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Export Is The Way Out
Boosting exports can be the solution for the U.S.’s current economic problems
Local Conference of Scientific Students’ Workshops
[Export Is The Way Out] 
“I had a trade deficit in 1986 because I took a vacation in France. I didn’t worry about it; I enjoyed it.”
Chairman of the Council of Economic Advisors under Presidents Nixon and Ford
[Export Is The Way Out] 
Table of Contents
Obama: “export is the answer”
Macroeconomic accounting identities
Reducing the Trade-deficit
page 18 Currency Depreciation page 18
The muting effect of the world economy
page 22 page 22
Lack of substitutes
Protectionism page 23 Restricting Foreign Ownership of Domestic Assets page 25
dollars. can a country with Peter Balazsik Page 4 . It was triggered by a liquidity shortage in the United States banking system.[Export Is The Way Out]  Unemployment and Current-Account Deficit page 25 Conclusion List of References page 29 page 27 Introduction As we all know too well. the greatest domestic consumption fuelled economy aims to be a net exporter. bailouts. As the United States is one of the world’s superpowers. And the world is closely watching now. the list would go on forever. and declines in consumer wealth estimated to be hundreds of billions of U. the world has been going through very hard times in the last 3 years. significant drop in economic activity. because winds seem to be changing: the greatest advocates of free trade might start using the tools of protectionism. But. Its economic decisions prognosticate the direction in which economic policy will be heading in the immediate future. America’s leaders see exports as the remedy for the problems they are facing. They have to consider factors that they never had to before. the actions of one participant might have serious effects on the others. It resulted in the collapse of key businesses.S. Due to the complexity of today’s economy governments. its policy actions set the agenda for the global economy. Markets and economies are highly interrelated. regulatory bodies and other decision makers have had to face unprecedented challenges. however if we wanted to name the affected areas and markets.
historical statistics from times when similar measures were used which I contrast with current statistics resulting from current measures. To appraise the potential effectiveness of the feasible policy responses I use basic economic theory.S. The decision was made: the United States aims to be a net exporter by doubling its exports in the next five years. and assess the possible consequences of their introduction. I will briefly introduce the main events of the Financial Crisis that led here. I review the possible tools to carry out this plan and assess their potentials with methods described previously. My paper will make an attempt to analyse the economic policy measures that American policymakers have at their disposal. when Ben Bernanke’s QE2 and elements of Barrack Obama’s Export Plan are introduced simultaneously making all players in the world economy hold back their breath. current economic problems. I pit academics’ opinions against each other to show how differently the present-day economist elite conceive of the current situation.[Export Is The Way Out]  the biggest trade deficit in the world turn its way around and be a competitive producer on international markets? Will the measures that they are about to introduce do any good. does it provide the desired outcomes on the Trade Balance and the economy? The conclusion shall verify or confute the Thesis: Boosting exports can be the solution for the U. into an even deeper whole? These are questions no one can answer at the moment. The chain of these measures ends in November 2010. or they will push the U.S. My research and analysis are based on three pillars. to show the main problems that the policies in question are supposed to solve. Peter Balazsik Page 5 . To highlight how differently the economy reacts now than in the past I will go through the policy responses that have been initiated in the last two years. The assessment has two focus points: Does the given tool work at all? If it does.
We shall start with a brief analysis of the events that led to the current situation. The crisis officially began in September 2008 with Lehman Brothers – one of the world’s biggest financial services providerdeclaring bankruptcy. and the changes in the key economic indicators based on which economic performance has been evaluated. The events that followed had very significant impacts on the Peter Balazsik Page 6 .[Export Is The Way Out]  Financial Crisis As the main focus of this paper is to prove or confute that a reduced trade deficit or a positive trade balance can be the remedy for the United States economic problems we shall see what these problems are.
(Tradingeconomics. Slater.5 billion in the course of one week. Mullin.[Export Is The Way Out]  financial markets and the world economy.1 billion the week before.2010) Housing prices dropped by more than 20% from their 2006 level and they kept decreasing slowly until the first quarter of 2010. 2009) The companies affected first were the ones directly involved in home construction and mortgage lending. Without the Emergency Economic Stabilization Act and the Troubled-Asset Relief Program that was rushed through in September 2009 there would have been a great threat of economic default in the United States. (Cutler. Comlay. (Altman. with hundreds of others following. so a liquidity crisis took place. It was not until July 2009 that it returned to positive figures and very modest growth is experienced today. (Russel. (Temple-Raston. and AIG just to name the biggest ones in the financial sector. 2010) S&P was Peter Balazsik Page 7 . Washington Mutual. 2008) As we can observe on the below graph the Gross Domestic Product started to decrease in January 2008. These included Merril Lynch.8%. Wachovina. This stopped corporations being able to replace their short-term debt. In the second quarter a small appreciation was experienced due to the stimulus packages and the homeowner programs. The International Monetary Fund estimates that US banks lost $1 trillion in the 2007-2010 period. then from around June-July it went through a serious decline and did not stop until –6. Freddie Mac. compared to $7. 2009) The credit markets suffered seriously as well: investors pulled $144. Fannie Mae.
