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America: Export Nation?
How Currency Imbalances and High Oil Prices may transform a Consumer-centric Economy into an Export-centric Nation
The other day I was watching a news program on PBS where several oil industry experts were asked why the price of oil was so high. Very quickly they pointed to the two main culprits. One was the US Federal Reserve, which had made the fatally flawed decision to lower interest rates, starting in August 2007. The other culprit was that new wave of speculators, financial institutions that had started investing in oil futures without knowing how to do it. In passing, these oil industry experts noted that the dollar was low, which was causing problems for the oil markets too.
What the experts did not address is WHY the dollar was so low. In today’s business environment, if you are charged with figuring out the long-term direction of your enterprise, no doubt these twin questions about currency imbalances and oil prices are at the center of your concerns.
And if you are thinking of selling your company, these issues are equally important, since they may dictate who your buyers will be and what country they come from.
A leading question in all of this, of course, is whether the combination of high oil prices and a low dollar is structural and therefore lasting in nature, or just a temporary condition that may fade away with a few clever policy decisions the Federal Reserve Bank could implement with the stroke of a pen. But whatever the answer to this question, the result of this current combination may be a major transformation of the American economy from consumer-centric to export-centric. I’ll explain, but first, we need to step for a little perspective on our current situation.
How We Got Here
To gain a sensible perspective on these related issues, let’s take a quick look at a long-term historic view of some of the most fundamental trade imbalances in the American economy. (See graphic, below.)
Prepared by Thomas Schinkel from data provided by the U.S. Department of Commerce
Trade imbalances between the US and the rest of the world are nothing new. In nominal terms it does not matter much whether you have a trade deficit of $100 billion or $500 billion. What matters is the size of the deficit in relation to the country’s total economic output.
So, a key measure is the trade deficit relative to the US Gross Domestic Product (GDP). For example, from 1989 to 1991, the trade imbalance between the US and the rest of the world actually declined from 2% of GDP to 1% of GDP. During the 1990’s it rose again to approximately 4% of GDP. But this trade imbalance ballooned to 7% of GDP in 2006, more than tripling in just ten years. The two main drivers were energy imports (mostly petroleum products), and manufacturers accelerating their shift of manufacturing facilities from US shores to the Far East.
What do we notice when we refract the US Trade Deficit into these two major components, the Energy Deficit between the US and the rest of the world, and the US Trade Imbalance with China? The US is importing so much more of its energy needs than it exports, again not just nominally, but relative to the size of its economy.
In 1991, the energy deficit was the single largest component of the US trade deficit with the rest of the world, mushrooming to 60% of the total trade deficit. But throughout the 1990s there was a sharp correction in this imbalance, and by 1999 it stood at a mere 20% of the total trade deficit.
Meanwhile, the imbalance in the trade relationships between the US and China kept growing, not just in nominal terms but relative to the size of the US economy as well. Today, China accounts for over 30% of the total trade imbalance between the US and the rest of the world.
Ever since China’s acceptance into the World Trade Organization in 2001, this trade imbalance has widened, again, not just in absolute terms, but also relative to the size of the US economy.
The Road Not Taken
One of the consequences of this never-ending and largely unmanaged saga of growing trade imbalances is that the Chinese, Japanese, and other governments were ever more flush with dollars which they routinely re-invested in US Treasury bills, with the expectation of steady returns on their investments.
With this backdrop of the growing trade imbalance between the US and the rest of the world, let’s go back to the question of why the price of oil is so high and the value of the dollar is so low. If, in August 2007, the Federal Reserve Bank had chosen to raise interest rates instead of lowering them, this might have bought some time for the value of the dollar, encouraging foreign governments to hang on to their T-bills just a bit longer.
This in turn, might have helped slow the rising price of oil, which is traded in dollars. The overseas oil producers argue that if the value of the dollar falls, so does their purchasing power, forcing them to raise their price to make up the difference.
But the consequence of an August 2007 interest rate rise would have been an avalanche of real estate-induced bankruptcies throughout the country far larger than what we have seen to date. With the trade deficit remaining out of control and with no policies that are credible (in the eyes of our creditors) to stem the tide, the Federal Reserve Bank seemed to be caught between a rock and a hard place at that time in 2007.
How to Get Back on Track
Pulitzer-Prize winning author and journalist Tom Friedman of The New York Times argues for trying to get a comprehensive fix on the structural imbalances in our trade relations with the rest of the world. More importantly, he argues, we need to get our energy deficit under control.
After all, he seems to say, you cannot have 1) a trade deficit, 2) an energy deficit, 3) a government budget deficit, 4) a wholesale shift of manufacturing jobs to overseas destinations and a strong dollar, and low prices for imported energy and have this continue ad infinitum. Come to think of it, those are not the ingredients of a virtuous upward cycle but of a negative, downward spiral. And that is what we seem to be in right now!
To break out of this spiral, Friedman argues for a Federal tax on all those conventional energy carriers that make us more dependent on foreign sources. First off, the collected tax would end up in the US Treasury’s coffers instead of other countries’. Such a tax would help stimulate the introduction and lasting integration of clean energy sources such as wind, solar, and hydrogen.
When the crisis is over, many assumptions about the US economy may have been turned on their ears. One of those assumptions is that without the seemingly all-important “Consumer Spending” there would be little left of the US economy.
The silver lining in these gathering storm clouds is that American manufacturers with innovative and leading-edge, high-quality products have a splendid opportunity to gain and regain world markets. Indeed, if present trends continue, my sense is that within the next five years the US will be going through a metamorphosis from a “Consumer-centric Society” to an “Export-centric manufacturing nation.”
This after all, is the only real way towards finding a new equilibrium in a world economy that has allowed major imbalances to accumulate as part of a set of policy assumptions that date back to the 1950s and 1960s.
Business consultant Peter Drucker used to say that “a problem properly defined is half solved.” If we apply this sage advice to our current challenges, perhaps we can stop embracing that knee-jerk definition of the US as driven two-thirds by consumption.
We could redefine the American economy as one that must be recalibrated towards increased manufacturing productivity stateside, and one that would greatly benefit from a shrinking consumption (import) component and a growing export component.
Appropriate and effective government policies could flow from redefining our present challenges in this fashion, providing the new assumptions behind taxing undesirable behaviors and providing stimulus and support of desired behaviors.
For those of you whose manufacturing facilities are still stateside, and who have been thinking of moving off-shore, perhaps it is wise to hold off on the decision for just another bit. (You might want to move those facilities back to the US in a few years!)
In closing, what is your worldview? And how do you let it influence your planning for survival and prosperity?
Many more articles in Insight & Commentary in The CEO Refresher Archives