I recently bought a superb Canadian Seaquest ocean-going kayak on the internet and had it shipped to my home in Hong Kong. I had sought quotes from 17 suppliers: eight in the US, four in Canada, three in the eurozone, one in the UK and one in Australia. All the Canadian, eurozone and Australian producers sent quotes promptly. None in the US did.
The kayaks of the US producers were just as good as the others, so I kept on bombarding them with emails. Finally two replied. None was interested in overseas business. They didn’t know how to do it – packaging, shipping, customs documentation, insurance and freight forwarding was beyond them.
My experience confirmed my view that US companies are poor exporters. That’s a big reason why the US external deficit has been relatively insensitive to a falling dollar.
What price benignity?
What then of those, including Federal Reserve chairman Alan Greenspan, who believe the US can achieve a benign adjustment to the deficit by a gradual fall in the dollar? I believe they are mistaken. That’s because the interrelationship between the global system and the US economy has undergone fundamental change.
For one thing, unlike in the past, no-one now outside the US would ever think of buying a US manufactured product, except in IT.
Another structural change since the 1980s has been that the US has become a great exporter of its own factories. This causes the interests of US Inc and the US state to diverge in ways that affect the dollar.
Then there are the specific skills of international trading. My US kayak producers clearly do all their business in US dollars. But if their production lines moved offshore, not only would more of their sales and costs be in other currencies, but also currency decisions would become integral to their operations.
So successful corporate globalization increases the US external deficit, while decreasing demand for the dollars that need to be reinvested in the US in order for the trade deficit to be financed cheaply.
Even US leadership of IT might be a perverse benefit. Many products that the users of technology make have a much longer high-value-added life cycle than the IT products used to make them. The result is a net competitive advantage to the users of IT over the producers of IT. This is one of the reasons why Europe is gaining market share over the US in global markets for manufactured products despite the weak dollar.
And then there is China, which has eclipsed Japan as the most challenging trade partner for the US. China’s unit labour costs are just 2% to 3% of the OECD’s. And its exports are moving up-market quickly and so becoming less sensitive to revaluation of the renminbi.
So there are lots of reasons to expect that a falling dollar will have a limited impact on correcting the US trade deficit. But does the US trade gap really matter? After all, foreigners have been willing to recycle their trade surplus dollars back into the US and so keep the whole merry-go-round turning.
But this only worked because the dollar has been the preferred currency of all international business. Now a credible alternative is emerging in the euro. US corporate treasurers will switch to euros or yen if it pays to do so. About half of Japan’s exports and 80% of its exports to China are now invoiced and transacted in yen compared with 10% five years ago. And Russia is increasingly invoicing oil in euros. Even central bankers are switching to holding more non-dollar cash.
All this means that the US external account equation has changed so that its exports are less responsive to a falling dollar and imports more sensitive to domestic incomes.
Irrational optimism
The optimists hope that self-sustaining economic recoveries in Europe and Japan will narrow the growth differential to the US and so boost demand for US exports. But the acceleration of growth needed from the rest of the OECD to get the US current account deficit down to, say, 2.5% of GDP is awesome. US export growth would have to be more than four times the average achieved in the past 10 years. The alternative is a US recession to reduce imports.
The fundamental problem is not the dollar’s external value but over-indebtedness of US households and their excess consumption, which increasingly depends on Asian central banks. These have reached the limits of what they can absorb. International corporate treasurers’ appetite for dollars is also waning.
The outcome from a falling greenback is not so much a speedy and smooth adjustment of the current account deficit as a dollar crash that will cause US asset prices to collapse and rupture the bubble economy.
