June 1, 2018
It is no secret that changes in a country’s trade balance can have a significant impact on a country’s economic conditions. A nation’s trade balance is the difference between its exports and imports of goods and services. If exports of goods rise more than imports, domestic manufacturers will supply not only the amount of goods needed to satisfy domestic consumption, but also additional goods required by the growth of the nation’s trade balance. In short, manufacturing output will grow to supply the growth of consumption plus growing excess of exports over imports. Conversely, if the nation’s trade balance is shrinking, domestic producers will be limited to producing less than the amount of goods consumed, as the decrease in trade balance will be supplied by foreign manufacturers.
This is important for domestic boxmakers who supply the corrugated packaging that protects manufactured goods during transport for both domestic and export consumers. Since some three-quarters of corrugated packaging is used to package nondurable goods, the behavior of the nondurable goods trade balance can provide a good measure of the impact of trade on corrugated converters.
According to the U.S. Bureau of Economic Analysis, inflation-adjusted consumer spending for manufactured nondurable goods rose by $258 billion between 2013 and 2017, amounting to $2.6 trillion last year. The chart below shows the key parameters of U.S. international trade in nondurable goods over the same time frame, adjusted for inflation. Examining it can help us to understand trade’s impact on the economy and corrugated producers that supply packaging.
Exports of nondurable goods amounted to a substantial $320 billion last year. Unfortunately, hampered by the 25 percent increase in the value of the U.S. dollar compared to a broad range of trading partners’ currencies between mid-2014 and the beginning of last year, exports of nondurable goods failed to grow since 2013. In fact, they fell by $4.8 billion, or 1.5 percent, during those four years. Over the same period, the rising U.S. dollar made imports more affordable, and imports of nondurable manufactured goods rose by 11.6 percent, or $51 billion.
Defined as the difference between exports and imports, the trade balance measures the net flow of goods into a country. For nondurable goods in the U.S., it stood at a deficit of $112 billion at the end of 2013. Since then it has worsened by $55 billion, ending 2018 at minus $167 billion. That decline is significant, amounting to a 50 percent rise in the deficit in just four years.
Excluding changes in inventories, U.S. manufacturers would supply 100 percent of the country’s needs for nondurable goods if there were no international trade. However, when trade flows are added, America’s factories can make not only the goods consumed at home, but also the net flows abroad (the trade balance). Unfortunately, when the trade balance is negative, domestic manufacturers have less than the full domestic demand to supply, as a portion of it is supplied by goods arising from the excess of imports over exports. In short, change in production equals change in consumption plus the change in the trade balance.
From that relationship, we can assess how significant the impact is on domestic manufacturers and those supplying them with corrugated packaging. During the past four full years, the worsening trade deficit amounted to 24 percent of the growth in domestic consumption—almost one-quarter of the total additional market opportunity to supply corrugated packaging to domestic producers! Put another way, even if the trade balance had not improved from its deficit of $112 billion at the end of 2013, the market for U.S.-made nondurable packageable goods would have expanded by $55 billion over the four-year period under discussion.
Since food is a large and packaging-intensive market supplied by almost all corrugated producers to some degree, it is illuminating to examine the effects of trade on these markets. The chart on the previous page summarizes the key data for manufactured food and kindred products.
In this manufacturing sector, the U.S. enjoyed a significant positive trade balance of $14.8 billion at the end of 2013. Since then, however, inflation-adjusted worsening trade conditions eroded that trade balance to only $2.9 billion at the end of last year, an $11.9 billion decline. Exports declined by 8.5 percent since then and ended last year at $58.3 billion, a decline of $5 billion. Imports, on the other hand, soared steadily, rising 13.2 percent ($6.3 billion) over the same period.
During that period, consumption of manufactured food products rose by $59 billion at a rate of 1.8 percent per year. Combining the rise in imports and the decline of exports almost wiped out the positive trade balance at the end of 2013. What these data show is that 20 percent of the slow growth in U.S.-manufactured food consumption was met by imported products during the past four years.
For independent corrugated converters who, for the most part, supply mature and slowly growing markets, the outsize impact of deteriorating trade conditions may have a larger role to play in the difficulty of identifying new or growing market opportunities than one might think at first glance.
Dick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.
