For decades, consumer spending and investment have been the main drivers of U.S. growth. However, net exports (exports of goods and services minus imports of the same) have become an important contributor to growth in recent years, as the growth of foreign demand has outstripped that of U.S. domestic demand and the dollar has weakened. With these trends projected to continue, net exports will continue to be crucial contributors to recovery. However, President Obama’s recently announced target of doubling exports in the coming five years appears overly ambitious based on past standards. Though policy changes can contribute to higher exports, it is crucial that the United States avoid the impression of taking steps that hurt its neighbors.
Why Exports?
Faster growth of U.S. exports would help compensate for the sluggishness of domestic demand, and also help ensure that the current account deficit, which declined sharply since the crisis outbreak, remains at manageable levels.
Domestic demand, the main driver of previous expansions, decelerated since 2004, and declined sharply over 2008-2009. As household savings rates recover from record lows, consumer spending is projected to grow only 2 percent in 2010 and 2.4 percent in 2011, constrained by a weak labor market, lower housing wealth, and tight credit. Spare capacity left over from the past two years’ large output decline may constrain growth in investment demand. While private investment contributed to GDP growth in the second half of 2009, inventory changes accounted for most of the improvement. Government spending, which added modestly to GDP growth in 2009, will grow slowly in 2010 and its growth will taper off as stimulus is withdrawn.
Exports provided a crucial boost to an ailing economy, accounting for about 2 percentage points of the fourth quarter’s 5.7 percent GDP growth.
In contrast, trade has contributed significantly to GDP growth in recent years. While U.S. net exports had subtracted about 0.5 percent from real GDP growth each year since the early 1990s, they added 1 to 1.5 percent to GDP growth each year from 2007 to 2009. During the past decade, the share of U.S. GDP accounted for by exports has risen from 10.9 percent in 1998 to 13.0 percent in 2008. In the five years before the crisis, real exports of goods and services increased by over 30 percent cumulatively.
Most recently, exports provided a crucial boost to an ailing economy, accounting for about 2 percentage points of the fourth quarter’s 5.7 percent GDP growth. Exports rebounded from very low crisis levels, growing at a nearly 18 percent annual rate in the third and fourth quarter of 2009. While exports may not maintain that remarkable pace, they are likely to remain a big part of the recovery.
Moreover, as domestic demand has slowed, so have imports. Their share in GDP has declined from an average of 16 percent in the five years before the crisis to about 14 percent in 2009 and their 10.5 percent growth in the fourth quarter of 2009 lagged that of exports. Import shares are likely to remain below their pre-crisis levels in 2010 and 2011.
Foreign Demand and the Weak Dollar Spurred Export Growth
Strong foreign demand and the depreciation of the dollar contributed to the strong performance of U.S. exports in the pre-crisis years. Expansion of demand in major U.S. export markets (estimated by the real GDP of the top ten U.S. export markets, which accounted for more than 60 percent of U.S. goods exports in 2009) grew three times faster on average than U.S. domestic demand from 2006 to 2008. Strong growth in the country’s major trading partners was led by the fast-growing emerging markets, such as China, but also included Japan and Europe. Goods exports to China expanded by about 70 percent from 2005 to 2008, compared to an increase of 20 to 26 percent to Canada, Mexico, and Japan.
Additionally, the dollar’s sharp decline since 2002 made U.S. goods cheaper in world markets, contributing to the improvements in net exports. According to the Peterson Institute, a one percent decline in the dollar’s real effective exchange rate translates into a $20 billion increase in U.S. exports after two to three years. From 2002 through 2008, the dollar depreciated by 18 percent in real effective terms; over the same period, real exports of goods and services grew by about 50 percent, reaching $1.6 trillion. Since hitting a five year high in March 2009, the Dollar Index, a trade-weighted basket of currencies of the United States’ biggest trading partners, has depreciated about 10 percent.
Doubling Exports in Five Years Unlikely
President Obama’s goal of doubling exports in five years would require exports to grow about 15 percent annually, much faster than the fast pace seen before this recession and more than three times the rate of projected global GDP growth in the coming years. During the past 25 years, it took an average of more than 10 years for exports to double, with the fastest doubling of U.S. exports, which occurred after the early 1980s recession, taking 8 years.
Doubling exports over five years against a background of moderate growth in world demand would likely require further sharp dollar depreciation. Goldman Sachs estimates that, even with above-consensus global growth of 4.5 percent over the next five years, the dollar would need to depreciate by about 30 percent in inflation-adjusted terms for U.S. exports to double. Most forecasts are projecting a much smaller depreciation, however, with the EIU, for example, predicting that the dollar will depreciate by about 10 percent in real effective terms in the coming four years. Moreover, in recent weeks, the eruption of the sovereign debt crisis in the European periphery—an issue unlikely to be resolved quickly—has led to a flight to the dollar, and the U.S. Dollar Index has risen about 7.5 percent since November.
During the past 25 years, it took an average of more than 10 years for U.S. exports to double, with the fastest doubling taking 8 years.
Still, while doubling exports in the coming five years does not appear achievable, U.S. exports are likely to maintain a strong upward trend, and to rise sharply as a share of GDP. They will continue to play a crucial role in the U.S. recovery.
Policy
The United States is the world’s largest economy and leads the G20. Accordingly, it is vital that policies that promote its exports not be seen as a “beggar-thy-neighbor” initiative, but rather as an attempt to rebalance its economy in the medium term, and in a way that enhances stability in everybody’s interest.
With this caveat, what can the United States do to support exports? Expansionary U.S. monetary policy is currently helping to keep the dollar low. Growth and inflation remain the focus of monetary policy, however, and economic recovery and inflation risk will eventually dictate that interest rates rise. Direct intervention to depress the dollar is neither desirable nor likely to be successful on a sustained basis.
Pressing for a gradual appreciation of the yuan is desirable but the impact on the United States will not be as large as is sometimes claimed.
Pressing for a gradual appreciation of the yuan is desirable and would probably help China rebalance its economy to favor consumption, but the impact on the United States will not be as large as is sometimes claimed, since China only attracts 7 percent of U.S. exports.
On the other hand, reducing the budget deficit once the recovery is on firmer footing will help contain domestic demand and lower long term interest rates, changes consistent with a lower dollar, lower imports, and higher exports. This policy would also be welcome in capitals around the world as promoting stability. The way fiscal consolidation happens is also important; for example a higher gasoline or energy tax would help raise large amounts of revenue, reduce imports directly, and contribute to the global commons by reducing carbon emissions. A VAT would exempt exports and moderate consumption overall. If appropriately graduated, as is the case in many other countries, a VAT could be less regressive and reduce imports of luxury automobiles and other high-end goods.
Beyond fiscal policy, other measures are likely to have only modest effects, and mostly in the very long run. Increasing trade finance facilities provided through the Import-Export Bank could help increase exports in some sectors. Ratification of the completed Panama, Korea, and Colombia bilateral trade agreements is desirable and would help boost exports to those countries, but they represent only about 4 percent of U.S. exports and it would also imply importing more from them. Concluding the diluted Doha agreement is highly desirable from a global perspective as well, but would also help only marginally and only after some years. Tax credits that favor research and development and investment in education would also only have an impact in the very long run. Measures that facilitate the temporary movement of labor would enhance U.S. competitiveness and would also be welcome by the global community.
Uri Dadush is a senior associate in and the director of Carnegie’s International Economics Program. Shimelse Ali is an economist in Carnegie’s International Economics Program.
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