Dollar’s Fall a Mixed Bag in U.S.
Walter Schreiner should be as sour as his kraut. Thanks to the dollar’s long slide against Europe’s currency, the Glendale deli owner is continually forced to raise prices on his imported jams, dumplings and pickled cabbage.
That ought to put a crimp in business. But Schreiner says sales haven’t slowed. “People accept higher prices, if it’s an item they definitely want,” he said.
Doug Youngdahl, who runs a cooperative of 4,000 California almond growers, should be thrilled that the dollar is expected to keep falling. That will make the nuts more competitive in foreign markets.
Instead, he’s worried. There’s a finite supply of almonds, which means increased demand overseas will boost the price paid by U.S. consumers. That might permanently slake their appetite.
“You can win in Germany and lose in San Francisco,” Youngdahl said.
As the almond executive and deli proprietor illustrate in their different ways, the falling dollar might not benefit the economy as much as the Bush administration hopes.
The administration has offered tepid support of a strong dollar but is widely described as quietly urging its fall. Its apparent hope: that an orderly devaluation will stimulate the economy by boosting exports and trimming imports.
But Schreiner, Youngdahl and others on the front lines of importing and exporting say the dollar’s influence is often overrated.
The dollar has been declining for several years, with an especially pronounced drop of more than 50% against the euro.
Yet imports are still rising faster than exports. Many things Americans covet, such as computers, TV sets and name-brand clothing, aren’t made in the United States anymore.
If the factories have fled, the farms remain. But even America’s agricultural exports, which have made a positive contribution to its balance of trade for decades, will be roughly equal to its imports in 2005, thanks in part to a surging appetite for exotic foods, the government recently calculated.
“If we’re looking for a weak dollar to be a silver bullet, to fix our deficits and make all of our businesses competitive again, we’ll end up no better off than we were when the dollar was strong,” said Al Lubrano, president of Technical Materials Inc., a Rhode Island specialty metals manufacturer.
It’s possible, of course, that the latest dollar decline simply hasn’t lasted long enough to have much effect. It’s also possible that it is already making a difference, and that the trade deficit, monstrous as it is, would be even more out of whack without the 3-year-old decline.
But economists cite several reasons the effect will be muted, even if the greenback continues to fall.
Trade, they point out, is not nearly as simple as it once was. Many U.S. manufacturers import materials to make the products they intend to export, so a dollar fall both helps and hurts. Furthermore, foreign economies from Japan to Europe are relatively feeble, so it’s an open question how many more American imports they can take.
As for the U.S. market, it’s such a crucial one for many foreign companies that they will shave their profit margins rather than raise prices to stay competitive.
Moreover, the dollar’s decline hasn’t been consistent against all currencies. Although it’s been hammered against the euro, the greenback is fixed against the Chinese yuan. And China is the trading partner that counts the most these days, the one with the best products for the lowest prices.
“The decline of the dollar will have more effect on who we import from than the amount we import,” said Charles W. McMillion, chief economist at MBG Information Services in Washington. “Instead of importing televisions or bluejeans from the mid-range developed countries, we’ll import it all from China.”
In theory, a sustained drop in the dollar will introduce a much-needed period of sobriety after years in which both the federal government and consumers have spent money in a carefree and even careless fashion, economists say.
As exports rise and imports slump, the trade deficit will shrink. Confronted with higher prices, consumers will save instead of spend. That will help finance the government’s massive budget deficit.
The Bush administration is counting on the dollar to fall because, its critics say, it has no other means to get the deficits under control.
“If you don’t want to raise taxes or cut government spending or benefits, what do you do? You talk about the dollar and hope it goes down,” said William Reinsch, president of the National Foreign Trade Council, a Washington lobbying group whose members are multinational corporations.
But “unless there’s an overwhelming change in the value of the dollar versus the whole world, the net effect is a lot less than you would think, and lot less than it used to be,” he said.
That’s certainly true so far with regard to imports. Not only are higher prices often proving to be no barrier to sales, as at Schreiner’s Fine Sausages in Glendale, but in many cases prices aren’t going up at all.
The dollar has fallen about 16% on a trade-weighted basis in the last three years, while import prices excluding fuel have risen only about 3.5%, government statistics show.
“Foreign companies are not interested in trade balances,” said William Alterman, assistant commissioner for international prices at the Bureau of Labor Statistics. “They’re interested in market share and profits. If they need to keep their prices down to maintain market share, they’ll do that.”
That seems to be the plan for German carmaker BMW. “We’re a premium brand, but we also operate in a very competitive market,” spokeswoman Martha McKinley said. “We do not adjust the price of our cars for short-term currency fluctuations.”
International companies the size of BMW have long had the ability to hedge against currency fluctuations, insulating themselves from all but the most permanent convulsions. It’s an option that smaller companies are now taking advantage of as well.
Steve Wallace, owner of Wally’s, a Los Angeles wine emporium, is buying French vintages for delivery next year and in 2006 at a fixed price. If the dollar falls further against the euro, he, and his customers, will be protected against sudden price increases.
Not that Wally’s customers are terribly price-conscious in the first place, Wallace says. “If I have lousy vintages in Bordeaux, no one’s going to buy them at any price. And if it’s a great vintage, it won’t matter if it’s $10 higher.” Imported wines have risen in the last three years from 30% to 40% of Wally’s sales.
Whether it’s expensive wine from France or cheap electronics from China, Americans are practically addicted to imports. In the first half of this year, they spent $850 billion on imported goods. That was $100 billion more than in the first half of 2003.
The most recent monthly trade figures, for September, showed a modest narrowing of the trade gap from August. Exports rose $800 million from the previous month, while imports were $1.2 billion less.
U.S. manufacturers say this favorable trend won’t continue unless China’s currency is unpegged from the dollar and allowed to float upward. Bruce Cain, an executive at XCEL Mold and Machine Inc. in North Canton, Ohio, says he needs a 30% appreciation in the yuan just so he can compete again.
“We’re a small company, and in the U.S. small companies do work for large companies,” Cain said. “But the large companies are going for their molds in China.” XCEL’s best customer just sent a large order to China.
Manufacturers more oriented to Europe than Asia are faring a bit better. “When the euro was worth only 84 cents, I didn’t even bother starting to develop business there,” said Lubrano, the Technical Materials executive. “At a buck, I started looking for customers over there, and at $1.10 they started looking back.”
At the euro’s current price of $1.32, Technical Materials is doing business with Europe.
So is Lubrano fervently hoping the dollar will continue to fall to where the euro is worth $1.75 or so?
No, because that would also boost the price that Technical Materials pays its overseas suppliers. A boost in one area produces a drag in another.
“There are no simplistic answers anymore,” Lubrano said. “If I were trying to build a business around a certain foreign exchange level, whether it was high or low, I’d be out of my mind.”
Agricultural exporters have a constraint that manufacturers don’t: Mother Nature controls the supply chain.
At Blue Diamond, the Sacramento almond cooperative run by Youngdahl, 70% of the crop is exported. As the dollar has fallen against the Japanese yen, shipments to Japan have increased to 60 million pounds this year from 43 million in 1999. But shipments to China, with its pegged currency, have declined over the same period, to 23 million pounds from 25 million.
“We already have profitable conditions,” Youngdahl said. “There’s no reason to advocate or desire a further weakening of the American dollar. We don’t have the supply to take advantage of it.”
