Exports Will Soon Drive Economy
I am struck by the orderly, utterly predictable manner in which the world economy has begun the transition to a different set of exchange rates. I am also impressed by how far things have come without drawing much attention. The clear message from what I see happening is that the world’s markets can take care of almost anything if left to their own devices. Apparently, that also was the message to be drawn from the recent economic summit in Venice, Italy, because I certainly couldn’t divine any other insights from it.
In the United States, the adjustment to a much lower exchange rate is well under way, even if it doesn’t show yet in dollars. We’re still working against the so-called J curve effect--meaning that the nation’s trade imbalance is getting worse before getting better because the declining dollar is driving up import prices. Even so, the trade deficit in volume terms seems to have turned around last summer and has fallen ever since at a surprisingly rapid pace. If we can just get the dollar to stay still for awhile, as it seems to have done since about mid-April, we may be in for even more pleasant surprises.
On the export side, expansion has been more or less continuous since the middle of last year and in a wide range of areas. The prevailing question a year ago was: “What do we have for export that anyone would want?”
The answer seems to be: a little of this and a little of that--including agriculture, which few would have guessed. The overall volume of exports seems to be growing about 10% a year.
As for imports, there is reason to believe that, earlier this year, they came into this country beyond our immediate needs for several reasons: to try to beat the inevitable price increases from a then-plunging dollar; to take full advantage of the various “voluntary” import quotas, especially for cars; to avoid the risk of quota cutbacks later on, and to lay the defensive groundwork against the swelling tide of protectionism that could well lead to a proliferation of other “voluntary” restraints.
Consumer spending has been on the weak side so far this year. Sooner or later, that weakness will be reflected in the volume of imports, among other things, because the two are closely related. With the dollar apparently stable and the auto quota year having ended March 31, we may be surprised by how much import volume growth slows later this year, possibly to a standstill. As a result, the trade deficit in volume terms may shrink rapidly, reversing the results of the past few years.
The numbers I’m talking about are not the numbers most people look at. These are volume numbers--barrels, bales and tons. What most people see are the trade figures in current dollars, and that’s a different story. The improvement in the balance of trade stimulated by the dollar’s fall isn’t showing up in dollar terms because import prices have been boosted by the relatively higher value of foreign currencies.
To make matters worse, oil prices are up nearly 50% from last summer’s levels so that, even though we’re not importing many more barrels of oil, oil imports in dollars are up dramatically. All told, to date there has been a virtual standoff between import price increases and volume improvements. Consequently, the trade deficit, in dollar terms, has hovered within an exceedingly narrow band of $13 billion to $15 billion per month for more than a year now.
The longer nothing appears to be happening, the shorter the tempers of businessmen and politicians, and the stronger the pressures for protectionist legislation. But the more the dollar keeps going down, the more import prices go up, masking genuine improvement. The Treasury apparently decided in April that we couldn’t afford the political risk of waiting any longer to see results. Accordingly, the United States suddenly agreed that the dollar had gone down far enough and that the government should join with other central bankers to stop the slide.
Can intervention work? Well, so far, so good. There has been more talk from government officials, including those in the United States, about the need to restrain the dollar’s decline than I can remember in a long time. I think it should be taken seriously. When all nations are united in an objective as they seem to be now, they probably can achieve it, at least for the near term. Besides, I think the major exchange rate relationships are about where they should be, making the job easier.
If the dollar remains relatively stable against other key currencies, the hard evidence of improving competitiveness soon will come to the surface of the statistics. To be sure, all import price increases are not in the system yet. Many importers have done everything short of going bankrupt to hold price increases down and maintain their hard-won markets in this country; however, as time passes, their ability to resist is wearing down. But, in volume terms, imports should remain flat or decline while exports continue to grow.
While I don’t expect miracles, my hunch is that we are likely to be pleasantly surprised over the coming months. The newspapers are beginning to pick up stories of renewed competitiveness in one industry after another, one example being a return of television set production to this country. The timing couldn’t be better. In Washington, we either get incontrovertible evidence of a turnaround in trade soon or we get a potentially expensive and, in my view, very destructive piece of protectionist legislation by year-end.
Given the weakness in domestic consumer demand, it would be hard to keep the United States out of recession without a boost from trade. The U.S. economy over the next year is likely to be driven more by exports and capital investment than by consumption. That is the exact opposite of what’s happened before and also is exactly what our trading partners have been insisting we should be doing. So, as we contemplate the 211th birthday of our nation, we can take comfort from the fact that the old American competitive spirit isn’t dead yet. It’s just been hidden under the J curve.
