export is the way out - peter balazsik

8/3/2019 Export is the Way Out - Peter Balazsik

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PTER BALZSIK

Export Is The Way

OutBoosting exports can be the solution forthe U.S.s current economic problems

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11/30/2010

Local Conference of Scientific Students Workshops


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[Export Is The Way Out] [2010]

I had a trade deficit in 1986 because I took avacation

in France. I didnt worry about it;I enjoyed it.

Herbert SteinChairman of the Council of Economic Advisors

under Presidents Nixon and Ford

Peter Balazsik Page 2


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Table of Contents

Introductionpage 4

Financial Crisispage 6

Policy Responsespage 8

Obama: export is the answerpage 13

Balance-of-Paymentspage 14

Macroeconomic accounting identitiespage 14

Reducing the Trade-deficitpage 18

Currency Depreciationpage 18

The muting effect of the world economypage 22

Lack of substitutespage 22

Protectionismpage 23

Restricting Foreign Ownership of Domestic Assetspage 25



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Unemployment and Current-Account Deficitpage 25

Conclusion page 27List of References

page 29

Introduction

As we all know too well, the world has been going through very hard

times in the last 3 years. It was triggered by a liquidity shortage in the

United States banking system, however if we wanted to name the affected

areas and markets, the list would go on forever. It resulted in the collapse

of key businesses, bailouts, significant drop in economic activity, and

declines in consumer wealth estimated to be hundreds of billions of U.S.

dollars.

Due to the complexity of todays economy governments, regulatory bodies

and other decision makers have had to face unprecedented challenges.

They have to consider factors that they never had to before. Markets and

economies are highly interrelated; the actions of one participant might

have serious effects on the others.

As the United States is one of the worlds superpowers, its policy

actions set the agenda for the global economy. Its economic decisions

prognosticate the direction in which economic policy will be heading in the

immediate future. And the world is closely watching now, because winds

seem to be changing: the greatest advocates of free trade might start

using the tools of protectionism; the greatest domestic consumption

fuelled economy aims to be a net exporter. Americas leaders see exports

as the remedy for the problems they are facing. But, can a country with

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Financial Crisis

As the main focus of this paper is to prove or confute that a reduced

trade deficit or a positive trade balance can be the remedy for the United

States economic problems we shall see what these problems are. We shall

start with a brief analysis of the events that led to the current situation,

and the changes in the key economic indicators based on which economic

performance has been evaluated.

The crisis officially began in September 2008 with Lehman Brothers

one of the worlds biggest financial services provider- declaring

bankruptcy. The events that followed had very significant impacts on the



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down by almost 50% at 735.09 in February 2009 and it is still far from the

historical levels. (Between 1,100 and 1,200 in November2010) (Yahoo!

Finance;2010)

Total home equity - which consists of household asset, retirement assets,and investment assets experienced a serious drop as well from $13

trillion to $8.3 trillion and it is recovering very slowly.(Altman; 2009)

The most important indicator of all is the unemployment rate. I

consider it the most important, because the Obama administration used it

as a tool to win the elections; the result is that all economic policy actions

of today are judged by their effect on unemployment. It was 4.6% in 2007

then in 2009 it reached 10%, which is a record only preceded by

unemployment levels of 1982. At the time of this papers completion it is

9.6%.So these are the problems the US government has been facing; we

shall have a look at their responses with special focus on the monetary

policy actions conducted by the Federal Reserve. Only responses after

September 2008 will be discussed, because the economic policies that the

US government is applying today are the results of these measures.

Policy Responses

Starting in 2007, the monetary authorities acted quickly to introduce

measures that respond to the demand by financial institutions for

increased access to capital. The Federal Reserve relaxed the terms of

access to liquidity and lowered the interest rates significantly. It proved to

be a suitable measure to avoid liquidity problems in 2007, however when

things went really wrong in 2008 the US lacked latitude. In September

2008 the discount rate was 2%; it was gradually decreased to 0.25% by 16

December 2008 in three steps, however a decrease of this scale could not

reach the desired effect. After this point it could not be lowered anymore,



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so the FED was without one of its most important monetary tool.

