CAMBRIDGE – The decade that preceded the 2008 financial crisis was marked by massive global trade imbalances, as the United States ran large bilateral deficits, especially with China. Since the crisis reached its nadir, these imbalances have been partly reversed, with America’s trade deficit, as a share of GDP, declining from its 2006 peak of 5.5% to 3.4% in 2012, and China’s surplus shrinking from 7.7% to 2.8% over the same period. But is this a temporary adjustment, or is long-term rebalancing at hand?
Many have cited as evidence of more durable rebalancing the “onshoring” of US manufacturing that had previously relocated to emerging markets. Apple, for example, has established new plants in Texas and Arizona, and General Electric plans to move production of its washing machines and refrigerators to Kentucky.
Several indicators suggest that, after decades of secular decline, America’s manufacturing competitiveness is indeed on the rise. While labor costs have increased in developing countries, they have remained relatively stable in the US. In fact, the real effective exchange rate (REER), adjusted by US manufacturing unit labor costs, has depreciated by 30% since 2001, and by 17% since 2005, suggesting a rapid erosion of emerging markets’ low-cost advantage – and giving America’s competitiveness a substantial boost.
Moreover, the shale-gas revolution in the US that took off in 2007-2008 promises to reduce energy costs considerably. And America’s share of world manufacturing exports, which declined by 4.5 percentage points from 2000 to 2008, has stabilized – and even increased by 0.35 percentage points in 2012.