US Trade Deficit Shrinks in July as Demand Surge Ebbs

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The U.S. trade deficit fell in July for the first time in three months, the Commerce Department said Thursday, as the vaccine-fueled surge in American consumer demand ebbed and exports picked up.

The trade deficit was $70.1 billion in July, according to the report, 4.3% lower than the previous month’s downwardly revised figure and a bigger drop than analysts expected.

Imports fell very slightly to $282.9 billion, while exports picked up 1.3% to $212.8 billion, in what Mahir Rasheed of Oxford Economics described as trade flows reverting after the United States’ vaccine-fueled spring bounceback.

“We expect the deficit to narrow further as foreign consumption gains momentum and domestic demand decelerates,” he said in an analysis. 

“The pandemic will continue to pose a downside risk to trade flows, but we expect a gradual normalization in trade dynamics as vaccinations increase and supply disruptions slowly ease.”

The decline in the overall goods and services deficit was fueled by a drop of $5.5 billion in the goods deficit to $87.7 billion, while the services surplus fell $2.4 billion to $17.7 billion.

Compared to July 2020, when the pandemic had badly hit global commerce and American consumer demand, the deficit was 37.1%, or $131 billion, higher.

Services exports increased marginally while goods exports made up the bulk of the overall jump, with capital goods seeing a $1 billion increase, while consumer goods and automobiles and parts rose by smaller amounts.

Goods made up most of the decline in imports, with consumer goods falling $2.1 billion and industrial supplies dropping $1.7 billion even as cars and parts rose $1.1 billion. 

However services imports increased by $2.4 billion, with travel rising $1 billion and intellectual property charges, which included rights to broadcast the 2020 Summer Olympic Games, gaining $0.9 billion.

Copyright Agence France-Presse, 2021

China last year became the first major economy to pilot a central bank-issued digital currency—a digital yuan, also referred to as the eCNY—and interest in the potential of such currencies in many other countries is also on the rise.

The impact of the digital yuan may not be that significant in the near future for companies with manufacturing or trading operations in China given that this currency is in a pilot stage and focused mainly on individual consumer adoption. However, the path forward for the digital yuan to become the primary currency in China has been set; it may only be a matter of time before it is the norm even for business-to-business transactions such as payments to suppliers, revenues from industrial customers, bank financing or capital investments with joint venture partners.

Adoption of a central bank-issued digital currency—or CBDC—in any other country may not be as much a business concern, considering such currencies are more convenient, potentially eliminate merchant fees, do not require an internet connection (as in the case with the digital yuan) and provide traceability to combat illegal transactions. Ordinarily, too, peoples’ hesitations to digitize hard cash can delay adoption. However, given what we know of China’s governing style, the potential for a choiceless adoption of digital yuan should be a point of consideration for foreign companies operating in China.

Race to Digital

A CBDC is a digital version of a country’s paper currency, very much issued and controlled by the respective central banks, unlike cryptocurrencies such as Bitcoin and others which are decentralized and unregulated. And the interest in CBDCs is on the rise.

Thirteen other countries—including South Korea, Singapore, Saudi Arabia and Sweden—are also piloting a digital currency. And the number of countries exploring the viability of a CBDC shot up from 35 in May 2020 to 81 countries as of July this year, representing over 90% of global gross domestic product, according to the Atlantic Council GeoEconomics Center. Of the regions with the four largest central banks—the United States, Europe, Japan and England—the United States is furthest behind.

China may be racing to issue its digital currency to assert a controlled alternative to decentralized currencies such as Bitcoin, or perhaps it wants to diversify away from a U.S.-dominated currency in a geopolitically tense world. Perhaps it wants to strengthen its surveillance over its citizens through a cashless society and curb money laundering. Whatever the reason, it appears that the Chinese digital yuan is making strides: The Central Bank of China has stated that as the adoption of digital yuan increases, it will gradually replace cash and coins with the digital yuan making it the primary currency. The government could even mandate the adoption of eCNY, leaving companies no choice. Even without a mandate, companies may still be forced to adopt it if their ecosystem demands it. U.S. companies that have operations in China or do business with Chinese vendors need to take notice of this changing landscape.

Currently the digital yuan is being piloted mostly in consumer-facing businesses such as restaurants, retail shops and ride-share services. The scope of testing has also expanded to include pilots for B2B payment settlements between two fuel trading companies, “technical testing” for cross-border usage (mainly with Hong Kong) and salary payments by certain companies.

In June, the People’s Bank of China piloted a blockchain-based platform to enable salary payments in digital yuan. Ecommerce platforms like Alibaba and Tencent that provide a channel for many U.S. companies seeking to enter the Chinese market are also piloting the digital yuan 

While there is no official launch date yet, some officials have indicated the eCNY may be ready for use by February 2022, which is when the winter Olympics is set to take place in Beijing.

Points of Concern

Privacy is likely the biggest concern with the digital yuan. While parties using this currency may not have access to each other’s data, the government will have complete visibility across the transaction flow—“controlled anonymity,” as the Chinese government calls it. Digital wallets run by private companies like Tencent and Alipay also store customer data, which the Chinese government can access. But with the digital yuan, there is no third party involved; the data is housed with the government. Payers are currently required to provide their national ID before paying in digital yuan.

“The digital yuan will also be “programmable” and could be set to only be used for payments after activation, “when certain pre-defined conditions are met,” according to a report from consulting firm Oliver Wyman. “This would provide additional levers for more flexible fiscal and monetary policies, as well as monitoring and controls, such as cross-border payments.”

Indeed, the eCNY is not as much about currency as it is about data and control. That programmability can allow the government to more aggressively control behaviors and enforce compliance. The government can set an “expiration date” for the digital yuan or perhaps wipe out an account’s cash balances for companies or individuals found not to be in compliance. It will hold the key to the cash box. Currently, too, the government can enforce compliance by restraining cash repatriation outside of China, but the digital currency makes it much easier to do this without providing companies much control over the outcome.

Manufacturing companies have generally limited the amount of cash maintained in China given government restrictions on repatriations, but the privacy and programmability aspects of the digital currency impose an additional layer of complexity in managing cash balances in China.

Privacy concerns, especially with a controlled government such as China, will not help in increasing adoption of the digital yuan internationally. But given that China is a major trading partner to many countries, it could force the adoption of the digital yuan in cross-border trade as well—although not in the short term. Countries may look to diversify away from the U.S. dollar, boosting the globalization of the yuan. Morgan Stanley predicts that the Chinese yuan will account for 5 to 10% of global foreign exchange reserves by 2030, from 2.1% in September 2020, promoting prospects for the Chinese yuan as a global settlement currency.

As more countries explore their own digital currencies, there may be a whole host of new rules for global businesses to navigate. But the launch and adoption of China’s eCNY for B2B transactions will be sooner than that, forcing companies operating there to take note.

Shruti Gupta has more than 15 years of experience advising multinational clients on their transfer pricing planning, supply chain structuring, global compliance and controversy management strategies. She is a senior analyst in RSM’s Industry Eminence Program, which positions its analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves.