Getting Serious About Doubling U.S. Exports

Speaking this past week at the Ex-Im Bank, President Obama laid out his strategy for doubling American exports within five years, a goal he announced in his State of the Union Address. Naming it the National Export Initiative, he described the strategy as “an ambitious effort to marshal the full resources of the United States government behind American businesses that sell their goods and services abroad.” The Initiative calls for the creation of an Export Promotion Cabinet, made up of the Secretaries of State, Treasury, Agriculture, Commerce, and Labor along with the United States Trade Representative and the Small Business Administrator, and envisions measures to arrange export financing, promote American businesses and products abroad, and open up markets by enforcing existing trade agreements as well as establishing new ones.

The goal of increasing American exports is critical to a sustainable economic recovery. Expanding exports can help offset weak domestic demand caused by household deleveraging, allowing us to work out of debt without a loss in output and a fall in our living standards. But like other Obama administration initiatives, the strategy the president articulated falls short of the goal. Here is why.

First, the strategy is heavy on bureaucratic changes and short on policies that will actually increase demand for American exports and improve the competitiveness of American-based companies. Most state governments have had export promotion programs for several decades now, including some efforts to help finance exports, but these efforts have had a modest impact at best. To be sure, a coordinated federal effort is welcome, and is likely to have more success than the scattered efforts of state trade missions, but even if successful it will make a relatively small contribution to the overall goal of doubling American exports. American exports hit a peak of $1.83 trillion in 2008 before falling to $1.55 trillion in 2009. Does one really think that the promotional efforts of an Export Promotion Cabinet will result in a $1.6 trillion dollar increase in the sales of U.S. produced goods and services abroad?

Second, the strategy neglects the single most important factor affecting U.S. exports and imports—namely, the trade-weighted value of the dollar. Since 1945, U.S. exports have doubled only once, and that was in the early 1970s, following the collapse of the Bretton Woods system and the sizeable devaluation of the U.S. dollar. In trade-weighted terms, the dollar fell 22 percent over the five-year period from 1971-1975, thereby making American exports more competitive vis-à-vis its main trade partners. The other big increases in U.S. exports also followed substantial dollar depreciations—in the late 1970s after the 1978-79 oil crisis, in the late 1980s after the Plaza Accord, and in 2004-08 following the bursting of the tech bubble (see Chart 1). Goldman Sachs estimates that, even with above-consensus global growth of 4.5 percent over the next five years, the dollar would need to depreciate by about 30 percent in inflation-adjusted terms for U.S. exports to double.

Yet the Obama administration has largely taken currency policy off the table, even to the point of failing to name China as a currency manipulator and allowing it to peg the yuan to the dollar, in spite of China’s huge current account surpluses, and in spite of the fact that the Chinese currency is undervalued by 30 percent according to many economists. The U.S. trade position did benefit temporarily from a stronger euro and yen, but the unfolding euro-zone debt crisis has now weakened the euro and the new Democratic Party of Japan government is now openly pursuing a weaker yen policy to help Japanese exporters and to counter the weak Chinese currency. If the administration was serious about doubling exports, it would take action against China for currency manipulation and make a new Plaza Accord a central pillar of its strategy.

Third, another major factor affecting exports is global economic growth, or more particularly strong economic growth among America’s principal trade partners. When our trading partners expand their domestic economies faster than we do, then (other things being equal) our exports to those economies tend to increase faster than our imports from them. But when our trading partners grow more slowly than we do, our trade balance tends to worsen. Thus, in order to double our exports in the next five years, we are going to need rising demand from abroad that comes from rapid economic growth and from the rebalancing of the global economy.

Unfortunately, global growth is forecast to be weaker during the next five years than it was during the expansion from 2003-2007. From 2003-2007, global GDP growth averaged 4.7 percent annually, and U.S. exports increased by 61 percent. For the next five year period of 2010-2014, the IMF forecasts annual average growth of just 4.2 percent, a half percent slower than during the 2003-07 period. What is worse, economic growth is expected to be particularly weak among our largest trade partners. With the exception of Mexico, growth is expected to remain flat or slow in the top five U.S. export markets, with particular weakness in the European Union, which accounts for 21 percent of U.S. exports (see Figure 1).

Figure 1: Growth Projections for America’s Five Largest Trading Partners

Source: US Census Bureau, International Monetary Fund, Authors’ Calculations

U.S. exports can still increase even if our current account surplus trading partners grow more slowly than they did in the previous five-year period, if they rebalance their economies to rely more on domestic demand and less on external demand. The president understands the importance of rebalancing the global economy with the large current account surplus economies, like China and Germany, consuming more and saving less. But his administration has failed to pursue an international diplomacy to bring about this important change. Except for a brief effort around the London G-20 Summit last April and a few occasional remarks, the administration has done little or nothing to press the large current account surplus and export-oriented economies—China, Japan, Germany, and the petro-dollar states, in particular—to do more to increase domestic and global demand and to begin the reforms needed to make their economies more balanced in the future. If the administration is serious about the goal of doubling exports over the next five years, that will need to change.

Finally, even if strong external demand materializes, it is not clear that U.S.-based companies will benefit. That demand could be filled not only be our competitors abroad but also by American companies that have off-shored production in recent years. Indeed, one of the more worrying trends of the past decade has been the slow erosion of America’s tradable goods sector, which has been hurt by years of a strong dollar and the lack of a supportive manufacturing strategy. To be sure, the United States currently has unused industrial capacity, but in order to double exports over the next five years, we will need to expand investment in the tradable goods sector and to on-shore more production.

That means the United States needs an intelligent on-shoring strategy, particularly an on-shoring manufacturing strategy. What we have now is an incoherent mix of policies that push companies in different directions and an incoherent mix of local conditions, some favorable and others unfavorable to locating investment and production onshore. In spite of the wage differentials between American workers and those in the newly industrializing economies, it is possible to develop a more coherent manufacturing strategy that avoids the low road of lowering wages or engaging in beggar-thy-neighbor protectionism. Such a strategy would aim to lower the cost of doing business in the United States while providing companies with the essential things they need to be successful.

Thus far, the administration has yet to acknowledge openly the need for an explicit manufacturing strategy, except in the limited case of promoting green energy investments. Some aspects of its program, such as some of its proposed infrastructure spending, will offer a modest boost to the manufacturing sector. But other aspects, such as those parts that may raise the cost of energy and health care in the United States, are much less favorable to boosting our manufacturing capacity. Until the administration develops a more coherent overall on-shoring manufacturing strategy, the goal of doubling exports will remain just that—a goal, and an unrealistic one at that.

In sum, if the Obama administration is serious about its goal of doubling exports over the next five years, it will need 1) a currency policy to ensure a fair and competitive playing field; 2) an international strategy to promote global growth and the rebalancing of the world economy; and 3) a coherent manufacturing strategy to onshore more investment and production so that increased external demand results in increased U.S exports.