which is a record only preceded by unemployment levels of 1982. however when things went really wrong in 2008 the US lacked latitude. we shall have a look at their responses with special focus on the monetary policy actions conducted by the Federal Reserve. Only responses after September 2008 will be discussed.6% in 2007 then in 2009 it reached 10%. because the Obama administration used it as a tool to win the elections. it was gradually decreased to 0. The Federal Reserve relaxed the terms of access to liquidity and lowered the interest rates significantly.100 and 1. It was 4.09 in February 2009 and it is still far from the historical levels.[Export Is The Way Out]  down by almost 50% at 735. I consider it the most important.6%. and investment assets – experienced a serious drop as well from $13 trillion to $8. (Between 1. Policy Responses Starting in 2007. retirement assets.2010) Total home equity . Peter Balazsik Page 8 . the monetary authorities acted quickly to introduce measures that respond to the demand by financial institutions for increased access to capital. however a decrease of this scale could not reach the desired effect. After this point it could not be lowered anymore.200 in November2010) (Yahoo! Finance. In September 2008 the discount rate was 2%. 2009) The most important indicator of all is the unemployment rate.which consists of household asset.3 trillion and it is recovering very slowly. because the economic policies that the US government is applying today are the results of these measures.25% by 16 December 2008 in three steps. At the time of this paper’s completion it is 9. the result is that all economic policy actions of today are judged by their effect on unemployment. (Altman. It proved to be a suitable measure to avoid liquidity problems in 2007.So these are the problems the US government has been facing.
Bush with the aim to allow the United States Department of the Treasury to purchase or insure up to $700 Billion of ‘troubled assets’. They provide credit for businesses.’ (Marshall. no matter what other policies are taken.was to restore the lending activity of the banks to consumers and businesses. helping participating institutions to stabilize their balance sheets and avoid having to write off more losses. no traditional government spending was involved. (Federal Reserve Bank of New York. They create jobs. These assets can then be sold with a positive return. The other very important goal of TARP –that was very heavily communicated . 2010) The first emergency response was carried out within the framework of the Emergency Economic Stabilization Act of 2008 and was called the Troubled Assets Relief Program. that jobs will be lost. These institutions provide credit for homeowners. 2009) Peter Balazsik Page 9 . Financial institutions benefiting from government assistance and aid can recover to their former strength increasing the value of the assets purchased by the Treasury. that the economy will just not be able to recover in a normal.[Export Is The Way Out]  so the FED was without one of its most important monetary tool. more houses will be foreclosed upon. The program was designed to protect the taxpayers’ money in the following way: the Treasury has the possibility to profit through its ownership of the assets. the unemployment rate will rise. These are illiquid assets held by banks and other financial institutions that are difficult to value. GDP will contract. It intends to improve the liquidity of these assets with the use of secondary market mechanisms. healthy recovery by our economy. Chairman of the Federal Reserve sees it: ‘I believe if the credit markets are not functioning. Here is how Ben Bernanke. 2008 by George W. because the only goal was to increase the money supply in the economy. Although the Fed was only a facilitator in this program I consider it as a monetary policy tool. It was signed on October 3. I therefore think this is a pre-condition for a good. healthy way. commonly referred to as TARP.
the second $350 billion on January 15. 2009) Another important point for criticism was the afterlife of capital after it was given to recipients. 2009. American Express. American International Group. PNC Financial Services Group. 2008) TARP has had a fair number of its critics. Largest TARP capital recipients – listed in descending order based on the amount they received . State Street Corporation. Most of the people saw it as a no-strings-attached present from the Treasury to Peter Balazsik Page 10 . Goldman Sachs. As mentioned above it was communicated as a tool to restore capital flow to consumers and small businesses – a fair promise when using taxpayers’ money -. Regions Financial Corporation. Ideally the loosening of credit will restore investor confidence in the financial institutions and markets. General Motors. Bancorp. For example it is not clear how the assets purchased by the Treasury are valued. which further facilitates lending. Morgan Stanley. It has been criticised largely because its purpose was not easily understood. There has been no transparent regulation on how the liquidity should be used by recipient corporations.’ (Bennett.S. Bank of New York Mellon Corp. Wells Fargo. It has been highly criticised for its lack of transparency. Bank of America.include Citigroup. however statistics show that it did little to achieve that. (Notwehr.[Export Is The Way Out]  Theoretically if banks’ balance sheets are stabilized they can stop reserving cash as a cushion against future losses and resume lending. If you end up paying too much. 2008. JP Morgan Chase. U. The problem with valuation is neatly summarised by Republican Senator Bob Bennett: ‘…if you end up paying too little to these institutions. you're not giving them the support that they need. then there's no upside potential for the taxpayer when the time comes for you to liquidate these. Chrysler. The first $350 billion was released on October 3. Capital One Financial. Discover Financial. which mark-tomarket accounting might drive you to. GMAC Financial Services.
