US exports have been in decline since late 2018, pressured by the combination of a strong US Dollar and trade disputes with China.
As of September 2019, US exports have dropped notably, with three-month moving averages falling by $1.7 billion year-on-year, according to the US Bureau of Economic Analysis (BEA). And year-to-date, exports decreased by $7 billion compared to the same period in 2018. In September 2019 alone, exports fell by $1.8 billion from the month prior to $136.8 billion.
The most sensitive sectors to the trade war and strong USD are foods and beverages, which fell by $1.5 billion in September. Most markedly, US soybean exports fell by $1 billion for the month.
At the root of the overall decline is the inhibiting effect of higher tariffs on bilateral trade with China. In September, US exports to China fell by $1 billion to $9 billion, while imports dropped by $1.2 billion to $10.76 billion.
The agricultural and manufacturing sectors appear to be hardest hit by the circumstances. Alongside US agricultural goods, automotive vehicles, parts and engine exports have fallen, pressuring growth in the manufacturing sector.
There is increasing evidence that the US manufacturing sector is softer amid the ongoing uncertainty around trade negotiations with China. The Institute of Supply Management (ISM) index reading for September showed a 10-year low at 47.8. Although the ISM index crawled up to 48.3 in October, a reading below 50 still indicates a contraction in the sector.
For US manufacturers and farmers, the strong Dollar is exacerbating the effect of higher tariffs on their exports to China because of the unfavorable exchange rate to the Yuan. The same can be said of other emerging currencies, which remain under pressure when the USD is strong.
Relative dips in the value of the Dollar are seen when the US-China trade dispute appears to be closer to a resolution. This means that overall, trade uncertainty is still a primary driver of the USD-Yuan currency exchange rates at the time of writing.
For the GCC’s Dollar-denominated exports like crude Oil, a strong USD may be a challenge given that OPEC is faced by a decline in global demand due to trade war uncertainties and declining global manufacturing growth.
Interestingly, non-oil exports and re-exports from the UAE rose from AED1.3 trillion in 2017 to AED1.6 trillion in 2018. The fact that non-oil exports were on the rise last year must be encouraging to policymakers seeking to diversify the regional economy and reduce the exposure to a strong USD or falling oil prices.
Still, the latest developments in the trade talks between the world’s largest economies are somewhat promising after China said it would stiffen penalties for breaches of intellectual property rights, potentially fulfilling a key US demand. This appeared to boost short-term investor sentiment and increase hopes that phase one of a comprehensive trade deal is imminent.
The deal on US agricultural goods purchases by China is less clear and it’s likely that market sentiment will remain cautiously optimistic until the phase one agreement is safely signed.
Meanwhile, the clock is ticking on the health of the global economy and the growth of the US export market.
In conclusion, in its role as a traditional safe haven, the USD may be seen as attractive for as long as trade disputes spread uncertainty into the investment markets. This may have the effect of supporting the currency’s value until the end of the year, barring any meaningful breakthrough in the form of final signatures on a US-China trade deal.