In an increasingly complex global economic landscape, there are no easy prescriptions for economic growth. The debate over China’s currency devaluation and the decline of the U.S. manufacturing sector has prompted many economists and policy makers to champion U.S. exports as a key to economic growth. Yet it seems that the U.S. manufacturing sector remains bound by both intractable economic realities in the developing world and a domestic monetary policy (undermined by instability in the Euro-zone) that has unwittingly led to a stronger dollar. In his 2010 State of the Union address, President Obama outlined an ambitious government-wide effort to put the United States on a path of strong economic growth, by doubling U.S. exports and creating 2 million jobs by 2015. So far, the plan appears to be on track, with gains of about 18 percent year-over-year. Recent trade pacts signed with India, and South Korea, valued at about $10 billion each, will help to move the president’s plan forward.
Based on trade data in October and November of 2010, U.S. exports appear to be outpacing the global average, in both nominal and volume terms. In 2011, U.S. exporters are poised to benefit from continued emerging market growth, which accounts for nearly 56% of all U.S. exports. Nonetheless, two central questions remain. Is there a viable argument to be made for export growth as a critical component of U.S. economic growth? Moreover, how can we reconcile this rather one-dimensional prescription for growth with a dollar that continues to strengthen in the face fiscal austerity in much of the developed world? That said, China’s currency (RMB) devaluation may be an important outgrowth of these questions, in serving as an overlooked crisis that is directly affecting employment in the U.S. and its growing budget deficit.
In November 2010, the Federal Reserve announced a second round of credit easing (QEII), aimed to spur new investment and consumption by targeting interest rates at the long end of the yield curve. According to Chairman Ben Bernanke, lower interest rates should prompt demand for durable consumer goods, and create easier financial conditions to promote a ‘virtuous circle’ of economic growth. The move to buy $600 billion in long term U.S. bonds should cause the value of the dollar to weaken, making exports more competitive and imports more expensive in the near term. However, this development has yet to happen, as confidence was shaken by recent developments in Europe, causing the dollar to climb against the Euro. With the agreement to bail out Ireland, some of the attention should soon shift back to the United States and QEII.
Nevertheless, Fed policy that undermines the dollar’s strength around the globe is a potentially destabilizing force in world markets. Of late, emerging market policy makers have expressed concern over foreign capital inflows that have contributed to currency appreciation. The Peterson Institute of International Economics, a Washington based, non-partisan research group, estimates that every 1% increase in the dollar, averaged against other major currencies, decreases U.S. exports by about $20 billion annually and destroys some 150,000 jobs. Nevertheless, there is a trade-off. Although a stronger dollar may make it more expensive for American companies to sell their goods and services abroad, imports will be cheaper, serving as a boon to U.S. consumers.
Yet the problem may lie in the mitigating effect that government borrowing can have on U.S. exports. According to the U.S. Bureau of Economic Analysis, the 2009 federal budget deficit was financed in part by foreign purchases of $468.8 billion in U.S. government debt. It seems that had other countries not used their capital to purchase American debt, they could have spent it on U.S goods or invested in the private sector of the U.S. economy. Perhaps a more prudent look at the government borrowing would reveal that exports would benefit from a smaller federal deficit, which would free up foreign dollars to buy U.S.-made goods and services.
The argument for fiscal prudence is certainly not a panacea. In an effort to better understand the rationale behind export-driven economic growth, it is important to attend to the connection between the undervaluation of the Chinese RMB and the loss of competitiveness in the U.S. manufacturing sector. China’s devaluation has long exercised a retardative influence on U.S. export activity and may be a principal contributor to the nearly six million jobs lost in the U.S. manufacturing sector. Historically, China’s devaluation was little cause for alarm among U.S. manufacturers. Through 1994, China’s 43% devaluation had no immediate impact on U.S. producers. Yet it took nearly two years for manufacturers to recognize that these were not temporary changes. According to IMF trade statistics, around 2000, Asian economies began to actively intervene in foreign exchange markets to suppress the value of their currencies, with little protest from U.S. authorities. Although it is beyond dispute that China’s actions in foreign exchange markets have been detrimental to U.S. exports, perhaps a rise in the RMB and the attendant rise in interest rates be beneficial for the larger U.S. economy, by imposing better fiscal discipline on our elected officials.
Despite a muddled international outlook, American continues to manufacture loads of goods that are in high global demand, with a fraction of the workers needed in the past. Technological improvements that provide for increases in worker productivity should not be decried as a net negative to domestic job growth. Displaced workers are forced to learn new skills, become more productive workers, earn higher wages and an improved standard of living.
Furthermore, an increasing factor behind the growth in exports is growing demand in emerging markets. Rapidly growing economies not only in Asia, but South America and also Africa, are increasingly importing many products and services supplied by the U.S. to further their own growth. With limited growth opportunities elsewhere, meaningful increases in U.S. exports might be one of the remedies to the current economic problems. With an unemployment rate of 9.0% in January 2011, U.S. exports could aid in job growth. While it may not be possible to get back to the 4-5% levels of unemployment seen earlier this decade, fuller levels of resource utilization would help the economy by increasing spending and investment. While the trade deficit is unlikely to disappear any time soon, if ever, a much smaller deficit would certainly go a long way towards addressing several persisting economic problems.
-Dariusz Bialuski ’11