: Goldman Sachs Group Inc. however most of this liquidity stayed at financial institutions and did not make its way back to the economy. Banks did not lend to each other because of the fear that loans would not be paid back. However this type of borrowing has been associated with bank failure.[Export Is The Way Out]  financial institutions. All in all we can say that TARP achieved its primary goal to provide liquidity in response to the financial crisis. They introduced the Term Auction Facility at the end of 2007 and have been using it since.P. Morgan Chase and Morgan Stanley) will the securities to other firms for cash. Many institutions considered this money available for acquisitions and future investments rather than for lending to the private sector. and it will help the dealers to finance their balance sheets. (Federal Reserve. Fed officials assume that primary dealers (e. The facility allows dealers to switch less liquid debt for easily tradable U. 2009) Another very important step by the Fed was the so-called Quantitative Easing or QE. We shall have a brief look at the concept behind this monetary policy tool that is historically used as a last resort when other tools are not available.S. Since banks would not have wanted to risk a bank-run the refused to apply for credit through the credit window. The Term Auction Facility protects the identity of the banks in need of liquidity to avoid the stigma of bank failure. whose ability to pay back the debt was questionable.g. We shall briefly have a look at the other facilities that the Federal Reserve introduced to counter-balance the financial stability. Peter Balazsik Page 11 . In case of liquidity shortage banks have the opportunity to go to the ‘discount window’ and borrow short-term funds from the central bank. 2007) Term Securities Lending Facility was introduced to promote liquidity in the financial markets for Treasury and other collateral. (Federal Reserve Bank of New York. government securities for up to 28 days.. Quantitative Easing can be done in two ways: the central banks simply print money or they monetize debt. J.
mortgage-backed securities and debt backed by government-sponsored enterprises. However even after all these incredibly high amounts of capital pumped into. The money to finance this purchase is created by the central bank electronically out of nothing. which played a very important role in the economic stabilization. The United States’ completed its first round of quantitative easing between December 2009 and March 2010 during which the Fed $1. besides very slow growth.[Export Is The Way Out]  When a country has given exclusive rights to its independently operated central bank to print money.. to do our part to help the economy recover and make sure that jobs come back to the United States. When the bonds are purchased from the public. and with this: create more jobs. So first they have to issue new bonds and sell them to central banks to acquire the necessary funds. high unemployment and low inflation rate are the problems: “The unemployment rate is still almost 10 percent. 2010) The main problem is that the capital that has been pumped into the economy stays in the financial sector and does not go to consumers and most importantly to businesses which would then be able to expand their operations. This was a shock therapy.. inflation is quite low. Banks can borrow capital from the Fed at 00. and the Federal Reserve has the responsibility . As Ben Bernanke highlights. they have to pay their debt or increase money supply from the currency that is already in circulation. Once they have this excess capital they can decide where to allocate or invest it. They could pass this money on to businesses that are Peter Balazsik Page 12 ." (Cooke.7 trillion of Treasury debt. Its healing effects were obvious even at its announcement before the actual purchases started. conduct more economic activities. the economy still does not seem to recover at the pace it should. The central bank needs to conduct an open market purchase to acquire the newly issued bonds. the public is left with an increased supply of capital. buy other companies.25%.
(Marketplacevideos. the lower their yield becomes. because Treasury bonds are underwritten by the full faith and credibility of the US Government. so they are completely safe. Bernanke said about the Federal Reserve’s program in an op-ed published in The Washington Post on 4 November 2010.[Export Is The Way Out]  starving for liquidity. banks actually stop the flow of capital from the Fed to the economy. The heavy costs of unemployment include intense strains on family finances.” The second aspect the Fed’s decision is based on is inflation being too low: Peter Balazsik Page 13 . He mentions two economic indicators that justify the further implication of expansionary monetary policy. The first problem he mentions is unemployment being too high: “Unfortunately. 2008) Based on what Fed representatives are saying the second round of quantitative easing is being implemented to change this situation. Instead what they do is they invest it into US Treasury bonds. We shall analyse what Ben S. so they are not safe. more foreclosures and the loss of job skills. the economy is deteriorating. but they consider this too risky. the job market remains quite weak. Businesses that the bank might lend to are in the economy. a large number of people can find only part-time work. and a substantial fraction of the unemployed have been out of work six months or longer. With the yield going down there will be less incentive for banks to purchase bonds with their excess capital and they are more likely to lend it to businesses. Long-term bonds yield about 2%. the national unemployment rate is nearly 10 percent. so the banks make some profit on the deal. They do this without taking any risk. By doing this. The more demand Bernanke creates for the Treasury bills.
