Good Year for Trade Won’t Help the Economy

Economic Forecasts

Good Year for Trade Won’t Help the Economy

A big jump in exports will be offset by a spurt in imports.

Rising trade won’t boost growth. U.S. exports will expand by 14% this year, a welcome increase after last year’s drop of 15%. But as the economy in the U.S. picks up, imports will also bounce back more strongly -- up 14% after plunging 23% in 2009.

While exports and imports will grow at the same rate, the latter is growing from a much larger base. The result will be a net negative impact. Increased demand for imports of oil, machinery, consumer goods and more will outweigh rising U.S. sales made to other countries. For the first time since 2006, the trade gap will widen, to $430 billion, or 2.9% of gross domestic product.

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Franklin Vargo, vice president for international economic affairs at the National Association of Manufacturers, notes that the U.S. is primarily a capital goods exporter and a consumer goods importer. At this point in the recovery, that specialization puts the U.S. at a structural disadvantage. “Consumer goods have a shorter production and delivery time than capital goods do,” says Vargo. “We’ll begin to see [demand for] consumer goods perk up, perhaps not robustly, but [it] will pick up. Capital goods depend on improving productivity or expanding capacity of factories overseas.”

Overall foreign demand for U.S. exports will be a major factor. Gains in sales to emerging markets will exceed losses from developed markets, but just by a bit. Collectively, the euro zone, Japan and the United Kingdom absorb just below one quarter of U.S. goods exports. All three economies are expected to remain mired in subpar growth. Indeed, the U.K. and parts of the euro zone will be lucky if they avoid tipping back into recession. By contrast, the U.S.’ top emerging markets in Asia and in Latin America -- China, Brazil, India, Mexico and South Korea, which also absorb a combined total of roughly a quarter of U.S. goods exports -- will all enjoy modest to strong recoveries.


Intrafirm trade will also play a big role in limiting any lift exports might provide the overall economy. In the 16 years since the North American Free Trade Agreement went into effect, many U.S. manufacturers have integrated their North American supply chains. This has helped firms reduce the cost of doing business, which in turn benefits U.S. consumers through lower prices. But it also means that assembly work that used to be performed in the U.S. is now done in Canada or Mexico.

The auto industry is perhaps the most emblematic of both the positives and the negatives of such integration. Charles W. McMillion, president and chief economist of MBG Information Services, cites the example of Los Angeles. Auto plants in and around L.A. used to assemble entire cars and trucks, installing all key components from engines to transaxles. Those factories that sent vehicles elsewhere for final assembly would ship them to destinations within the U.S., such as Ohio. But the units themselves would be exported as finished products. Now, such L.A. plants send the frames to maquiladoras in Mexico for finishing, then reimport the completed vehicles to sell in the U.S. market.

“It’s especially important to count the value of it when you ship it across [the border] as an export but also when you ship it back as an import,” says McMillion. Because the value of the finished imports exceeds that of the unassembled exports, “this is a case where exports are an indication of lost jobs, rather than adding jobs.”

Protectionism will get a lot of attention but have little real effect on trade. Edward Alden, trade expert at the Council on Foreign Relations, says, “The surprising thing so far is how little protectionism there’s been,” despite widespread fears that that the recession might unravel the world trading system. According to a recent study by the Organization for Economic Cooperation and Development, trade restrictions imposed from October 2008 to October 2009 affected less than 1% of the value of global imports, and the early indications are that new trade curbs are on the decline.


The one potential area of concern is a brewing fight over China’s currency. The Treasury Department is due to make its semiannual report to Congress on currency manipulation on April 1. If the Obama administration declares that China is deliberately keeping the value of its currency low in order to subsidize its exports, Congress will demand it take action -- ranging from imposing antidumping and countervailing duties on Chinese imports to filing a dispute with the World Trade Organization. If it decides not to call China out in this fashion, support will build on the Hill for legislation that would effectively force the White House to take such action. And while many in Beijing recognize that the country will eventually need to allow the yuan to strengthen, China will resist any outside pressure to do so.

Sales of capital goods and supporting services will provide the biggest lifts. Companies that will benefit most include manufacturers of information technology, electronics, chemicals, heavy equipment and medical technology, along with providers of business services, engineering, wholesale trade and transportation. Exports of food and beverages will also show improvement as living standards in developing countries rise further.

Regionally, the Northwest will gain most. California may rank highest in the nation in terms of the total value of its exports, but measuring exports as a share of state GDP, Washington state wins the crown at 20% compared with the Golden State’s 6%. And unlike California, Washington runs a trade surplus. Civil aircraft and aircraft parts, courtesy of Boeing’s plants in Everett and Renton, will make up half the state’s foreign sales, with Chinese carriers its top customers. Oregon will also do well, thanks largely to its semiconductor and wheat exports. Elsewhere, demand for oil products and drilling gear will benefit Texas, while coal will lift West Virginia’s prospects. And Farm Belt states will do well exporting soybeans and corn.

The states most vulnerable to weak sales abroad will be South Carolina, Alabama and Utah. A fall in European demand for luxury cars will hurt South Carolina and Alabama, which house BMW and Mercedes-Benz plants, respectively. Utah’s top customer is the ailing U.K., which buys gold, computers, electronics and aircraft parts from the Beehive State.