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Can the United States transform itself into an exporting juggernaut?
Subject:
Gross domestic product (Forecasts and trends)
United States economic conditions (Forecasts and trends)
Foreign exchange (Prices and rates)
Foreign exchange (Forecasts and trends)
Author:
Bergsten, C. Fred
Pub Date:
07/01/2011
Publication:
Name: Business Economics Publisher: The National Association for Business Economists Audience: Academic; Trade Format: Magazine/Journal Subject: Business; Economics Copyright: COPYRIGHT 2011 The National Association for Business Economists ISSN: 0007-666X
Issue:
Date: July, 2011 Source Volume: 46 Source Issue: 3
Topic:
Event Code: 010 Forecasts, trends, outlooks Computer Subject: Market trend/market analysis
Geographic:
Geographic Scope: United States Geographic Code: 1USA United States

Accession Number:
270375993
Full Text:
The United States is capable of becoming an exporting juggernaut if if follows the right policies. This paper discusses what goals the United States should pursue and how it should go about reaching them. The goals should be ambitious--more ambitious than current policy suggests. Gross exports should increase to about 20 percent of GDP, whereas the current account deficit should decline to about 2 percent. The most important instruments to achieve these goals are liberalization of export controls, aggressive pursuit of trade agreements, and exchange rate correction--particularly with China. The paper gives estimates of what can be achieved by these instruments.

Business Economics (2011) 46, 154-158.

doi: 10.1057The.2011.13

Keywords: trade policy, export growth, current account, exchange rates

Can the United States become an exporting juggernaut? My answer is yes, if the policy framework is right. I have a lot of confidence in the underlying competitiveness of American industry. Over the last 15 years, U.S. aggregate productivity growth has increased by an average of 2.5 percent a year. In manufacturing, productivity has increased by an average of 4 percent a year. That is not bad in terms of improving the United States' underlying competitive position. It suggests that American industry can hack it internationally. But only if the policy framework is right.

I want to talk about the policy framework mainly in two respects: one, what should be our goal; and second, how should we achieve it?

1. U.S. Export Goals

The goal has been set by the president--double exports over 5 years. To me, that is fine. It is a good start but it is grossly inadequate. It means that exports would have to increase by about 14 percent a year over a 5-year period from a low base--the 2009 recession year base--so it is easier to achieve. Still, annual growth of 14 percent would about double the 30-year average. Exports have grown 7 to 8 percent per year over that period, so meeting the president's objective would require a growth path that would be about twice the 30-year average. On our calculations, business as usual--meaning, no additional export push -would only achieve a growth of about 60 percent in U.S. exports over the 5-year period as opposed to the 100 percent growth set as a goal by the president. Thus, you are talking about a significant increment, from 60 to 100--moving up by about two-thirds to move the growth rate up from something like 8 to 14 percent. This would be substantial, but I regard that only as a start. For reasons that I will indicate, we have to have separate goals for gross exports and net exports. Remember that the goal of the administration's policy--double exports in 5 years--is purely on gross exports. It says nothing about net exports, the current account balance, the trade deficit, or the contribution of the trade sector as a whole to the economy.

I would first of all beef up the gross export goal. My goal would be to raise it from where it was--10 percent of GDP in 2010--to 20 percent of GDP in 2020. Now, that has a nice marketing ring, but it also substantively indicates a more lasting commitment, a more fundamental enhancement of the share of exports in the national economy; and I think we should set our goal on gross exports beyond doubling over 5 years.

But that is not enough, because the impact of trade on the economy comes from net exports, the current account balance, the trade balance--whichever way you want to put it. Therefore, I would set a second goal, which would be to reduce our current account deficit from where it is now down to about 2 percent of GDP, at most.

The current account deficit had a recent peak of 6 percent of GDP in 2007. It was cut in half--basically by the recession but also by the decline of the dollar. It is now rising again--quite sharply, in fact, through the middle of 2010--and is now about back to 4 percent. On most projections, it is headed back up to 5 or 6 percent. I think it is imperative for a variety of reasons that we cut that back to a maximum of 2 percent. This would reduce our net foreign debt to GDP ratio to a level of about 50 percent, which would not be too risky from a financial standpoint.

Reducing the goal of a current account deficit to 2 percent of GDP would require reaching the first goal: a pace of growth of exports well over 10 percent for the decade as a whole. It would mean doing about 25 percent better than we have done historically in export markets for a sustained period of time. These goals are ambitious but achievable and should be the underlying conceptual construct for where we would like to see our trade position go over the coming decade.

