April 01, 2010
"Export or Die"
From today's Economist, Greg Ip writes:
America's economic transformation will require businesses to rely less on selling to Americans and more on selling abroad.... The emphasis will be on high-value products and services rather than on labour-intensive items such as furniture and clothing.
This article is part of a longer special section on America's Economy.
One interesting point:
... between 1993 and 2003 [t]he increase in any given year came almost entirely from existing exporters, but over time new ones played an increasing part. For example, in 1993 alone firms exporting existing products to existing markets accounted for 91% of total export growth. But over the entire ten-year period they made up a relatively modest 35% of the total, with new firms contributing 24% and firms with new products or entering new markets as much as 42%.
Posted by Menzie Chinn at April 1, 2010 01:15 PMdigg this | reddit
Doesn't comparing 1993 to a ten year period including the 199-2001 tech bubble skew that figure? I think a time series chart would be more informative (less potentially misleading).
Also at what point does a new exporter become an existing exporter?
Posted by: KevinM at April 1, 2010 01:33 PM
Good idea. The world is in a state of rather dramatic deficient AD and the solution to the deficiency at home is to export our unemployment. Right.
The most likely prospect I see for a U.S. export boom will do American workers no good - it is a boom in agricultural exports as incomes grow abroad. Such a boom would give us a nice case of 'Dutch Disease' to go along with the continuing Asian currency misalignments that are helping deindustrialize the country.
Posted by: don at April 1, 2010 02:30 PM
You are assuming ag products pricing will remain relatively constant. Food products over the next 50 years will be more valuable than oil.
Posted by: Not Irving Fisher at April 2, 2010 12:14 AM
"Food products over the next 50 years will be more valuable than oil."
Oh, really? You have a cold fusion device you'd like to sell us?
Posted by: eric at April 2, 2010 06:05 AM
I don't have anything very insightful to add here. Just that I think this is a great post and hope that Larry Summers and President Obama are thinking along these same lines as Professor Chinn.
If the Administration's economic team could combine solid bank regulation/bank cap. limits and a type of "longterm stimulus package" with concentrated spending in strategic industries where America has comparative advantage (although admittedly those industries sometimes hard to pinpoint) it would be super. And some things that we don't necessarily export could add to efficiency, such as wind energy and more automobiles and buses using natural gas.
Posted by: Ted K at April 2, 2010 11:45 AM
The tax laws (and, for public companies, the accounting rules) incentivize American businesses who sell services and products abroad to make and sell those services and products abroad.
What basis is there for believing that American businesses will export anything other than the capital necessary to build their businesses where they make their sales, just as they do today?
Posted by: Tao Jonesing at April 2, 2010 06:44 PM
"What basis is there for believing that American businesses will export anything other than the capital necessary to build their businesses where they make their sales, just as they do today?"
Posted by: Mark G. at April 3, 2010 06:38 AM
Its logical. The US built up too much private debt (net importer), and the only way to repay the excess debt is to export more than it imports for awhile. The bank could facilitate this process by stopping the electronic printing press. Higher interest rates would discourage domestic borrowing. If they keep trying to encourage more domestic debt, the future debt crises will be even worse than the one in 2008.
A reasonable amount of debt facilitates business, and consumer income smoothing over the life cycle. However, excessive debt to GDP is counter productive (debt must be serviced out of GDP, so this ratio is germane). This accounts for the diminishing marginal productivity of debt we have experienced. The first debt builds the most productive factories, and later debt less productive ones. At some point, more debt only produces counter productive bubbles.
Posted by: Too Much Debt at April 3, 2010 03:41 PM
I had the same thoughts. Unfortunately that is what classical Richardian comparative advantage demands. All one needs is to look at the limitation of farm land per capita in Asia and see how until Asia is sufficiently urbanized no amount of currency realignment could change the fundamental wage advantage in Asian manufacturing.
Posted by: HZ at April 3, 2010 11:30 PM
The export strategy seems to be at best a hopeful long shot, and at worse, a dead end strategy. Again, two fundamental questions arise that few seem willing to address: (1) what do we export that will exceed our current imports; and (2) who do we import it to?
I find it most unfortunate that many are out there touting the RNB appreciation against the USD as if this alone would work some miracle. Um, that won't instantly reverse the process of de-industrialization that the US has gone through over the last 10 to 15 years. It's fairly disturbing to witness such reasoning that if we simply start exporting goods that somehow or another someone somewhere will absorb them--if only things were that simple.
