Tuesday, July 22, 2014

Exports Are Cool but Geographically Challenged

Exports are cool. Not cool enough to be in the lyrics of any rock song I know of but definitely cool enough that President Obama declared in 2010 his goal was to double USA exports to the world. I wrote about that in this blog space a while ago. It looks even less doable now than it did a while ago. So here I go again! I have some new data that shines a light on why it is next to impossible to make large gains in exports now.
It also suggests that attacking the EX-IM bank right now would be highly counter-productive. 

Before I get to that data it helps to see why the President and others think exports are so cool.  An export exists when a business firm on US soil produces a good or service and sells it to someone living outside of US soil. These people might be Canadians buying auto parts from Kokomo Indiana, Mexicans buying industrial equipment from Columbus Indiana, or UK citizens purchasing an Amtrak ticket that will take them from Indianapolis’ Union Station to the Grand Canyon.  You might say that such sales amount to the same thing as when the buyer lives on US soil – but you would be only partially right.

The important difference is the impact that exports have on our national ability to grow. USA buyer purchases are ultimately limited by what they earn. Let’s suppose you can earn $100 and you spend locally $80. The rest goes into saving or to goods and services produced abroad.  From time to time you can spend more than $80 but it can't last. The “equilibrium” spending for income of $100 is $80.  Now let’s imagine that a foreigner decides to buy from us and we are able to hire more people to produce these extra goods and services. The foreigner, therefore, expands how much our nation produces and how much income we earn.

So long as foreigners want our goods and services, this export sale permanently increases national output beyond what our own citizens earn. It raises our incomes as well. The increased income means we can buy more domestic and foreign goods. This is what is so cool about exports.

Trace the steps…more exports…more output…more income…more domestic spending…even more output.

If a country like Germany or Japan or the USA is able to win the global competition for goods and services, it can use this ongoing competitiveness as a way of permanently increasing its output and economic growth.  If you are still reading and are somewhat awake you might say something like – hold on fella. Whoa Nellie. Won’t other less competitive countries get a little irritated and make unhappy noises? The answer is yes. We have a term “beggar they neighbor” to characterize countries like China who are notorious for playing the export game. But the truth is that while the others feel jilted they can always reduce the unwanted impacts by raising the competitiveness of their own products and services. And while China is well-known for using exports for growth, there are many countries that use this strategy to a lesser degree and therefore are not as notorious. The game goes on.

So exports are cool and we in the USA would like to beggar our neighbors. But the data have not been kind to the President’s goals for expansion. Notice that before the recession hit, US exports were exploding. Between 2003 and 2008 USA exports of goods and services in current dollars increased by 81%. In the five years after the recession started, from 2008 to 2013, exports increased by only 24%. That is quite a slowdown. While it is true that exports declined in 2009, they have increased in every other year and totaled $2.28 trillion in 2013. They have, however, been growing slowly.

If your horse is running too slowly you give it more JD. Right? Or you do something to speed it up. In past blogs I have pooh poohed efforts to reduce the value of the dollar among other policy remedies. In this blog my focus is geography. Before you come up with a solution for exports it might be a good idea to see which countries are buying more or less from the USA. Luckily the Bureau of Economic Analysis has data on USA exports by country destination.

It might surprise you but Canada and Mexico are the largest purchasers of US products. Apparently closeness counts when it comes to kissing and international trade. In the table below I list some key export destinations – countries and world regions. The table order is in terms of how much each destination bought from the USA in 2008 (because I inter-mix countries with regions the totals do not add).

The table below has three columns. The first column tells you export sales from the USA in 2008. The second tells you the percentage change in exports for two different time periods: between 2008 and 2013/ and 2003 to 2008. The final column tells you how much higher USA exports would have been “if” they had grown at the rate from 2003 to 2008. It shows you how much dollar exports we lost because of the slowdown in the past five years.

Some takeaways from the table:
·       
The 28 countries of the European Union accounted for the largest share of US exports in 2008. After growing by 86% between 2003 and 2008, the EU barely increased its purchases from the USA in the next five years.

·        You can understand the overall EU changes by looking down the table at the UK and Germany. Those countries were buying less USA goods and services in 2013 than they bought in 2008. That performance came after very strong increases in the previous five years of 67% and 81% respectively.

·        Nafta partners, Canada and Mexico, were the largest country destinations of USA goods and services in 2008. They bought more from the USA in the time period from 2008 to 2013, but the decline in growth was much less pronounced than for Europe. Similarly S. Korea and the Newly Industrialized Countries (NICs) slowed in their USA purchases but had relatively strong rates.

·        OPEC and China had the fastest purchases from the USA in 2003 to 2008, 153% and 233% respectively. During the next five years OPEC’s purchases of USA goods and services fell off dramatically while China’s continued growing at 84%.

·        Japan had the slowest growth of USA purchases in first five year period (31%) which fell to growth of only 6% in the last five years.

·        The final column shows what the USA lost because of these slower growth rates of exports. For example, if USA exports to these regions or countries had maintained the pace from 2003 to 2008, exports to the EU and NAFTA between 2008 and 2013 would have been much higher: $404 billion and $129 billion higher, respectively.

Between 2008 and 2013 total USA exports of goods and services to the world rose by about $440 billion. This table shows that a repeat of the growth during 2003 to 2008 would have added another $434 billion just from the EU and NAFTA in 2008 to 2013.

