President Obama’s goal of “doubling exports over the next ten years” seems like a win-win in that it will boost employment and reduce the troubling U.S. trade deficit. At first glance, his position makes sense politically and economically. But there is a problem. Because of the globalization of production that U.S. companies have championed over the past 20 years, exports from sectors other than agriculture require a much higher level of imports than ever before. As a result, the job creation from expanding exports is much lower than it was in the 1980s and 1990s.
In economic terms, the President’s goal of doubling exports makes sense. Foreign demand is expected to be the fastest growing component of U.S. demand in the coming years. And other, domestic, sources of economic growth are less promising than they have been in the past.
We can’t consume our way out of our problems. Consumption demand is going through a long-term adjustment from the build up of consumer debt over the past ten years. Private investment also is not a likely singular basis for recovery. It stopped being the most dynamic source of U.S. economic growth years ago. With fear of a double-dip recession, lots of built-up excess capacity and still inexplicably tight credit, private investment spending is unlikely to be a driver of US economic growth. Government spending has been politically excluded by the bi-elections. Federal spending has grown rapidly over the period of economic crisis, but calls for deficit reduction mean that the kinds of increases we have seen in government spending over the last few years may not be politically feasible in the future.
That leaves the export sector. With the dramatic growth rates of the emerging markets — most prominently Brazil, India and China, — the potential for growth in U.S. exports is considerable.
A rapid doubling of exports also makes sense politically, since it relies on the spending power of foreigners not the U.S. government, and in this sense is a “free lunch.” Moreover, if export growth is blocked by tariffs or exchange rate manipulation, the source of the failure lies outside U.S. borders not within.
There are two problems, though, with the policy goal of doubling exports. One is that it may require beggar-thy-neighbor devaluation on the part of the U.S. This is the accusation the U.S. faces from Brazil, Korea, Germany, Japan and others as a result of the Fed’s second round of monetary easing, as we saw dramatically revealed during the President’s trip to Korea. These countries are concerned that U.S. export growth will be at the expense of their own exports.
The second problem is more serious for the President, since it relates to the employment effect in the U.S. of an export expansion. U.S. exports increasingly rely on U.S. imports, as manufacturers in the U.S. import many components of their products. This is true of Boeing’s 777, Apple’s iPod, Cisco’s servers and IBM’s consultancies. More than ever in U.S. history, U.S. exports depend on U.S. imports and (outside of the farm sector) the most profitable U.S. companies are also those most reliant on the importation of inputs.
So while a doubling of exports may be attainable, its employment effect is much less than it was 20 years ago. It would be misguided for many reasons to try to return to the nationally-integrated production structures of the 1980s. So a substantial and sustainable program of job creation will necessarily have to confront the slow pace of growth of domestic demand. This, in turn, will require a reform of firm innovation policy and perhaps even a new set of social protections that redistribute the high profits earned by many exporters (and simultaneously importers) today for social protection or decent wages to other, domestic, areas of work, along the lines described in my previous post.
Excellent points. From a practical standpoint, it seems to me that a growth economy in the United States will require us to profitably produce more than we consume. While innovation is an important element in the growth equation, so are a number of other factors. Virtually all business investments are based upon estimates of the present value of projected after tax flows adjusted for risk. That implies at the very least, businesses need to have competitive tax rates. There is also a time dimension in the discounting of cash flows, and this directly relates to the ability to move through a permitting process in a reasonable manner and complete the capital project in a cost effective manner. Part of the risk equation includes the projected regulatory environment in which the project will operate long term, and this entails things in addition to regulatory concerns. It does presume the availability of competitive energy, raw materials and effective employees who are willing to learn new skills, multi-task, and operate in a flexible work environment. Many of the human resource issues are linked with innovative organizational structures, participation and a broad range of reward systems. Most of these things have been very difficult to get done. For instance, there is virtual gridlock in obtaining approvals for significant capital projects. This has contributed to the de-industrialization of U. S. industry and a shift towards consumption away from production. The world economy is competitive, and due to our cost structures, we will need to gain an edge through innovation, scale and effective organizational development. I really don’t see any policy initiatives that support this type of redevelopment. I think that this also implies that if the United States is successful, it will probably take some growth away from other economies. This will become increasing difficult as our currency and credit worthiness continues to deteriorate. A weak dollar and high debt leverage have only short term benefits and in the end will produce very negative results. At least, that is what my experience is suggesting. I hope that I’m wrong.
Increasing exports coupled with an increase in trade deficit does represent a strange delimna. Yale Global Online reports that, “Since World War II American exports have doubled about every 10 years, growing at about 8.3 percent each year.” So doubling exports in 5 years does represent quite an acceleration of a process that has been going on for quite awhile. However, the New York Times reported that the trade deficit “narrowed in September,” and the trade deficit with China even decreased slightly, though its still accounts for most of the overall deficit, and is still close to the record high. And while labor in China continues to be extremely cheap, it doesn’t seem likely that increasing exports to developing countries can erase that gap.
So your statement that, “More than ever in U.S. history, U.S. exports depend on U.S. imports and (outside of the farm sector) the most profitable U.S. companies are also those most reliant on the importation of inputs,” points to the fact that it is just plain cheaper for US companies to make components abroad than in the US. This apparently will not change anytime soon; even on a bad day, US workers will not care to compete with workers in Vietnam, or anywhere else, that make between $50 and $70 a month, which is even less than many workers in China. Wages in “emerging markets” are rising overall, but there’s still a way to go until a “level playing field” is reached. Furthermore, the demand stimulated by rising wages, at least in China, is mostly meant for domestic products, not “Made in the USA.” Perhaps this development might ultimately lead to a decrease in the trade deficit; however this hasn’t yet happened in any significant way, but it will be interesting to see what the unintended consequences might be.