However, the dollar doesn't need to devalue against anything if the US wanted to attempt to raise exports; what it in effect has to do is increase its competitiveness--billonaire Wilbur Ross proved that when he bought out Bethlehem Steel in 2003 and turned it around to not only create a better quality steel than the Chinese, but at a cheaper cost! At the time, as now, the prevailing thinking was that no one could under sale the Chinese due to the massive wage arbitrage.
Yet, for the US, it's a bit difficult for me to pin down the exact problem for the US, that is, is it one of governmental policy or national character? Or both? In any case, it is not necessary, and certainly not sufficient, to have a devalued currency to make one's exports competitive, or else someone should inform the Germans of this.
And as far as we have to increase exports, that is simply fallacious thinking. A country like the US certainly has the ability to provide its own consumptive needs in terms of manufacturing, which in turn would lead to employment increasing; and for much of its history the US did meet its own domestic needs, as both imports and exports balanced out and were not a significant part of GDP.
Posted by: Brian at April 4, 2010 12:08 AM
Quotes from Brian:
"who do we import it to?"
"Um, that won't instantly reverse the process of de-industrialization that the US has gone through over the last 10 to 15 years."
"import to"?? "10 to 15 years"?? Gee, it's hard to beat informed analysis like this isn't it?? Almost enough to make me start reading newspapers again. Ever wonder how guys like Dick Shelby and Bob Corker get elected??? Look no further than the above quotes from Brian. You know, I forgot who it was, but there was some talk this week about "the most dangerous man in America". I would argue that the most dangerous man in America is the uninformed or ignorant voter.
Posted by: Ted K at April 4, 2010 05:21 PM
Its going to be hard for us to export when everyone else is trying to run a trade surplus too.
There just aren't enough affluent buyers anymore, most of the "Western Economies" have aging or declining populations and the rest of the world is either too poor and corrupt or simply can't afford to buy our goods
The real solution is to build a sustainable way to rise everyones standard of living.
If that doesn't work (and I don't think it can) we would be better of with controlled trade in blocks.
Posted by: abprosper at April 4, 2010 05:32 PM
You must forgive my ignorance, which I readily admit that it is my unfortunate case to have been born, and still dwell, in such a condition. Further, I would certainly benefit, and especially appreciate, any correction you can make to my ill thinking--for I have always found it of great personal satisfaction to be the one corrected than to be the one doing the correcting.
I have no doubt that my inability to derive any satisfactory answer from your above post is due to my ignorance, so if you would be so kind as to explain to me how simple it would be to transform the US into an export driven economy? Could you further explain to me how this strategy will perform in light of China, Germany, and Japan keeping their economies geared towards massive exports? It is my understanding that the Japanese will devalue the Yen to maintain exports (On my "dangerous" and unscientific back of the envelope accounting has the Yen to maybe going to 120 to the USD over the next couple of years--however, feel free to correct me).
I thank you in advance?
PS: would you mind also giving me some investment strategies to follow over the course of the next year?
Posted by: Brian at April 4, 2010 07:32 PM
I was in the financial services sector forever. Then I found out that all original wealth comes from the earth. Think about it.
I did a lot of reading here and didn't see a word about Ludwig von Mises the greatest economists in the last 100 years. Keynesian ideas are fading fast and I for one will be very happy to see what develops next.
Posted by: jake jacob at April 4, 2010 09:43 PM
Maybe I was a bit harsh. The situation gets me very angry sometimes. Actually I agree that America has a big problem with exports and it should be somewhere in President Obama's 5 top goals to get America's exports going again. I think the main problem is labor costs. An American worker wants more money than a Chinese or Mexican worker for the same hour of work (productivity). So probably all those cars GM sold in China, were made in China, by Chinese workers. So it helps GM's profit, but it doesn't help an American looking for a job now.
How to solve it?? It's extremely extremely hard. Maybe some targeted government subsidies in strategic industries which are basing factories and jobs here in America. Alan Blinder has talked about a new-jobs tax credit which I have mixed feelings on, but might be worth a TRY. http://www.washingtonpost.com/wp-dyn/content/article/2010/02/18/AR2010021802607.html
Also there is a lack of industrial infrastructure now. But changing the low export situation in America right now requires a long-term view, at least 5 years, and more realistically 10 years.