The following lines from Ben Bernanke’s article quoted above particularly attracted a great amount of criticism: “Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply. Is it possible that too much inflation – and with this a weaker dollar favorable for export – is the primary goal? On 11 March. “ So according to the Chairman these monetary policy tools are implemented to fight unemployment and to generate inflation necessary for economic recovery and growth. Although low inflation is generally good. government to increase exports to increase the number of jobs.7 trillion – as admitted by Bernanke himself – did not do much good. Nor did it result in higher inflation” The question arises from many that if the first $1. why would another $600 billion help? (Bernanke. or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. In the most extreme case. 2010 President Obama ordered an all-out effort by the U. QE2 is set up to create jobs and some inflation. As it can be expected the policy measures have their fair number of critics. 2010) Obama: “export is the answer” Many see the Quantitative Easing 2 as an element in Obama’s plan introduced in March 2010 to double exports in the next five years. very low inflation can morph into deflation (falling prices and wages).S. such as bank deposits. which can contribute to long periods of economic stagnation. Peter Balazsik Page 14 . most measures of underlying inflation are running somewhat below 2 percent. inflation that is too low can pose risks to the economy .[Export Is The Way Out]  “Today.especially when the economy is struggling. One of the risks of using this monetary policy measure is creating too much inflation.
2010) Balance-of-payments The primary goal of this paper is to analyze what steps could be taken in order to achieve U. . exports in the next half a decade: "We are at a moment where it is absolutely necessary for us to get beyond those old debates.S. This Cabinet will be the central body to help Obama execute his plan of doubling U." (Weber.[Export Is The Way Out]  "This morning. he also created the Export Promotion Cabinet. I signed an executive order instructing the federal government to use every available federal resource in support of that mission. Commerce. and whether it is the right policy to follow. the members of which will be representatives from the departments of Agriculture. Labor and State. Those who once would oppose any trade agreement now understand that there are new markets and new sectors out there that we need to break into if we want our workers to get ahead. It will take into account the possible economic consequences of these feasible political measures and take sides on whether boosting exports and achieving a trade surplus can bring the desired economic outcomes for the U. . .’s plan of boosting exports by examining all the options the government has at its hands to influence the balance-ofpayments. Peter Balazsik Page 15 .S.S." As part of his initiative.
and transfers.[Export Is The Way Out]  We shall begin with understanding what the balance-of-payments is and how it is built up. and world economies and assess the effects of international monetary policies on the domestic economy. The capital account shows public and private investment and lending activities. There are three balance-of-payments categories. By these equations we can identify the links between the U. and a use of funds (either an increase in assets or a decrease in liabilities or net worth) is a debit. services. Macroeconomic accounting identities There is a set of macroeconomic accounting identities that link domestic spending and production to savings. loans. Simply put. and short. The current account records flows of goods. These transactions include trade in goods and services. a source of funds (either a decrease in assets or an increase in liabilities) is a credit. The balance-of-payments statement is based on double-entry bookkeeping. It begins with the observation that national income (or national product) is either spent on consumption or saved: National Income = Consumption + Savings (#1) Peter Balazsik Page 16 . and investment. and hence to the capital-account and current-account balances. and the official reserves account measures changes in holdings reserve assets – such as gold and foreign currencies – by official monetary institutions. every economic transaction recorded as a credit brings about an equal and offsetting debit entry and vice versa. it is an accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries. consumption.S.and long-term investments. and vice versa. transfer payments. According to accounting convention.
Peter Balazsik Page 17 . and a current-account deficit occurs when domestic expenditures exceed domestic output. A country that produces more than it spends will save more than it invests domestically and will have a net capital outflow. the remaining spending must be on imports. research and development. a nation that spends more than it produces will invest domestically more than it saves and have a net capital inflow. The equation is the following: National spending = Consumption + Investment (#2) Subtracting #2 from #1 will result in a new identity: National Income – National Spending = Savings – Investment (#3) Consequently if the nation’s income exceeds its spending. because if it was invested domestically there would not be any surplus. We can begin with national income and subtract national spending on domestic goods and services from it. What we should have remaining is exports. Similarly.[Export Is The Way Out]  National expenditure (what the nation spends on goods and services) can be divided into spending on consumption and spending on real investment. To the contrary. Real investment means plant and equipment. The surplus capital must be invested in another country. savings will exceed domestic investment and the result is surplus capital. if we subtract spending on domestic goods and services from total expenditures. This inflow will appear as a capital account surplus and a reduction in official reserves. and other expenditures to increase the nation’s productive capacity. Combining these two identities leads to another one: National Income – National Spending = Exports – Imports (#4) The above equation illustrates that a current-account surplus arises when national output exceeds domestic expenditures. We shall analyze the link between the current and the capital account. This capital outflow will appear as a capital account deficit (in some combination) and an increase in official reserves.
