I've had my eye on export and manufacturing numbers the last few months. Why on earth? you ask. We're coming out of a balance-sheet recession, which means that families and companies are using new money to pay back old debts. In a balance sheet recession, fiscal stimulus (eg government spending) gets mopped up by states and households, while monetary stimulus (eg low interest rates) gets ignored by banks.
The quickest way out of a balance-sheet recession, the story goes, is exports: fresh money in exchange for goods. If a country wants its goods to be competitive, it need the good to be either unique or cheap. The United States had better hope for unique, because we have a hard time making our goods cheap. We have high wages, and high living standards, and safety and environmental regulations, and tax benefits for multinational companies to build stuff and sell it abroad. That's one reason why even export-minded companies choose to make so much of their products overseas.
The other reason that receives a lot of attention is China. There is a
lot of demagoguing around the issue of China's currency, the renminbi,
which the government keeps artificially low to preserve its trade
advantage. But this struck me as a smart, clean and sober analysis of the Chinese
currency controversy, so I thought I'd pass it along. The writer is
Willem Thorbecke of the Asian Development Bank Institute, via Economix:
The Chinese exchange rate has also been kept low relative to the dollar. This has further reduced the dollar costs of processed goods produced in China for export to the United States. It has also caused other Asian countries that compete with China in third markets to intervene and keep their exchange rates low relative to the dollar. This reduces the dollar cost of parts and components that are produced in other Asian countries and shipped to China for assembly and re-export to the United States. These low exchange rates thus reduce the dollar prices of processed exports and allow China to sell more to the United States.
As many Chinese economists have noted, artificially low wage rates and interest rates and inadequate enforcement of environmental regulations imply a huge transfer of wealth from Chinese households to businesses. Artificially low exchange rates also represent a transfer from consumers to producers because weaker exchange rates limit the amount of imports that Asian consumers can purchase from the rest of the world.
China runs enormous surpluses with the United States largely because consumers in China provide subsidies to producers. These subsidies cause consumption in China to equal only 35 percent of gross domestic product., a very low level for a country at China's level of development. The Chinese government is committed to adopting more consumer-friendly policies in the medium run. As it does, China's surplus with the United States should decrease also.
If you care about the future of American exports, you have to care
about the state of American manufacturing. As another great Economix
post points out, the manufacturing rally from early this year has not
only stalled, but also reversed:
Manufacturing shed 6,000 jobs in September, and the rate has been flat since May. The industry added 134,000 jobs in the first five months of the year. In some respects, this should not come as a surprise. For months, economic analysts such as David A. Rosenberg at Gluskin Sheff have warned that companies had finished their sparse inventory building. The second-quarter figure for gross domestic product showed a big jump in imports and a drop in exports.
Why else does the United States have such a problem with exports? One pat answer is: We're very rich, but we act even richer. High wages and regulations make it more expensive to build and do stuff here than, say, Mexico. And even higher spending (for a long time, the average American spent more than he earned) means we buy a lot of stuff from the world, and from ourselves. If you're a producer in Germany or northern China, you almost have to look across country lines to find a decent consumer base. If you're a producer in Iowa, the world's most ravenous consumer lives inside your national boundary.