The main short-term answer would be to get extremely tough on China with their currency valuation (Yuan,RMB). That means that Obama/Geithner/Summers and company cannot pussy-foot around with them and wait for China to make the move. In order to coax China you must SHOVE China to do ANYTHING. It's just how their culture works. You have to play hardball with China or they don't respect you. If China doesn't give the FIRST inch you just walk away from the table. That's the only negotiation Chinese can comprehend, or the Chinese think you have "sucker" written on your forehead.
Investment "advice"??? I cannot give you investment advice because I am not qualified or certified to give you investment advice. I can give my investment OPINION. I think interest rates and inflation will probably take off (increase) in late 2011 and 2012, so you might want to be invested (with a long-term horizon) in a basket of commodities. When I say commodities it does NOT necessarily mean gold or silver. Could be other commodities like oil or even food. A very very low-fee ETF (with a "basket" of commodities) MIGHT be a good choice. Vanguard is famous for those, but there are many companies, Vanguard is just one example. You could possibly ask a CFA (Chartered Financial Analyst) or take some months and educate yourself to choose individual stocks on your own at a discount brokerage.
THE ABOVE COMMENT BY ME IS ONLY AN OPINION, NOT INVESTMENT ADVICE. Wish you good luck and happiness Brian.
Posted by: Ted K at April 5, 2010 12:14 AM
Let us not concern ourselves with the tone, that is, form, of our communication: I have often found it to be a truism that wisdom more often than not comes packaged in pain and discomfort than pleasure; and anyone concerned with their own thinking should prefer harsh truths to singing false praise.
Also, understandably, the current situation is a cause for a tremendous amount of frustration, and so I think it is prudent for one to express themselves in order to prevent an unhealthy build up of frustration--and hopefully as one side speaks from frustration, the other side listens with controlled reason, knowing that frustrated words are not a personal attack, but a letting of steam; after all, let us constantly remind ourselves that irregardless of policy: we're all here in the same boat.
Please keep in mind that as you read the following that it derives from an untrained mind, and to top it off I posses not special qualifications that would in any way qualify what I say as "informed". All I can say is that I sometimes read and do my best to contemplate what it is I have read; and if what I say falls short or should prove utterly ridiculous, than perhaps it is better that I have said it and been rid of it than retain it within me.
As for the RMB either being revalued to appreciate against the USD, or even allowed to float in general, I'm a bit skeptical on whether it will have a material impact on the US economy. Yes, the RMB peg has created distortions, but I'm of the opinion that the RMB peg was/is done with the approval with the US government--this allows to capital flows to pour into China, and in turn they sterilize those flows by buying US Treasuries, and this allows the US government to continue to borrow and run huge budget deficits during the Bush Administration (and now during the Obama Administration). After all, a currency peg cannot be effective without both parties in cooperation (which we also have a peg with Saudi Arabia, and of course that's because of oil--so we don't hear much about them being manipulators).
Of course this policy is not sustainable over the long run, however, it has been going on for about ten years now. My main point, though, is that the US government, our government, and that being us, are not exactly innocent victims here. Why the Chinese in fact haven't allowed the RMB to appreciate already is a bit disconcerting. At this point the Chinese do not gain as much as they lose in that if they hope to have their currency taken seriously in the currency world and to be a contending reserve currency then they have to unpeg it. Personally, I don't know what the Chinese government sees that I don't, but I suspect that they might have a lot more insolvent companies and even banks than has been let on, and an RMB revaluation would expose these hidden losses and bankrupt many of their companies. However, I must stress that I'm at a loss in this regards.
Furthermore, our current trade deficit itself is nothing but a symptom; and on this note I am of the opinion that the likes of Mr. Krugman are incorrect--the trade deficit is a symptom of domestic US policies and the lack of wealth formation through real savings.
As for interest rates, I think you're correct that in the short and intermediate term, nominal rates will rise, but in the long term may come down as deflation becomes the prevailing force. However, I have been conducting some option strategies with the Fed Funds Rate. As for oil ETFs I haven't really found one that I felt comfortable with in how they track the underlying price, so I still stick to the futures market.
Thank you for taking the time to respond, and I look forward to any further response you might have.
Posted by: Brian at April 5, 2010 09:33 PM
What should be done?
1. Agree that the trade deficit is intolerable and that it will not go away or be reduced by anything other than U.S. government intervention.