When I focus on the net imbalance, remember that what I am trying to do is to quantify a U.S. national target that would be consistent with the agreed international strategy of the G20 for rebalancing the world economy. Remember that coming out of the great recession, it has been widely agreed--by the G20, IMF, and others--that one needs not only a strong recovery from the recession but a sustainable recovery, meaning one that is reshaped. This means one that is not susceptible to growing international imbalances--notably the big Chinese surplus and the big U.S. deficit--because those lead to unsustainabilities of their own over time that must be avoided in the future.

For the United States, that, of course, means relying much more for future growth on net export growth and underlying investment rather than on debt financing, consumer demand, and government budget deficits. That is an essential rebalancing of our internal economy as part of the rebalanced global economy agreed by the G20 for sustainable global growth in the future. What I am suggesting here, albeit briefly, is how to quantify that in terms of what it would mean for U.S. trade, which is the dominant driver of our current account position.

2. U.S. Export Policy

Given this prelude and goals, how would we do it? There are a whole variety of policy instruments that one uses to try to expand exports--both gross and net. I am going to focus on three that I think are most important in terms of quantitative impact.1 One of these three, as we will see, dominates everything else.

Export controls

The first--not the most dominant one--is to seriously liberalize our export controls. We did a study over 10 years ago at our institute that showed that U.S. export controls were cutting off our own foreign sales by $30 to $50 billion per year--not a massive amount, but not trivial. The export controls had been liberalized a little. But they have been retightened with China in mind. A whole new review is going on within the government--with very modest progress to date. Export controls are one policy area within the purview of the government where substantial liberalization could be achieved.

It is interesting that when we talk to our biggest, newest trading partners--China, India, and others--the main thing they ask for is that we liberalize our export controls so they can buy more from us in sectors where they want to buy. There are legitimate national security reasons not to sell some things, and I do not suggest a blanket elimination of controls on everything. However, the controls have been far too restrictive and far too ignoring of the economic consequences for the kinds of things we're talking about today. Therefore, I would suggest that substantial gains could be achieved from significant liberalization of the export controls.

Trade agreements

The second dominant policy instrument is trade agreements. It is clear that we need to open many foreign markets to U.S. sales. We need to do so in part as a defensive measure because all the other major trading countries in the world--from China to Germany to India--are signing trade deals with each other, whereas the United States sits on the sideline. The United States is losing big time. Therefore, at a minimum, for defensive purposes, we need to be aggressively signing trade agreements with Asian countries and the European Union--especially big countries like India and Japan.

In concrete terms, I would make sure that the current Trans-Pacific Partnership initiative expands to bring in big Asian traders, such as Japan and South Korea, and then liberalize as far as we can with those countries. And more bilateral agreements. India would be at the top of my list. Egypt, if it reforms and moves toward free markets as well as democracy, would be another candidate. In fact, we came very close to launching an FTA negotiation with Egypt 5 years ago.

A whole variety of countries are candidates for trade agreements. We have estimated that the South Korea agreement is worth more than $10 billion in exports. A deal with India or Japan would be worth much more than that on the export side as well. The Doha Round of multilateral negotiations--in terms of what has been negotiated so far--is a mouse. We have studied it in detail. It would expand U.S. exports only by S7 billion--less than the South Korea agreement and not even clearly more than the Colombia or Panama agreement.

However, if the Doha Round were expanded to seriously include services, some trade facilitation steps, and some big sectoral agreements, its impact could multiply fivefold; and we could expand our exports by $40 billion, according to a series of estimates we have made. Thus, trade agreements should be an important part of the equation.

Exchange rate

The third instrument, and by far the most important which swamps everything else and works on both the import and export sides--is the exchange rate of the dollar. Our models show that every 1 percent depreciation of the exchange rate of the dollar on a trade-weighted basis strengthens the U.S. current account balance by $20 to $25 billion per year, with a 2-year lag. If the dollar is overvalued by a mere 10 percent, which is our latest calculation of where it is about now, its correction would improve the U.S. trade balance--our net export position--by something like $200 to $250 billion per year once that correction was phased in over a 2-year period. That swamps everything else.

We know empirically that those relationships work. The impact of depreciation that I mentioned is derived from a practical reading of the changes in exchange rates and subsequent changes in U.S. trade and current account positions over the last 40 years. At the moment, the reason that the dollar is still overvalued on average by about 10 percent is pure and simple: the undervaluation of the Chinese renminbi (RMB) and several currencies around it in East Asia.

