Reply #14: Global: The Paradox of Trade [View All]

[54anickel]

http://www.morganstanley.com/GEFdata/digests/20041213-mon.html#anchor0

The dollar is topic du jour in world financial markets. While there was a sharp reversal in the US currency last week after an unrelenting bout of selling since early October, the case for a weaker dollar remains very much intact, in my view. It is central to what I have called global rebalancing -- the shift in relative prices that an unbalanced global economy needs in order to establish a more sustainable equilibrium. I have stressed from the start, however, that dollar depreciation can’t do the job alone. That point bears further elaboration.

The United States has a serious and worrisome current-account deficit problem -- an imbalance that hit a record 5.7% of GDP in mid-2004 and that, by our reckoning, seems likely to widen further to at least 6.5% over the next year. Fully 92% of America’s current account deficit shows up in the form of a trade gap on goods and services -- a shortfall that also hit a record of $623 billion (annualized) in the third quarter of this year. Currency fluctuations can have an important impact in shaping a nation’s competitive position. For that reason alone, many believe that a weaker dollar will boost US exports and inhibit imports -- thereby resulting in a sharp narrowing of America’s trade and current account deficits. This conclusion has also formed the basis of the belief that a weaker dollar will spur an important shift in the mix of US growth -- bringing output and jobs back home in a fashion that will establish a more solid base for domestic income generation. These conclusions may be wishful thinking.

Trade is the glue of globalization. And there can be no mistaking the explosive growth of global trade since the late 1980s. The ratio of global trade to world GDP rose from 17% in 1986 to a record 27% in 2004, according to IMF estimates. Over that 18-year period, growth in world trade volumes averaged 6.3% per annum, well in excess of the 3.5% average pace of world GDP growth. Not surprisingly, this surge in trade has provided a disproportionate benefit to low-cost manufacturers in the developing world. This has come at the expense of the high-cost developed world. While the US remains the world’s largest exporter with an 11.1% share of total global exports of goods and services in 2003, its portion has been declining over the past several years. In fact, in 2004, America’s average share of exports and imports, combined, fell to 13.2% -- down sharply from nearly 16% in 2000 and the lowest such portion since 1982. With America’s share in global trade on the wane, it would certainly be an uphill battle for the US to trade its way out of its current-account conundrum.

The arithmetic of America’s trade imbalance makes a currency-induced turnaround all the more daunting. The main reason is that US imports are currently 53% larger than exports. That means export growth has to be roughly 50% faster than import growth just to hold the trade deficit constant. Or putting it another way, if export growth was to surge and hold at double the pace of import growth, it would take about 10 years for the US trade deficit to be eliminated. Two conclusions follow from such calculations: First, the United States is unlikely to export its way out of its trade quagmire by a currency-induced improvement in competitiveness; with globalization pushing the US share of global trade down to the low end of historical experience, such an export-led resurgence seems highly unlikely. Second, the only real hope for meaningful improvement on the trade front over the next several years is on the import side of the equation; given the secular shift of rising import penetration into the US, that would undoubtedly require a protracted slowing of US domestic demand growth. More about that later.

But there is another important twist to this story. To the extent that output can be brought back home by a narrowing of the US trade deficit, job creation and income generation would potentially get a new assist. Such impacts could then spread to the economy at large through classic “multiplier effects” -- in effect, broadening the base of domestic demand support. This would be welcome news for a saving-short US economy that has turned increasingly in recent years to asset-based saving as a new means to support private consumption. It would also be an encouraging development for US businesses and investors -- potentially boosting market share at home and abroad and sparking related improvements in corporate profitability and equity prices.

Such a transformation may be a real stretch. In large part, that’s because of the secular erosion of the US manufacturing base -- ...

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