451.803. Trade Balance with Japan Exports Imports Balance 2010 44.6 86.568.S.262.S.6 121.831.466.7 (U.8 1998 57.845. Census Bureau.1 64.120.8 42.479.313.924.5 2008 65.449. must run a current-account deficit.7 44.805.3 56.7 129.721.7 83. The below statistics of U. and why the United States. which saves less than it invests.2 76. 2010) Noting that savings minus domestic investment equals net foreign investment.459.863.8 139. we have the following identity: Net foreign investment = Exports – Imports (#6) Peter Balazsik Page 18 .5 126.473.428.4 81.6 2000 64.159.5 2003 52.032.6 138.669.236.663.2 121.4 2001 57.303.8 2006 58.1 2004 53.4 2002 51.323.2 74.755.3 84.4 146.979.8 89.548.180. which goes as follows: Savings – Investment = Exports – Imports (#5) So if a nation’s savings are higher than its domestic investment.8 73.442.4 2007 61.8 2005 54. This explains why the Japanese – who have a very high savings rate both in absolute terms and compared to their investment rate – run a current-account surplus.141.3 118.6 145.2 95.134.0 148. it will run a current-account surplus.680.003.004.114.1 1997 65.S.014. Trade Balance with Japan support this concept as well: U.1 69.[Export Is The Way Out]  If we combine equation #3 and equation #4 we have a new identity.2 2009 51.463.6 69.0 130.0 1999 57.0 121.036.6 66.021.555.397.
if it is in deficit it indicates that the nation is a net capital importer. Department of State.S. I would like to propose that based on my research a current-account surplus is not necessarily a sign of economic prosperity. then the rest of the world is buying from the United States. We shall see some examples: as we can observe below the U.S. If the current-account is in surplus. because this is the only way they can assure their capital account surplus. however later on it turned to be a very bad decision that – many say. Economically healthy countries tend to run trade deficits. Simply put. with its huge currentaccount deficits is a major capital importer. (Shapiro. 2010) Peter Balazsik Page 19 . During its three centuries as a debtor nation it transformed from a minor colony to the world’s strongest power. (U. and a current-account deficit is not necessarily a sign of weakness or lack of competitiveness. as Europeans sent investment capital to develop the continent. because they allow us to assess the “solutions” proposed by the United States to improve the current-account balance. ran trade deficits from early colonial times to just before World War I. Interestingly enough. and that the rest of the world is investing more in the United States than it is investing in the rest of the world. the U. the country must be a net exporter of capital. This equation explains why the U.S. 2003) These identities are useful. ran surpluses while the infamous SmoothHawley Act was passed and levied high tariffs on goods imported to the U.contributed a lot to the Great Depression.S.S. So any foreign exchange earned by selling in another country must be either spent in imports or exchanged for claims against foreigners.[Export Is The Way Out]  This equation is saying that the balance on the current account must equal the net capital outflow. it means that the United States is buying more goods and services from the rest of the world. First the act seemed to be a success.
S. Government Spending. and current-account surpluses may signify a high level of savings or a slow rate of growth. the larger its current-account deficit (or smaller its surplus) will be. Imports are positively related to income: a nation that grows rapidly will import more goods and services. the faster a nation grows relative to other economies. It turned out to be the most discussed and debated topic on the G-20 meetings in Seoul. As a result. which we shall note. The Fed or the Treasury have not made an announcement in clear and declarative sentences. policymakers in the next five years will be to improve the competitiveness of American goods and services on international markets. Reducing the Trade-deficit As it was very clearly phrased by Mr Obama.[Export Is The Way Out]  (U. the first priority of the U. dollar is the hot spot on today’s global economic agenda. Currency Depreciation The devaluation of the U. The below section will analyze the tools that they have available to carry out this plan. So current-account deficits may reflect strong economic growth or a low level of saving. but dollar Peter Balazsik Page 20 .S. 2010) There is another correspondence.S. and at the same time weak economies will slow down or reduce imports.
One of the supporters is Paul Krugman. Others see high inflation as the biggest risk of currency devaluation. 2010) In his opinion. The reason to believe this is that the U. In theory permitting the currency to return to its equilibrium level will help to reduce the trade deficit.S. and many who think that there is no simple relation between the exchange rate and the current account balance. It is not a surprise that they are going into this direction. and both exchange rates and trade balances are determined by more fundamental economic factors. His argument is that the measures to weaken the dollar can inflate away debt: Peter Balazsik Page 21 . but focuses on debt. We shall examine the validity of this policy measure and assess its efficacy as the solutions for America’s economic problems. The result is that a country with an overvalued currency will run a trade deficit. however Mr Krugman believes that it is not enough inflation –despite of the expansionary measures – that should be feared the most. Having said that. his argument says nothing about improved trade balance and higher employment. The question is: can it be the solution for the United States? An overvalued currency acts as a tax on exports and a subsidy to imports. Nobel Price winner economist.[Export Is The Way Out]  devaluation is what we can expect. In times of economic recession all countries are trying to sell to the world and no one wants to buy. a weaker dollar is “not necessarily a bad thing. “ Interestingly. politicians and businesspeople who believe that this theory works in practice. There are many academics. The devaluation of the USD – being the world’s reserve currency – would have serious effect on a very big number of countries. is simultaneously introducing QE2 and openly pressuring China to revalue the Remninbi despite of heated international criticism. (Wikipedia: Paul Krugman. in this exact situation it is hard to find someone who would speak in favor of dollar devaluation openly. reducing the former and increasing the latter.
