The United States ran a massive trade deficit of $485 billion in 2016. Economic data through July of this year show it will likely widen by a significant margin in 2017. That may hardly sound like news at this point given the gloomy discussions around the topic — but what if we’re having the wrong discussion to begin with?
It may be difficult to believe, but there’s a solid argument that America can make significant progress closing its trade gap, and much sooner than many people think. Incredible growth in energy exports and domestic chemical production in the next decade will provide a once-in-a-generation opportunity to rebalance the country’s trade. Best of all, there are several stocks that will allow you to piggyback on the coming shifts.
By the numbers
While the trade discussion often focuses on exporting and importing physical objects, otherwise defined as “goods”, economists also track an economy’s use of its knowledge base, otherwise defined as “services”. So although America ran a $735 billion trade deficit in goods last year, it recorded a $250 billion surplus in services. The result: a total goods and services trade imbalance of $485 billion in 2016.
That’s…not so great. But the total trade imbalance has improved significantly in the last decade after hitting an all-time low at $762 billion in 2006. That’s thanks to a steadily growing services surplus and a goods trade imbalance that has remained relatively constant.
However, the totals hide real progress that’s already well underway in specific sectors. As might be expected for a post-industrial economy with a leading higher education system, the United States dominates global services trade, which includes subcategories such as insurance, intellectual property, professional consulting, R&D, financial, and so on.
Meanwhile, despite a goods trade deficit of $735 billion, there’s a lot of reason for optimism. Why? America is in the process of flipping its former worst trade category into its absolute best. Consider that energy-related products accounted for 43% of the total goods deficit in 2010, with imports exceeding exports by $273 billion. But thanks to the shale revolution and growing exports, energy-related products accounted for just 8% of the total goods deficit last year, with an imbalance of only $58 billion.
In fact, energy-related trade was the only category to see an improvement from 2010 to 2016 — and it was massive — although agricultural products was the only category to post a surplus in goods last year.
Stocks closing the trade gap
While the massive gain in energy products from 2010 to 2016 was more than offset by decreases in the other 11 categories in the last decade or so, American energy export volumes are expected to rise significantly in the next few years alone. Couple that with falling imports and Uncle Sam is poised to be a net energy exporter sometime in the 2020s.
Kinder Morgan (NYSE: KMI) is uniquely positioned to capitalize on increasing energy exports. It owns 70,000 miles of natural gas pipeline in North America, moves about 40% of American consumption, and owns 16% of the nation’s storage capacity. That’s all good news for investors, especially considering that the United States will go from having just 1.6 billion cubic feet per day (Bcf/d) of liquefied natural gas export capacity in 2016 to over 9.5 Bcf/d by the end of 2019. The company’s fee-based business model should easily flourish as increasing amounts of natural gas are moved from the country’s heartland to its shores.
Investors are expecting big growth for another company with a unique position. Nearly one-third of America’s expected LNG export capacity by 2019 will be owned by one company: Cheniere Energy.
Natural gas will also be a boon for Uncle Sam’s goods trade balance outside of energy related exports. Massive investments in chemical production facilities that use natural gas as a feedstock should easily allow the country to become a net chemical exporter once again.
Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) is building a world-class facility outside of Pittsburgh that will convert ethane found in shale natural gas to polyethylene, a key building block chemical for various polymers. The location puts it within 700 miles of 70% of North American consumption, the size will boost the company’s total chemical production 10%, and the value created will be critical for boosting free cash flow.
That facility likely squashed plans for Braskem, Brazil’s largest chemical company, to build a cracker in Appalachia (in nearby West Virginia). So, the company is instead building a new polypropylene manufacturing facility in Texas. Not only will it be the first such plant built in North America since 2005, but it will be the largest in the Americas. Additionally, the company has secured long-term supply agreements to ship American ethane all the way to Brazil to diversify its feedstock options in its home country — an extraordinary move. Why? A majority of its chemical inputs are sourced from its parent company, Petrobras, in Brazil.
Cheap natural gas also gives the United States a formidable long-term global advantage in manufacturing — one that potentially could be tapped to rebalance other trade categories in the coming decades. For instance, it may be possible to begin reinvesting in domestic auto manufacturing or electronic products manufacturing, the categories with the two largest deficits today. Indeed, Foxconn is in the preliminary stages of doing just that. The company has pledged to invest up to $10 billion to build an LCD panel manufacturing facility in Wisconsin, while it’s poking around other states as well.
What does it mean for investors?
There are great reasons to be bullish about American trade. Services — quietly the country’s best export — continue to soar. The country’s ascension as a top global energy exporter in the next decade will lead the way to chipping away at the trade deficit. Intelligent policies targeting specific sectors could significantly reduce trade imbalances in other categories, perhaps even allowing the United States to breakeven on goods and services trade in the next 20 years or so.
While much of the potential progress depends on the decisions made in the next decade, the opportunity to rebalance American trade is sitting right in front of us. Given the right national strategy that focuses on the long-term health of the economy, there’s a solid bull case to be made that the United States can close its $485 billion trade gap.