Wednesday, November 26, 2014

The Great American Mirage

NEW HAVEN – In September 1998, during the depths of the Asian financial crisis, Alan Greenspan, the United States Federal Reserve’s chairman at the time, had a simple message: the US is not an oasis of prosperity in an otherwise struggling world. Greenspan’s point is even closer to the mark today than it was back then.

Yes, the US economy has been on a weak recovery trajectory over the past three years. But at least it’s a recovery, claim many – and therefore a source of ongoing resilience in an otherwise struggling developed world. Unlike the Great Recession of 2008-2009, today there is widespread hope that America has the capacity to stay the course and provide a backstop for the rest of the world in the midst of the euro crisis.

Think again. Since the first quarter of 2009, when the US economy was bottoming out after its worst postwar recession, exports have accounted for fully 41% of the subsequent rebound. That’s right: with the American consumer on ice in the aftermath of the biggest consumption binge in history, the US economy has drawn its sustenance disproportionately from foreign markets. With those markets now in trouble, the US could be quick to follow.

Three regions have collectively accounted for 83% of America’s export-led growth impetus over the past three years – Asia, Latin America, and Europe. (Since regional and country trade statistics assembled by the US Department of Commerce are not seasonally adjusted, all subsequent comparisons are presented on the basis of a comparable seasonal comparison from the first quarter of 2009 to the first quarter of 2012.)

Not surprisingly, Asia led the way, accounting for 33% of the total US export surge over the past three years. The biggest source of this increase came from the 15-percentage-point contribution of Greater China (the People’s Republic, Taiwan, and Hong Kong).  Needless to say, China’s unfolding slowdown – even under the soft-landing scenario that I still believe is most credible – is taking a major toll on the largest source of America’s export revival. The remainder of the Asian-led US export impetus is spread out, led by South Korea, Japan, and Taiwan – all export-led economies themselves and all heavily dependent on a slowing China.

Latin America provided the second-largest source of America’s export resurgence, accounting for another 28% of the total gains in US foreign sales over the past three years. Brazil and Mexico collectively accounted for 19 percentage points of that increase. Growth in both economies is now slowing significantly, especially in Brazil. But, given the close linkages between Mexican production and US consumption (which is now sputtering again), any resilience in the Mexican economy could be short-lived.

Finally, there is the sad case of Europe, which has accounted for 21% of the cumulative growth in US exports over the past three years. Here, the US Commerce Department statistics are not as helpful in pinpointing the source of the impetus, because only a partial country list is published. What we do know is that the United Kingdom, Germany, and France – the so-called core economies – collectively accounted for just 3.5% of total US export growth since early 2009, with the UK grabbing the bulk of that increase. That suggests that most of America’s European export gain was concentrated in the region’s so-called peripheral economies. And that is clearly a serious problem.

Forecasts are always hazardous, but some “what-if” scenarios shed considerable light on what all of this means for the world’s largest economy. Since the second quarter of 2009, US annualized real GDP growth has averaged 2.4%. With roughly 40% of that increase attributable to exports, that means the remainder of the economy has grown at an anemic 1.4% pace.

Under a flat-line export scenario, with no rise in US exports, and if everything else remains the same (always a heroic assumption), overall real GDP growth would converge on that 1.4% bogey. That is a weak growth trajectory by any standard – likely to result in rising unemployment and further deterioration in consumer confidence.

Alternatively, in a moderate export-downturn scenario, with real exports falling by 5% over a four-quarter period, real GDP growth could slip below the 1% “stall speed” threshold – leaving the US economy vulnerable to a recessionary relapse. By way of reference, the assumption of a 5% export downturn pales in comparison with the precipitous 13.6% decline in real exports that occurred in 2008-2009. As such, this “what if” is a cautiously optimistic assessment of the downside risks stemming from weak external demand.

All of this underscores one of the more obvious, yet overlooked, implications of an increasingly interdependent world: we are all in it together. The euro crisis is a serious shock, and is now producing ripple effects around the world. Europe is export-led China’s largest source of external demand; as China goes, so goes the rest of China-centric Asia; and, from there, the ripples reach the shores of an increasingly export-dependent US economy. As recent weakness in employment and retail sales suggests, that may already be happening.

Greenspan’s warning in 1998 came at a time when US exports accounted for only about 10.5% of GDP. Today, that share stands at a record-high 14%, as post-crisis America has made a big bet on an export-led revival. The current global slowdown is not on a par with what occurred in the late 1990’s or the more wrenching shocks of 3-4 years ago – at least not yet. But today’s global downturn can hardly be dismissed as unimportant for the US or anyone else.

In an era of globalization, there are no innocent bystanders. There are certainly no oases of prosperity in the face of yet another major shock in the global economy. America’s growth mirage is an important case in point.