By our calculations, the exchange rate of the dollar is about right with respect to the euro, the Canadian dollar, the peso in Mexico, and most of the currencies of our other big trading partners. That was not true a decade ago. The dollar at that time was overvalued by 30 percent or more. It came down by a trade-weighted 25 percent between 2002 and 2007.

That exchange rate adjustment was the second big reason, in addition to the great recession, that our current account and trade deficits came down so sharply between 2006 and 2009. The imbalance was cut in half. But now, with the continued large undervaluation in China and other Asian countries around it, the external imbalance of the United States is rising again.

I mentioned before that the G20 has agreed on rebalancing. That needs to be part of the recovery of the world economy. At the moment, the imbalances are going in the wrong direction. The Chinese surplus is going back up, as is the U.S. deficit.

The Chinese imbalance is driven, in important part, by massive Chinese intervention in the currency markets. For the last 5 years, China has been intervening in the currency markets at an average of $1 billion per day--buying dollars and selling RMB to keep the dollar price up and the RMB price down and therefore keeping China's currency undervalued and the dollar overvalued. This is a huge factor in competitiveness worldwide, given the fact that China is now the world's biggest trading economy and second-largest economy, maybe getting close to the United States in purchasing power parity terms. It will certainly over time become by far the dominant trading country in the world.

When the biggest trading country in the world is intervening massively to keep its currency undervalued--we estimate by over 20 percent--what you have is the equivalent on its part of a subsidy for all of its exports of 20 percent and an additional tariff of at least 20 percent on all of its imports. This is the largest protectionist measure in the history of mankind and therefore needs to be dealt with effectively.

There are ways to deal with it. The United States could respond with what I call countervailing currency intervention. The Chinese buy dollars and sell RMB. The United States could buy RMB and sell dollars to counter it directly in the currency markets. We have countervailing import duties as a normal component of our trade policy arsenal. Why not do the same thing on the currency side with countervailing currency intervention? You could retaliate on trade, but I think it would be much neater to do so directly on the currency side. I had an op-ed in the Financial Times recently explaining that concept: I think that would be a natural way to go.

I am encouraged that the sweet reason that we have been trying on the Chinese for at least 5 years is beginning to prevail. Over the last 6 months, the Chinese have let the RMB go up at a real annualized rate of 10 to 12 percent against the dollar. If they let that continue for another couple of years, it would achieve the 20- to 30-percent adjustment that is needed and go a long way to achieve the export objectives that I have laid out for the United States. But we would have to be vigilant to make sure that the dollar does not again become overvalued against other currencies, as it has done all too frequently over the last 30 years.

The United States could again become a major exporting power. However, it does need to have in mind both a sustained goal for gross export expansion and an additional goal for bringing our net export deficit down sharply as part of the global rebalancing exercise.

The way to remedy our export position is primarily through easing our own export restrictions, aggressively pursuing market opening in the rapidly growing emerging markets of the world that still have trade barriers, and making sure that the exchange rate of the dollar--particularly against our top competitors in Asia--avoids overvaluation and gives our firms an equal opportunity in world markets.

Questions and Answers (Edited)

Q: "With U.S. natural gas prices trading at an all-time record discount to oil prices, what are the opportunities to boost manufactured exports of gas-intensive products? What can or should policy do to help?"

Mr. Bergsten: Many of our competitors subsidize the price of energy inputs to their products. This is particularly true with the big oil and gas exporters in the Middle East in petrochemicals and some other products. There has been an effort over the years--with mixed success--to get them to cease and desist by bringing those practices under the WTO or otherwise go after them. The improved competitiveness of our position now ought to simply make us redouble those efforts to, at a minimum, get the others to desist from distortive subsidies so that our competitive advantage would be permitted to play out through the lower prices that obtain in the market.

Q: "To get a current account deficit of 2 percent of GDP, given an investment goal of roughly 10 percent of GDP, the national saving rate would need to be about 8 percent of GDP. Since the fiscal deficit is about 10 percent, how can we obtain the necessary personal saving rate of 18 percent?"

Mr. Bergsten; To obtain an adequate national saving rate, I would eliminate the federal budget deficit. In fact, I'd move it to a small surplus. That will take some time, but we're talking here of a 5 - to 10-year horizon. Bring the federal budget deficit down by a percent of GDP per year for a decade.

That may sound outlandish but it's what happened in the 1990s. In 1993, we had a budget deficit of 6 percent of GDP. At the end of the decade, we had a surplus of 2 percent of GDP. The budget position improved by one percentage point of GDP per year for 8 years. That is what we need now. We need it even more desperately now because our starting position is so much worse. For a whole variety of reasons, even unrelated to the international side, we need that. That is the way you equate the math.

