Weaker Greenback No Boon for Exporters
A slumping dollar has made American goods more affordable overseas, but Friday’s report that the trade deficit had widened to a record $37.6 billion in May shows that a weaker currency isn’t going to spark an export boom any time soon.
That’s because currency fluctuations are just one piece in a complex mix governing trade flows, with the most important factor the overall strength of the U.S. economy.
Even weighed down by corporate scandals and a swooning stock market, the U.S. remains the driving force of a global economy heavily dependent on consumption by American businesses and consumers. Downward spikes in the U.S. markets ripple around the world, sapping strength from trading partners, most of which were just starting to show signs of a recovery.
Since the beginning of the year, the dollar has lost about 11% of its value against the yen and 15% against the euro. On Friday, the dollar held its ground against the euro, at $1.01, but fell against the Japanese currency, buying 115.77 yen, down 0.91 from a day earlier.
Although prices of U.S. airplanes, machine tools and vegetables have declined overseas and imports have become more costly, Americans continue to consume foreign goods at a voracious rate.
Even as exports rose 0.7% to $80.6 billion in May, imports climbed 1.8% to $118.3 billion, the Commerce Department said in its monthly report. The resulting trade gap was 4% higher than the $36.1 billion registered in April.
“Exporters face a lot of lackluster markets,” said Gary Hufbauer, a senior fellow at the Institute for International Economics, a Washington think tank.
It also takes months for a weaker currency to be reflected on the export side because the goods must work their way through the trading system. In the meantime, the value of imported products entering U.S. ports gets an immediate boost when converted into dollars.
The stakes are high for California, the nation’s largest international trader, which last year saw its exports dive 11% to $106.8 billion. Although a weak dollar alone won’t revive the state’s exporting fortunes, companies such as Salinas, Calif.-based International Produce Group, one of the nation’s leading exporters of fruits and vegetables, say it already is giving them a lift.
“It’s definitely making the product more affordable,” said sales executive Dottie Massey.
But for sectors such as computers and electronics, which accounted for nearly half of California’s exports last year, the benefits of a weaker dollar are less clear- cut. For example, computer chips designed by a U.S. firm are typically manufactured and tested in facilities around the world, rendering a currency swing in one country something of a wash, said George M. Scalise, president of the Semiconductor Industry Assn. in San Jose.
American companies that do business abroad get a boost from a weaker currency because their overseas earnings are worth more when converted back into dollars. But a weaker dollar raises the price of imports, unless they are priced in dollars. Because U.S. manufacturers consume about 20% of all imports, they face higher costs on that side of the ledger.
The flip side is true for European companies such as Swiss-based Nestle, which conducts more than 40% of its business in U.S. dollars or currencies tied to the dollar. Those earnings will be worth less when they are converted to a stronger Swiss franc.
But on the plus side, the company’s dollar-priced imports of commodities such as coffee, sugar and cocoa are cheaper, as is its dollar-denominated debt. It is too soon to tell whether the latest currency shift will be a plus or minus, said Nestle spokesman Hans Renk.
The sliding dollar is clearly a plus for Pasadena-based label maker Avery Dennison, which depends on overseas markets for 44% of its sales, said Chief Financial Officer Daniel O’Bryant. Not only has the weaker currency boosted the dollar value of its overseas earnings, it has discouraged foreign competitors that have flooded the U.S. market in recent years.
“A strong dollar is like bait to foreign competitors,” O’Bryant said. “Weak currency costs and strong currency revenues attracts them to the U.S. market.” To protect itself against financial turmoil, Avery Dennison has created a “natural hedge” by building manufacturing facilities near its customers so its costs and revenue are in the same currencies.
This globalization of the supply chain has diminished the effects of currency changes for many firms. Nearly half of U.S. imports and one-third of exports are intra-company, meaning they are transactions between a U.S. parent and a foreign subsidiary or a foreign parent and a U.S. offshoot.
A large share of U.S. exports to Mexico and Canada consists of components for autos and electronic goods that are assembled and shipped back to the States. A U.S. auto maker is unlikely to increase the shipment of parts to a Mexican assembler simply because a weak dollar brings the price down. And that same auto maker would have to pay more for imported crankshafts or leather seats.
“What we’ve seen in the aftermath of the free-trade agreement is a lot of intra-company trade and within-industry trade,” said John Johnston, chief economist for RBC Capital Markets in Toronto. “They build parts of cars and ship them back and forth across the border in different forms. This is less sensitive to the exchange rate.”
The dollar’s strength was one of the factors that drove many U.S. manufacturers to Canada and other offshore locations. But those firms also were seeking benefits beyond a more favorable currency situation, such as lower labor costs, more hospitable tax regimes or the inside track to promising markets.
“You would have to see a pronounced movement in the Canadian dollar before you see those kinds of investments unwind,” Johnston said.
American manufacturers have been particularly critical of a lofty dollar. The National Assn. of Manufacturers estimates that a strong dollar has cost U.S. manufacturers $140 billion in decreased export sales and more than half a million lost manufacturing jobs in the last year and a half.
Prices of U.S.-made machine tools sold in Europe by Oxnard-based Haas Automation Inc. have not been adjusted downward to reflect the dollar’s recent slide, said President Gene Haas.
That’s because when the dollar was flying high, the company refrained from increasing its prices in euros to reflect the exchange rate differential, opting to absorb the hit out of its profit. Now that the tables are turned, Haas said, the company is looking to get some of that back.
“We have eaten currency losses for years. Now we’re just breaking even,” he said.
Daniel J. Meckstroth, chief economist at the Manufacturers Alliance, an Arlington, Va.-based trade group, is counting on the weaker dollar to keep manufacturers close to home, where they are less likely to run afoul of political unrest or transportation glitches. That risk became all too real after the Sept. 11 attacks shut U.S. airports and shipping lanes.
Meckstroth is betting that the stock market turbulence and corporate credibility problems will keep the dollar from rebounding, as skittish investors continue to pull money out of the U.S. He hopes that foreigners will use those repatriated funds to strengthen their economies, weaning them from their reliance on export-led growth and making them better customers for U.S. goods.
But Japan, already a leading buyer of U.S. agriculture products and high-tech goods, is resisting. Since May, the government has been dumping yen to try to slow the currency’s rise, fearful that it will hurt exports and quash the country’s hopes for a recovery from its long slump. South Korea’s government also has said it would intervene if its currency, the won, continues to strengthen.
“There are a lot of countries around the world that have a stake in a strong, growing U.S. economy so they can export to us,” Meckstroth said. “But there’s going to be an adjustment.”