It works in theory. The arguments that have been found during my research mainly focus on the potential consequences. is that the plausible-sounding argument that debt can’t cure debt is just wrong. and Chinese customers to the price changes they face. The only way to find out how much the Chinese currency is undervalued is to allow it to float freely and remove the restrictions on China’s capital account. however the success of this political measure all comes down to price elasticity. Cato Institute – has to say about this. and it will in itself erode the debt of the Sams. 2010) These two statements will certainly not experience a friendly reception from U. creditors.S. The logic that the U. Center for Trade Policy Studies. the relative responsiveness of U. There is a consensus among academics. businesspeople and politicians on this. which will do two things: it will make it possible to have a negative real interest rate. is following is that if the value of the Remninbi increased against the dollar.” (Krugman.S. however in the aspect of my paper the question should be: will a devalued dollar help the trade balance? We shall see what Daniel Ikenson . 2010) Peter Balazsik Page 22 . Yes. then. The number of the opposition –who think devaluation will have negative consequences – is much higher. if you can get it.” “The bottom line.associate director. He conducted an extensive research on the United States and China to find out the strength of the link between currency values and trade flows: The first point of the argument is that the Remninbi is undervalued. that will in a way be rewarding their past excesses – but economics is not a morality play.[Export Is The Way Out]  “One answer is inflation. however there are debates about the magnitude.S. then Americans would reduce their purchases of Chinese products and the Chinese will increase the purchases of American products. (Ikenson.
S.000 in import value.S. Peter Balazsik Page 23 . We suppose that U. the consumption should decrease by more than 20%: $10. exports to China. adding to the trade deficit. After a 25% RMB appreciation and a 10% decrease in purchases it would look like this: 90 pc X $125 = $11.000 / $125 = 80 pc At the same time. purchasers would reduce their purchases by 10%.S.250. We shall take a Chinese product that costs (before RMB appreciation) $100 to import.[Export Is The Way Out]  We shall analyse this concept through the below example: If the RMB appreciated by 25% and U. because the price charged for the goods remains the same in dollar terms. In order reach a trade deficit decreasing effect. We shall analyze the historical statistics to try to predict the potential outcome of dollar depreciation against the RMB. then the import value will actually be greater than before. while the quantity sold to China increases due to more demand caused by RMB appreciation.S. the 25% increase in RMB value will undoubtedly increase U. The simultaneous effect of the two aspects described above will determine the benefits of RMB depreciation for the U. consumers are currently purchasing 100 pieces of this product: 100 pc X $100 = $10.
They grew by $3 billion. the appreciation was 2. exports to China increased by $28. exports to China had a growing trend. However the reason behind this increase can be very much debated. During the same period.8% resulting in an increase of $12. 2010) Between July 2005 and 2008.S. The most substantial – 9. $3 billion. It is very likely to have been the result of growing Chinese demand and market penetration by American companies happening simultaneously.RMB appreciation occurred in 2008. 2005 was the first year when RMB appreciation occurred.3% rise. (Ikenson. The above graph shows that U. however the export value fell by more than $1 billion. a 20% RMB appreciation occurred.1208 for one RMB to $0.[Export Is The Way Out]  (Ikenson. 2010) The value of U. $6. Despite an even stronger appreciation of 4. which meant a significant 69.3 billion.S.1464. the U. In 2006.1 billion from 2001 to 2004 with the exchange rate staying at 8.5 billion in U. exports. If the determining power of Peter Balazsik Page 24 . the value of exports increased by $6.5% . The value went from $0.7%.4 billion.S.2 billion and $6. the increase in 2007 was only $9. trade deficit with China increased from $202 to $268 billion.28 RMB consistently.8 billion.S.
