The case for U.S. exports
Kemmsies says one of the best bets for growing exports is down on the farm.
As noted in previous columns, the United States is becoming increasingly import-dependent, which given its substantial foreign trade deficit will require exports to continue to grow faster than imports as has been the case for the last few years.
If this fails to happen then the U.S. dollar is likely to resume weakening to the point where the countries exporting goods to the United States will be compelled to let their currencies appreciate. That would increase the price of U.S. imported goods. As the country becomes increasingly import-dependent and imported goods' prices increase, inflation would also increase. This would occur as baby boomers retire to a fixed-income lifestyle. With these trends in place it is no surprise policymakers are developing programs to stimulate U.S. exports.
Increasing the competitiveness of U.S. exports is much easier said than done. Since the United States is becoming more import-dependent, it is likely not a competitive exporter of those types of goods. The key question then is for what types of exports can the United States compete?
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The answer lies in the economics concept of comparative advantage. In the long run economies tend to export things where it has a relative advantage and import those things where they have a relative disadvantage.
The main reason the United States is becoming import-dependent is that it has an older population that is growing its expenditures on services faster than on manufactured goods. It would seem the United States would export its extra production to countries with younger populations where spending on goods is growing at a fast clip, such as China, which for the first time is reporting higher domestic car sales than the United States, and Brazil which recently overtook Germany as the world's fourth-largest automobile market. However, American workers are older and earn more than most workers in emerging market economies.
Even if freight movement was costless, the United States could not export goods at prices that emerging market consumers can afford. It is better to move the factories to emerging markets locations and export from there to the United States. The takeaway from that is U.S. goods manufactured in a labor intensive fashion are unlikely to be competitive.
However, long-term interest rates on U.S.-issued government bonds are lower than those issued by most emerging market governments. This means the cost of capital is lower in the United States and goods that are produced in a capital-intensive as opposed to labor-intensive manner are likely to be competitive.
There are many goods that are produced in a capital-intensive manner ' too many to list here. One of the top categories, however, is agricultural products. Agricultural production increasingly uses more capital and less labor as evidenced by the ongoing long-term U.S. trend of rural to urban migration. Agricultural production on very large farms that use a lot of machinery allows economies of scale to be achieved that are not possible for the labor-intensive small farms that are more typical of emerging market economies. On a macroeconomic basis then, agricultural goods are very likely to be a major driver of export volumes.
There are at least two other reasons why agricultural goods fit the bill. Water is a major factor of production. Although potable water is becoming globally less abundant, the United States has a relatively more abundant supply of water for the foreseeable future. To a certain extent, agricultural products are a value-added way of exporting water.
The United States may not be the information and communication technology leader that it once was, however, it is still the leader in biotechnology. A significant amount of research and development has gone into genetic modification of food crops to improve their suitability for certain uses (such as increasing the oil content of soybeans), their resistance to pests and to reduce the amount of water required to grow the crops. These advantages also improve the competitiveness of downstream products such as meat exports.
Genetically modified crops require more careful handling than has historically been the case for bulk agricultural products. This is partly due to maintain the quality of the grain or oil seed. Often times genetically modified crops are containerized for this purpose. While containerizing crops is more expensive than bulk handling, the ability to manage the quality of the product and process smaller orders allows shippers to compensate for the higher cost.
The problem is there is a mismatch between the locations where containers tend to collect (urban areas where most imports are destined) and where they are needed (rural areas in the case of agricultural goods). However, there are logistics options available to resolve this.
It is no surprise policymakers are more focused on U.S. export competitiveness compared to a decade ago. Hopefully the export initiatives will be accompanied by investment in the infrastructure necessary for them to be successful including lower energy costs. If so, the outlook for U.S. trade volumes and economic health will be a lot brighter.
Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or e-mail, [email protected].