), the State Department ($2 billion) and the space program ($2 billion), plus smaller trims in other areas. The one area to be increased was the development of alternative energy and energy efficiency, which was increased by $2 billion (a 100% increase).

The biggest changes, though, were on the revenue side, which were increased a total of $154.2 billion. The biggest source of revenues ($63.3 billion) arose from increases in personal income taxes for higher earners. Those with incomes over $100,000 saw their taxes go up 5%, while those with incomes over $1 million had increases of 10%.

"Clearly Americans are concerned about the deficit and are ready to make some tough choices to bring it down—more than Congress is even ready to consider," said PPC Director Steven Kull.

Other major increases came from an increase in taxes on capital gains and dividends from 23.8% to 28% ($22 billion), a new transaction fee on financial transactions of 0.01% ($20 billion), a 5% increase on corporate taxes ($17 billion), a tax on sugary drinks of $.05 an ounce ($9 billion), an increase in the estate tax ($7.8 billion), a tax on alcohol ($7 billion), a fee to banks who have large amounts of uninsured debt ($6 billion), and repeal of the 'carried interest' tax break for fund managers ($2.1 billion).

There were significant partisan differences. Republicans only cut $5 billion from defense, while Democrats cut $91 billion. Republicans cut $9 billion from education, while Democrats increased it $3 billion. Republicans cut environmental spending by $6 billion, while Democrats raised it by $1 billion. Most Republicans did not join in on increases to corporate taxes, estate taxes, and taxes on sugary drinks.

Nonetheless, Democrats and Republicans did converge on $86 billion in deficit reductions, including $69.2 billion in revenue increases and $17 billion in spending cuts.

Overall, Democrats made the largest reductions to the deficit of $306.5 billion, with $96 billion in net reductions to spending and $210.5 billion in revenue increases. Republicans made total deficit reduction of $134.2 billion, with $65 billion in spending reductions and $69.2 in revenue increases.

(Source: Voice Of the People)

France cut its budget deficit target for 2015 and announced that this year’s economic growth could beat the government’s 1% forecast, as the country posted a smaller than expected fiscal gap for 2014.

Statistics office INSEE announced that the budget gap dropped to 4% of economic output in 2014 from 4.1% in 2013, signalling economic recovery is underway.

The data "paves the way for a revision of the 2015 public deficit to about 3.8% of GDP," Finance Minister Michel Sapin said in a statement.

The euro zone's second biggest economy, France’s economy grew by 0.4% in 2014, the same rate of growth as see in 2013. Sapin is predicting a 1% growth for 2014.

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However, France needs to take further steps to bring its economy in line, with European Union finance ministers stating this month that they had given France two more years to cut the deficit to the 3% limit.