the increase in import value was 38. So RMB appreciation increases the buying power of Chinese consumers – favorable for U. like Apple.7%. But how is it possible? According to research 35-50% of U. exports . and other costs from other countries. seemingly going against the law of demand. Most of them placed their production facilities outside the U. We shall see the possible reasons behind this: The muting effect of the world economy So. and in particular 2008. and they actually increased the purchase of Chinese goods. labor. import from China increased by $94.S. production.Wang.Wei. It is enough to look at the most successful ones. During the period from 2005 to 2008.S. it should have caused a more significant increase than it did in 2007.[Export Is The Way Out]  currency value was that great. the recent statistics are even more worrying for those who seek deficit reduction through currency devaluation. and kept the trading.S. so Chinese exporters must have lowered their RMB-denominated prices. The rest of them reflects costs of material. most of the final value of Chinese exports was imported to China.S. but at the same time it makes Chinese manufacturers and assemblers more competitive. This is a natural response to keep export prices steady. developing and research activities only.S. This increase was met with an only 15% of import quantity. it is evident from the above that although the RMB appreciated by 21%. On the import side. while the RMB was appreciated heavily.3 billion. So Americans showed very strong price inelasticity. none of the production is Peter Balazsik Page 25 . (Koopman. Since Chinese value-adding operations are mainly low-value manufacturing and assembly operations. because the relative prices of their inputs fall. imports from China ar Chinese value-added. 2008) Lack of substitutes U.. companies change their production strategies in the last twenty years. U.
a very active economist contributor to Yahoo! Finance: “The United States industry was essentially built on protectionist tariffs until 16th amendment of 1913 allowed federal government to start functioning via income tax instead of high tariffs on imports. tariffs or other forms of limitation on foreign imports.S. it causes a price increase. give the domestically produced substitutes a competitive advantage. By restricting the supply. When it comes to protectionism opinions are very sharply divided. (iPhone: Designed by Apple in California. So U. alternatives for many types of Chinese products. As Mr Ikenson (2010) from Cato institute put it: “It is doubtful that members of Congress. A tariff is basically a tax imposed on a foreign product sold in a country. The two words “protectionism” and “works” are rarely found right next to each other. The majority of academics and economists support the view that protectionism does not work and it is adverse for those who imply it as well as those who it is implied against. But that is the effect of relative dollar depreciation. It means the imposition of quotas. would proudly announce to their constituents that they intentionally reduced their real incomes.S. who support action to compel Chinese currency appreciation. however we shall see what arguments the supporters come up with: One of the open supporters of Protectionism is Pavel Podolyak (2010).[Export Is The Way Out]  carried out domestically. A quota specifies the quantity of a particular product that can be imported into a country. Assembled in China) Simply put: there are no U.………… if one Peter Balazsik Page 26 .” Protectionism Another response to a current-account deficit could be protectionism. consumers in many cases have to face two options: they are pay a higher price for the Chinese product or cease consumption completely. The purpose is to increase the price of the imported product.
France and England in 18th-19th century.S. which consequently increases the value of the dollar. protectionism was always the dominating factor to help out native industry. 2003) Peter Balazsik Page 27 . Japan. We can find a great number of highly recognized economic experts publishing their arguments against protectionism. it would reduce the purchases of foreign steel.“ The opposition is much more populous.into the United States. exports. (Shapiro.Holder of Ivadelle and Theodore Johnson Professorship in Banking and Finance. and decreases the import cost of foreign goods –with no tariffs on them .[Export Is The Way Out]  looks at how world's key societies rapidly became wealthy and powerful (in the last 300 years). and a collective decline in the standard of living. For example. However. mercantilism never went away and still works wonderfully in more advanced forms in China and Japan (and even in Western Europe to a certain degree). and Germany in 19th-20th century. So the conclusion is that any reduction in imports caused by tariffs and quotes will be offset by the decrease in exports and increase in other exports. A higher-value dollar increases the cost of U. and author of numerous books on international finance – point in his book of Multinational Financial Management is hard to miss: “……. Sharpio’s . We shall see the most open and illustrative one: Alan C.the results are ultimately a rise in the price of products consumers buy. Certainly we can understand the desire of a state to lower protectionist measures once its industries have sufficiently grown and benefited from them.” He mentions the currency exchange rate as the factor which abolishes the possible positive effects of protectionism. if the government imposes tariffs on steel. and China in 20th are just some of the success stories. an erosion in purchasing power.” “One may begin to argue that protectionism of old was different in that it was an ideological pillar of now "discredited" mercantilism. The consequence of this is a decreased demand for foreign currency. United States.
which Peter Balazsik Page 28 . restricting foreign ownership historically goes with slower-than-normal growth. In fact. economic policy. Chinese retaliation and corresponding rise in cost of imports will not help United States get further away from risk of a hyperinflationary scenario.Brue. It also causes domestic investments to fall. Reducing foreign capital inflows will raise real domestic interest rates. Restricting Foreign Ownership of Domestic Assets Although this policy measure has not come up as a possible element of the currently implemented U. because the opportunity cost rises with the real interest rates. it might be worth taking Shapiro’s thoughts into consideration as well. It would thus make sense for Barack Obama to sneak in defensive nationalist measures gradually. It stimulates savings. First. and it is somewhere between the two extremes. situation. In theory. the effect of protectionist measures highly depends on the structure of the given economy.S. In case of the current American situation I would consort with Pavel Podolyak’s (2010) words: “At this point.Flynn. there are two reasons behind its impracticality for the current U. because more projects have positive net present values. rapid and badly needed protectionist measures may shock United States into falling further into the economic abyss. the effect is balance between savings and investment. the solution is not black and white.[Export Is The Way Out]  As one would expect. a small section shall be devoted to it as a possible tool of current-account deficit reduction. 2010) Although this approach could generally work. According to him.” When it comes to economic efficiency. and the elimination of excess domestic spending that caused the current-account deficit in the first place. protectionism punishes the efficient and internationally competitive businesses and it shelters the inefficient ones that would otherwise be unable to compete against imports.S. (McConnell.