USA Export growth fell during the global recession but then grew slowly thereafter. While we might want to discuss national competitiveness or the overall value of the dollar or unfair trade practices – this little exercise today says that our export challenge is very much geographically oriented. Europe struggles with post crisis economic growth. OPEC is trying to adapt to new competition. Other countries, including S. Korea and China are not growing like they used to. Japan languishes.

This little exercise suggests that raising US exports will be neither easy nor global. It won’t be easy because most of our main trading partners continue to be weak. It will not be easy or global because the problems or issues in each country are not the same. Mexico is not Germany and Canada is not the UK. Discussions about the US EX-IM bank suggest old-style thinking. Europe has demonstrated its importance to US exports – but without some US financial assistance to EU buyers of USA products, it is hard to see why or how they can afford to buy even what they are buying now. We won’t double USA exports in the near future but our policies should realistically address a country/regional set of issues.


          Table. USA Export Destination
                      2008           %
                    Exports      Chg*    Higher?
        Billions                     billions
EU                   471          1/86          404
Canada            308        19/56           114
Mexico            178        44/53             15
NICs               147        34/56             32
UK                  114         -5/67             81
Japan               107          6/31             27
OPEC               92        22/233          192
China                87        84/153            59
Germany           83         -9/81              75
S. Korea           50        28/57               15
Brazil                45        56/183             56


% Chg column has two numbers. Both are percentage 
changes over a five year period. The first is from 
2008 to 2013. The second is from 2003 to 2008. 

10 comments:

  1. Very interesting info, but in the international trade game of today, isn't the correct phrase "bugger thy neighbor?"

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  2. Dear LSD. Campaigner-Lair-Blamer-in-Chief Obummer’s declaration to double exports? Is that like if you like your exports you can keep them? Sorry, I just couldn't let that one go by.

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  3. UH I agree with the analysis. However, my company exports to Asia and South America. Both areas have had their ups and downs but our exports have grown in comparable units ( we discount to the off shore companies) faster than our domestic growth.

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    1. You must be doing something right James!

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  4. Our end goal is to expand output, but the struggle between short and long term sustainability will remain. In the long run, I think the solution lies in trade agreements that would actually increase our imports. While this would have a short term negative effect on output, it seems to be the most ‘healthy’ way to influence foreign financial strength. By increasing their output and wealth, we then have strengthened our international customer base.

    The alternative would be to race in the other direction. Jump back on the ‘Made in the USA’ wagon and place restrictions on imports. This would increase our output in the short term. The fight over which industry or vertical to ‘support’ would be lobbyist dream, but the end result would be increased output.

    I would vote to take the route of a longer, more realistic approach. As China got rich on exports, they became our #1 customer. As the race to find cheap labor navigates to places like Indonesia and Africa, future customers are also developed. That is a slow moving train and one fueled by importing their goods, but it is the future.

    With the ECB feeling increased pressure to devalue the Euro, that geography’s ability to bounce back as a top US customer will continue to be slow.
    - G. Simril

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  5. Dear G,

    Nice thoughts -- I can't disagree with any of them. To me the issue always gets back to fundamental competitiveness. A country fails domestically AND internationally if their companies are not competitive. Lots of things can affect the trade balance in the short-run as you say -- but trade takes care of itself if you just do what is necessary to create growth in the long-run. Viable companies is the only way to do that!

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  6. LD - you are the man. Your posts are informative and funny. Unfortunately you are wrong about ExIm.

    Emerging nations look at the U.S. and China to model their economies after. Are we prepared to cede the argument to state-directed economies already? In '07, France and England each disbursed more export credit than us. We beat both combined in 2012. Is our plan to ramp up a export credit trade war in an attempt to out-subsidy China over the long-run?

    As capitalists, we know the state makes a lousy investor. It's inefficient, and in the long-run it totally fails. The short-run jobs argument should be ignored by students of Henry Hazlitt - what about when B-town lost 500 jobs in 2005 due to ExIm? what about the other unseen losers? The Government Accountability Office acknowledges that ExIm just shifts jobs around, it doesn't create (m)any on net.

    Love exports. But where is the love for foreign-subsidized imports, which lower the price of goods for American consumers and inputs of production for American entrepreneurs?

    If Airbus is cheating, go to the WTO. In the meantime, the 1st steps are to fix our highest-in-the-world tax rate and prioritize FTAs.

    Smaller nit to pick - ExIm was commissioned by FDR in 1934. It is literally a product of old-style thinking.

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    1. Thanks J. As you know I am not a lover of subsidies or export promotion. I summarized the case for exports as a way to show why we are often drawn back to export subsidy policies. But there are many holes in that case as you point out. This post was about why geography is a major reason today for why the usual policies won't work. I wanted to show the inconsistency of Obama as he says he wants to promote exports and at the same time wants to limit EX-IM. The later helps foreigners buy our goods. So does he want to promote exports or not?

      I would chunk EX-IM in a minute if I knew we had a consistent set of policies designed to make the country more competitive. But as it stands, Ex-IM is not the only part of our policy that could be called old-style thinking. As in recent attempts to limit inversions, Obama is often motivated by income distribution concerns and not by any genuine concern for international trade.

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