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    1. Commentedsrinivasan gopalan

      If internalization of production and services of skilled people helped and are still helping fire America's export Juggernaut, the reasons for its internal restiveness about the problems plaguing the American economy could not be answered with any justification. The free trade bastion which has been the major prop for the erstwhile GATT and its next avatar the WTO at least in its first decade since its advent in 1995 is now a reluctant supporter of the WTO. This is borne out in not sealing a deal to the long-delayed Doha Round of trade talks set off in November 2011As long as this is not recognized and remedied before long, the problems plaguing the developed countries would only persist and worsen further. The global community in general and the United States in particular can no longer afford to keep themselves off from the virtues and the attendant gains of multilateral cooperation in their own enlightened self-interest. It is the lack of perspicacious vision to evolve a collective solution to the global common problems that has been the sole factor in the current shambles in which many advanced countries find themselves with the emerging economies in tow! It is time international cooperation is made feasible in an inter-connected universe where globalization and liberalization had gone too far to effect any unilateral remedy by any one country, however puissant it may be! G.Srinivasan. New Delhi

    2. CommentedProcyon Mukherjee

      I cannot quite agree that exports alone hold the key to the future as we need to look at the quality of this export, how intensive it is in the labor component is also equally important. What we see today is an export of capital, which is fueled by an enormous amount of liquidity in the system.

      The soaring bond prices and near zero yields is as much a reflection of liquidity preference as lack of credible investment option that has a clear future; the range of uncertainty is no way diminished by the flow of money, in fact it is adding to it. But treasury bonds are a different story. Even if I assume that a bulk of the preference for treasury bonds stems from those who want to create insurance for its currency, we have seen actually that these currencies have been depreciating, like the Yuan or the Rupee. This leads one to the stunning inference that America has become the chief exporter of capital to the external world for buying labor (both skilled and unskilled) at the cheapest possible cost. The acceleration of this activity (export of capital and import of labor) effectively boils down to heightened unemployment within the national territory and a downward wage spiral, which is also the very reason why inflation is tamed at its best.

      By higher capital export that is used in cheaper labor imports, we do not see how America will progress. We are adding to labor surplus.

      Procyon Mukherjee

        CommentedJim Nail

        Completely agree, Procyon. Export composition is key. I still maintain that we should focus on net exports rather than on exports per se, anyway. There must be a middle ground that allows global companies to seek low costs, while still allowing broad-based US manufacturing to exist.

        CommentedWilliam Hampton

        I agree. You hit the nail on the head. I would hope that it back fires and these cheap labor sources start becoming serious competitors to our corporations. At least maybe this could cause the reduction of soaring prices. I that unlike labor, big money seems to be unionized, I doubt this will happen.

    3. CommentedWilliam Hampton

      I have a question. If an American company manufacturing from China sells their products to Germany are those products considered exports of American products or Chinese products? How do these products made in China by American companies help the American economy as much as products made in the USA? Where are the materials from and produced that are used to make products made in China by American companies? etc, etc, etc. I do not see any economists talking about this, and how it is affecting this country. It seems to me there should be a distinction between those products made in China and ones actual made in America. Maybe it is not important or I am not reading enough.

        Commentedpeter fairley

        reply to Will Hampton. quote: "the monthly figures for the trade deficit are significantly overstated, says a Federal Reserve Bank economist(1999).

        The U.S. Census Bureau, which is responsible for trade data, says that a major component of the trade deficit called the merchandise trade deficit overstates the gap between imports and exports of goods.

        The Census believes that merchandise exports are probably understated by 3 percent to 7 percent, but possibly as much as 10 percent.
        Since there is no evidence of similar errors in import data, Census estimates the merchandise trade deficit was overstated by as much as 34 percent in 1997.
        Until the Census began basing figures on exports to Canada on that country's import data, in 1990, it was estimated that exports to Canada were understated by as much as 20 percent.

        A major reason the data are flawed is because Census bases merchandise trade figures on the paperwork importers and exporters file with the U.S. Customs Service -- but exporters are not required to file paperwork for shipments valued at less than $2,500. Instead, Census relies on a survey to estimate the fraction of total trade in these small shipments; but the most recent survey was conducted almost 10 years ago.

        Since then, the market share of small shipments has changed relative to large ones, due to such things as the boom in inexpensive air cargo services; but the magnitude of the shift is unknown.

        Source: Joseph A. Ritter, "An Overstated Headline," National Economic Trends, July 199, Federal Reserve Bank of St. Louis

        CommentedKevin Lim

        No simple answer. Here is a primer

        A simple example. If I imported unpainted toy trains into USA from China, and painted/packaged them in USA, its unlikely any body would be willing to certify them made in the USA. Where it gets tricky is where the components are split up and from all over. Say I get thet train wheels from a supplier in Brazil, the chasis from China, and the electronics from Germany, and I assemble them altogether in a plant here in USA. Whether I can label it made in the USA (or China, Germany, Brazil) depends on what are the tariff classifications of the components and the finished product under the Harmonised System.

        It can get pretty complex and its a fertile ground for litigation as manufacturers try to squeeze into a domestic origin for tariff purposes.

        Sounds confusing? It is.

    4. CommentedManmohan Manu

      Good article . I work for McGladrey and there's a guide on exporting on the website ( ) with insights from surveys and industry experts .