2. Agree that any solution must retain competition among U.S. firms and exporters to the U.S. (eliminates traditional protectionism)
3. Agree that any solution must take out insurance against attempts at retailation.
The proposal is a federal law which establishes a schedule of gradually increasing tariffs on ALL imports that are manufactured in China, Japan, Germany, Canada and Mexico. (Five countries that account for 60% of U.S. trade deficit in 2006). No other change in imports control or export subsidy.
Posted by: ReformerRay at April 6, 2010 05:33 PM
My take on the Chinese currency revaluation debate is this: the correlation study i've done for the 2002-2009 period does show that the Renminbi is negatively correlated with China's exports to the U.S. with an R sq of 78%.
Having said this, the Chinese cannot afford to wait for a rebalancing of their economy if the US consumer demand for China's goods weaken in the next five years due to deleveraging, higher interest rates and other headwinds.
So this resistance to a revaluation is basically political and perhaps China is trying to hide the fact that its consumer demand is insufficient to prop up the global economy for at kleast the next five years unless it revalues its currency.
I reckon that China needs to revalue the RMB by 10% per annum for the next five years to support a consumer spending growth of 30% per annum. Only at this pace will China be a positive source of global consumer end demand instead of being largely an intermediary for global manufactured goods.
My projections of global rebalancing arising from a shrinking US market and expanding Chinese consumer market are outlined in this recent post:
Posted by: Jeremiah at April 9, 2010 01:42 AM
Right now there is a lot of unemployment in the U.S. So if we can increase our exports there will be jobs for all those workers. That sounds like a good idea. The only questions are export WHAT and TO WHO? According to the article, we will export high-value products and services to developing countries like China.
But is that possible? The U.S. imports many manufactured goods from China. Chinese factory workers earn less than $1 per hour, about 1/20 what factory workers in the U.S. earn.
How can people that earn 70 cents for hour afford to buy high-priced products made by American workers that earn $20 per hour. An iPad costs $499. American worker can buy one in 25 hours. Chinese worker can buy one in 700 hours, which is 58 12-hour days. Is someone really going to spend several months pay on a high-value product like an iPad?
The only way for China to be able to afford products made by U.S. workers would be for Chinese wages to rise and U.S. wages to come down. They should meet somewhere in the middle, maybe at $5 per hour. But how likely is that? U.S. wages are stuck high. Minimum wage is $7.25 about 10x what the typically Chinese factory worker makes.
And how can Chinese workers get their wages to increase 5x or 10x when there are hundreds of million of potential workers in the countryside? Can they organize and form labor unions to demand higher pay? What happens to troublemakers like union organizers in China?
I think the idea of increasing exports to China and other developing markets is a pipe dream, unless wages equalize, which I don't see how they will.
Also I have a question. The article said Intel engineers earn $150K per year and Chinese engineers earn $50K per year. Is it really only 3x? I wold have thought at least 10x, more like 5K to 15K per year. Does anyone know how much Chinese engineers earn?
Posted by: Gray Fox at April 10, 2010 04:11 AM
Here is an analogy to U.S.-China trade I would propose.
There are rich people in Newport Beach, California that make $200K per year.
There are lots of poor people in nearby Santa Ana that they can hire for $80 to $100 per day, which is like $27K per year
Every day, low wage people from Santa Ana take the bus to Newport Beach to work. They perform all kinds of services for the rich people from Newport Beach like housecleaning, gardening, child care, cooking, restaurant worker, store clerk, cashier, etc. etc.
But what services can the Newport Beach people offer the Santa Ana people at a price that Santa Ana can afford to pay? Not much that I can think of. You don't see Newport Beach people driving to Santa Ana in their Mercedes to work everyday, do you? It seems like Santa Ana has the workers and Newport Beach has the consumers. You gotta have money to be a consumer.
Posted by: Gray Fox at April 10, 2010 04:34 AM
Gray Fox/etc: Overly simple analogy that leaves out population demographics.
Here's an attempt to give you a better simple analogy:
Imagine Newport (US) has a total population of 10 rich consumers, and Santa Ana's (China) population is 75. If Santa Ana's 'rich' population rises from 5 to 12, then suddenly Santa Ana (China) can be a net importer of Newport's (US) high quality goods.
Once factoring in population and wage disparity demographics in each respective country, you have a better picture.
Posted by: Michael at April 12, 2010 08:57 AM