In national income accounting terms, you have to get the savings minus investment imbalance on the domestic side to correspond to the exports minus imports imbalance on the international side. If we can, in addition, induce a higher private saving rate, we give ourselves a little more flexibility on the budget side. It may make rebalancing a little faster.

I think we can do that. There are a variety of measures--particularly as we have to increase taxation in the country--to make sure we increase national savings by raising consumption taxes, not income taxes. We would thereby deliberately deflect the composition of domestic income from consumption to saving. I think we can do that too. Even just limiting ourselves to a necessary fiscal correction, I think we get the counterpart domestic change that the question had in mind.

Ed Gresser (panelist): May I make one additional point? On our current account imbalance and our trade deficit, a large factor that is difficult to control is the price of oil. We began the 2000s at S100 billion in oil imports and got to almost $500 billion in 2008. By contrast, our imports from China rose from about $100 billion to $300 billion. If there were a way to make the U.S. less oil-intensive, then one of the very big factors that has driven our deficit would diminish, and one of the big potential shocks to the U.S. economy would become less of a danger.

Mr. Bergsten: It also takes us back to using more domestic natural gas.

Q: "Doubling exports seems to require an industrial/ trade policy. Does this leave room for a national 'infrastructure build' as another source of growth or would export growth preclude it and take its place. There are many people who think that a lot of investment needs to be made in infrastructure?"

Mr. Bergsten: I think infrastructure investment and export expansion are mutually supportive. Improvements in infrastructure, whatever their primary motive, could certainly be oriented in a direction to strengthen our international competitiveness--ports, airports, road transport feeding into export terminals. If you had a serious effort to pursue a multimodal national transportation strategy with export expansion as one component, you could importantly help the export expansion effort as well as deal with a dire domestic problem.

Q: A 10 percent depreciation of the dollar against the RMB would not improve U.S. productivity or technology. It is a short-term and provocative trade enhancement that would be a beggar-thy-neighbor move that could possibly lead to protectionism. Why should we be in favor of that?

Mr. Bergsten: How could anybody call a deprecation of the dollar competitive devaluation or protectionist when the United States is running the biggest trade deficit in the history of mankind? How could anybody say it's protectionist to try to get China to let its exchange rate appreciate when they have deliberately held it down by intervening to the tune of SI billion per day in the currency market for 5 years in order to keep the dollar price up and the price of their currency down?

As I pointed out, that is the biggest protectionist step in human history, since it amounts to an across-the-board export subsidy of 20 to 30 percent and an additional import barrier of 20 to 30 percent on every product. With those two facts in mind, tell me how it is that the United States could be called protectionist or a '"competitive devaluer" from trying to get its exchange rate back to an equilibrium level that would still have us running a trade deficit of 2 percent of GDP--a deficit that very few countries in the world are willing to countenance.

Q: "Germany became the world's largest exporter with a vastly overvalued currency."

Mr. Bergsten: I disagree. You tell me how you define a currency as overvalued in a country that runs a massive trade surplus. If you raise the issue of purchasing power parity, I will tell you that it is irrelevant for international trade competitiveness purposes. For most of the post-war period, the deutschmark, and more recently the euro, has been substantially undervalued on any kind of trade comparison.

(1.) These exclude the many useful things that can be done with the Export-Import Bank and the export promotion programs at the Department of Commerce. These are useful, should be done, and should be supported; but I think they are small in terms of their quantitative impact.

Remarks presented at the 27th Annual NABE Economic Policy Conference, March 7, 2011.

* C. Fred Bergsten has been director of the Peterson Institute for International Economics since its creation in 1981. He was assistant secretary for international affairs of the U.S. Treasury during 1977-81 and functioned as undersecretary for monetary affairs during 1980 81, representing the United States on the G5 Deputies and in preparing G7 summits. During 1969-71, he coordinated U.S. foreign economic policy as assistant for international economic affairs to Henry Kissinger at the National Security Council. He has been a senior fellow at the Brookings Institution, Carnegie Endowment for International Peace, and the Council on Foreign Relations. He has been a chairman, co-chairman, or member of a number of prominent commissions dealing with international economic relations. He has received a number of awards for his contributions. He received MA, MALD. and Ph.D. degrees from the Fletcher School of Law and Diplomacy and a BA magna cum laude and honorary doctor of Humane Letters from Central Methodist University.
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