there will be a continuing need for foreign capital. we shall have a net impact of zero. (Gould. there are two side-effects here that need to be taken into consideration. As it was discussed earlier. The underlying rationale here is that imported goods and services are substituting domestic goods and services and this costs jobs. GDP grew 43% faster than Japan’s or Germany’s. the U. In the last twenty years the U. U. Second.S. policymakers have nightmares about. it is claimed that reducing imports would raise domestic production and employment. Woodbrdge. However. (Holland .S. 1993) Peter Balazsik Page 29 . A paper published by the Federal Reserve Bank of Dallas in 1993 examined 23 OECD countries during a 38-year period. Every single move is justified by decreasing the unemployment rate. If follow this logic. So jobs are saved in the protected industry. although its trade deficit soared. Historical evidence supports this way of thinking. decreasing imports would raise the value of the dollar. Ruffin. Hence. economy is fueled by domestic consumption and as long as Americans spend more than they produce. Also. However we shall see the degree of correspondence between trade balance and unemployment.S. It is no different in case of the policy measures targeting the current-account deficit. thereby reducing exports and encouraging other imports.Ewalt. and it found no systematic relationship between trade deficits and unemployment rates. even though both nations had huge trade surpluses with the United States.[Export Is The Way Out]  is what U. but other jobs are lost by the decline in exports and the rise in other imports. 2006) Unemployment and Current-Account Deficit Unemployment is the Joker card for American politicians. created jobs three times as fast as Japan and 20 times faster than Germany.S.
we can Peter Balazsik Page 30 . we can find many extremes. Secretary of Commerce lays down the logic behind export-led policies very simply: “…….S.export initiative. the more we hire people to make those products.. and the more products we make. The reasoning behind the president’s plan is very simple: the more products we sell abroad. Although countries with trade deficit tend to have a higher unemployment rate.S. which aims to double the amount of U. U. Conclusion Gary Locke. after conducting an analysis on factors that influence international competitiveness and on policy tools that could initiate this process.” However.[Export Is The Way Out]  If we look at the below table containing current data from 2009-2010. we can see the same theory proved: (Data from: Wikipedia) The correlation between unemployment rates and trade balances in percentage of the GDP is around 60%. and we need to take into consideration that unemployment is determined by a great number of factors besides the trade balance. the more products our companies have to make here at home. exports over the next five years creating some two million new jobs in the process.
companies. tariffs.S.S. However American companies are producers. industrial components. before they are exporters. programs that improve information and technical assistance to first-time exporters.S. which reduce their competitiveness both at home. regulations. capital and labor. they consume equipment. And as producers. policymakers would like it to seem. manufacturers.S. export potential. (The White House Office of The Press Secretary. energy. 2010) The elements of Obama’s National Export Initiative program are aiming at enhancing the competitiveness of American business internationally in every way. (Ikenson.S. imports. These producers account for half of the value of U. 2010) In sight of the above. taxes. And as consumers of all these inputs. American trade representatives visit countries to improve market access overseas for U.[Export Is The Way Out]  see that it is not as simple as U.S. they face the consequences of U. The Export Promotion Cabinet promotes Federal Resources currently available to assist export by U. Credit availability for exporters is increased. raw materials. They develop programs for export assistance. 2010) Peter Balazsik Page 31 . (Locke. Commercial Advocacy is guaranteed to companies that open to new markets. mandates and other impediments imposed by their own governments. and as exporters. we can believe that the National Export Initiative assumes that it is only foreign-borne obstacles that reduce the U.
U. producers have to face much stronger domestic regulation than their competitors in Asia. Peter Balazsik Page 32 . economy recover. However based on the research and analysis that have been conducted. there is no strongly proven relations between the economic measures that are taken currently and their effect on the problems that are being targeted. accompanied with much higher social security contributions. I was led to the conclusion that doubling exports in the next five years can be an achievable goal. I cannot deny either that increased international competitiveness would indeed help the U. In order to become an export-led economy. occupational health and safety regulations.[Export Is The Way Out]  Taking these facts into consideration. and the trade balance to be improved. we can say that the United States needs an overall structural change in order to achieve its goal to be an export-led economy. Let alone Labor Unions that would fight severely against any cuts in wages.S. They need to deal with much stricter environmental.S. These issues would all have to be on the table if exports are wanted to be doubled. the structural changes needed to be done would have to be so deep-rooted that they might put the United States on the slippery slope during this unstable period.
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