Exporting Our Way Out of Trouble?

The latest economic palliative du jour is that the plunging value of the dollar and a vibrant global economy, ex-the US, will boost exports and thus help our economy avoid a recession. This concept does not last long under closer examination. Let's look at some charts...

The first one shows US imports and exports of goods and services as a percentage of GDP. The US ceased being an net exporter long ago; more recently, exports have been rising smartly, but imports have been rising even faster.

Data: FRB St. Louis

The net result has been a massive trade deficit, now at 5% of GDP, slightly improved from the record 6% but still exceedingly high. If we were Argentina or Russia we would have gone bankrupt long ago; but since the dollar is (still) accepted as a reserve currency we are (still) able to issue dollar denominated debt, purchased by foreigners to finance our imports.

Data: FRB St. Louis

Under normal conditions, the drop of the dollar against other currencies would have made foreign goods more expensive, crimped imports and restored balance. However, these are not normal times: there are two major issues that prevent this from happening.

Firstly, China's exports rely heavily on its pegged currency. The yuan is only very slightly firmer vs. the dollar in the past two years. This mercantilistic approach to currency valuation heavily promotes China's exports and restrains their imports. In the past, such policies were known as "beggar thy neighbor". In today's trade-dependent world we use slightly more diplomatic terms, but the end result is the same: we are running close to $300 billion per year in the red in our China trade balance, or 2.1% of GDP.

The deficit with China was already growing between 1990 and 2001, but thereafter it accelerated at a much faster pace. This can't be accidental - it was as if a switch was thrown and Chinese imports were suddenly allowed to flood into the US.

Data: FRB St. Louis

We can also observe this sudden shift in the number of manufacturing jobs in the US. The sector lost 3 million jobs within just 18 months and has never recovered.

Employment in the US manufacturing sector (chart: BLS)

These events point to a conscious plan, a policy choice to remove manufacturing from the US and replace it with cheap Chinese imports. I don't know if it was supposed to go so far as it has, but it has clearly gone too far.

Secondly, the rise in oil prices currently penalizes the US trade balance to the tune of at least $350 billion per year, or 2.5% of GDP; that's how much we have to pay each year at current market prices to import crude oil. In 2001 we paid less than 0.9% of GDP; within just 6 years oil import bills have increased by 1.6% of GDP.

Our trade deficit, as it stands today, is structural: it is caused by our decision to import from China instead of manufacturing at home (deficit: 2.1% of GDP) and relying on oil imports (increased deficit: 1.6% of GDP). Adding together the two effects (3.7% of GDP) we see that they account for 75% of our current trade deficit. Unless we do something about those two structural factors first, we cannot possibly hope to export our way out of domestic economic troubles.