THE AVENUE MARCH 16, 2010
This past summer, National Economic Council Director Larry Summers laid out a new vision for the next American economy: one that is export-oriented, low-carbon, innovation-fueled, and opportunity-rich. Dr. Summers mentioned the export goal at the December job summit export session and President Obama made it clear in his State of the Union this year:
“We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.”
Following on this commitment, the president launched the National Export Initiative last week at the Export-Import Bank’s annual conference. This is a rather typical export promotion policy, focused on increased trade financing, advocacy, and assistance for American businesses, especially small- and medium-sized businesses interested in expanding their markets abroad. The promotion of services exports is a new addition, reflecting the increased importance of service exports in U.S. trade.
Whether this export initiative will be successful is hard to tell. This policy is the last in a series of statutes and executive orders intended to promote U.S. trade. The Omnibus Trade and Competitiveness Act of 1988 and the Export Enhancement Act of 1992 are some of the existing laws governing U.S. export policy. President Clinton created a Trade Promotion Coordinating Committee in his first presidency. It is difficult to see the difference in the newly created Export Promotion Cabinet.
Recent research coming out of the World Bank shows that export promotion agencies on average have a significant impact on the volume of exports. However, the U.S. case is different, given that it proposes a decentralized network of initiatives across agencies and not a single export promotion agency. It will be difficult to determine the budget dedicated for export promotion activities or evaluate the effectiveness of this export promotion network.
Leaving these governance issues aside, the effectiveness of the initiative may be hamstrung in that it doesn’t deal clearly with the elephant in the room: the undervalued Chinese currency.
More U.S. exports help reduce the trade deficit that eats away from the domestic output. About half of the U.S. goods trade deficit in January 2010 was with China. Service exports will not help in the short term; although the U.S. has consistently a trade service surplus with China, U.S. services balance cover only 2 to 4 percent of the goods trade deficit. Even during these last two years of recession, the U.S. trade deficit is a mirror image of the Chinese trade surplus, showing the trade aspect of Chimerica.
Note: the amounts are in current dollars. The U.S. trade deficit numbers are seasonally adjusted. There is no information on seasonal adjustment for the Chinese numbers.
The three-month moving averages shown are computed by summing the subject month, the two prior months, dividing by three and showing the average at the end month of the period. A moving average is useful in smoothing the volatile trade data so that trends can better be discerned. Sources: U.S. Bureau of Economic Analysis and the Chinese General Administration of Customs.
President Obama mentioned at the launch of the export initiative that "China moving to a more market-oriented exchange rate will make an essential contribution to that global rebalancing effort.” Several days later, the Chinese premier, Wen Jiabao retorted that “I don't think the renminbi is undervalued.” The U.S. is not alone in its problems with the Chinese currency. One day later, the Japanese Senior Vice Finance Minister Yoshihiko Noda urged the Chinese to revalue their currency.
The United States should not be shy about dealing with this issue, given that it is not going to go away on its own. As Paul Krugman explained yesterday in his NYT op-ed, the fear that the Chinese will sell suddenly large amounts of U.S. assets is unjustified. After all, this would depreciate the dollar (and make U.S. manufactured goods more competitive), while depressing the value of Chinese foreign holdings, a strategy not favorable to China.
The National Export Initiative is a good start, especially for raising awareness about the importance of exports at the state and local level. But it will not cut deep into our trade deficit as long as the Chinese renminbi remains undervalued.