(Federal Reserve Bank of New York; 2010)

The first emergency response was carried out within the framework

of the Emergency Economic Stabilization Act of 2008 and was called theTroubled Assets Relief Program, commonly referred to as TARP. Although

the Fed was only a facilitator in this program I consider it as a monetary

policy tool, because the only goal was to increase the money supply in the

economy, no traditional government spending was involved. It was signed

on October 3, 2008 by George W. Bush with the aim to allow the United

States Department of the Treasury to purchase or insure up to $700 Billion

of troubled assets. These are illiquid assets held by banks and other

financial institutions that are difficult to value. It intends to improve the

liquidity of these assets with the use of secondary market mechanisms,

helping participating institutions to stabilize their balance sheets and avoid

having to write off more losses. The program was designed to protect the

taxpayers money in the following way: the Treasury has the possibility to

profit through its ownership of the assets. Financial institutions benefiting

from government assistance and aid can recover to their former strength

increasing the value of the assets purchased by the Treasury. These

assets can then be sold with a positive return.

The other very important goal of TARP that was very heavily

communicated - was to restore the lending activity of the banks to

consumers and businesses. Here is how Ben Bernanke, Chairman of the

Federal Reserve sees it:

I believe if the credit markets are not functioning, that jobs will be lost,

the unemployment rate will rise, more houses will be foreclosed upon,

GDP will contract, that the economy will just not be able to recover in a

normal, healthy way, no matter what other policies are taken. I therefore

think this is a pre-condition for a good, healthy recovery by our economy.

These institutions provide credit for homeowners. They provide credit for

businesses. They create jobs.(Marshall; 2009)



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When a country has given exclusive rights to its independently

operated central bank to print money, they have to pay their debt or

increase money supply from the currency that is already in circulation. So

first they have to issue new bonds and sell them to central banks toacquire the necessary funds. The central bank needs to conduct an open

market purchase to acquire the newly issued bonds. The money to finance

this purchase is created by the central bank electronically out of nothing.

When the bonds are purchased from the public, the public is left with an

increased supply of capital.

The United States completed its first round of quantitative easing

between December 2009 and March 2010 during which the Fed $1.7

trillion of Treasury debt, mortgage-backed securities and debt backed by

government-sponsored enterprises. This was a shock therapy, which

played a very important role in the economic stabilization. Its healing

effects were obvious even at its announcement before the actual

purchases started.

However even after all these incredibly high amounts of capital

pumped into, the economy still does not seem to recover at the pace it

should. As Ben Bernanke highlights, besides very slow growth, high

unemployment and low inflation rate are the problems:

The unemployment rate is still almost 10 percent, inflation is quite low,

and the Federal Reserve has the responsibility ... to do our part to help the

economy recover and make sure that jobs come back to the United

States," (Cooke; 2010)

The main problem is that the capital that has been pumped into the

economy stays in the financial sector and does not go to consumers and

most importantly to businesses which would then be able to expand their

operations, buy other companies, conduct more economic activities, and

with this: create more jobs. Banks can borrow capital from the Fed at 0-

0.25%. Once they have this excess capital they can decide where to

allocate or invest it. They could pass this money on to businesses that are



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starving for liquidity, but they consider this too risky. Instead what they do

is they invest it into US Treasury bonds. Long-term bonds yield about 2%,

so the banks make some profit on the deal. They do this without taking

any risk, because Treasury bonds are underwritten by the full faith andcredibility of the US Government, so they are completely safe. Businesses

that the bank might lend to are in the economy; the economy is

deteriorating, so they are not safe. By doing this, banks actually stop the

flow of capital from the Fed to the economy. (Marketplacevideos; 2008)

Based on what Fed representatives are saying the second round of

quantitative easing is being implemented to change this situation. The

more demand Bernanke creates for the Treasury bills, the lower their yield

becomes. With the yield going down there will be less incentive for banks

to purchase bonds with their excess capital and they are more likely to

lend it to businesses.

We shall analyse what Ben S. Bernanke said about the Federal

Reserves program in an op-ed published in The Washington Post on 4

November 2010. He mentions two economic indicators that justify the

further implication of expansionary monetary policy.

The first problem he mentions is unemployment being too high:

Unfortunately, the job market remains quite weak; the national

unemployment rate is nearly 10 percent, a large number of people can

find only part-time work, and a substantial fraction of the unemployed

have been out of work six months or longer. The heavy costs of

unemployment include intense strains on family finances, more

foreclosures and the loss of job skills.

The second aspect the Feds decision is based on is inflation being too low:



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Today, most measures of underlying inflation are running somewhat

below 2 percent, or a bit lower than the rate most Fed policymakers see

as being most consistent with healthy economic growth in the long run.

Although low inflation is generally good, inflation that is too low can poserisks to the economy - especially when the economy is struggling. In the

most extreme case, very low inflation can morph into deflation (falling

prices and wages), which can contribute to long periods of economic

stagnation.

So according to the Chairman these monetary policy tools are

implemented to fight unemployment and to generate inflation necessary

for economic recovery and growth. As it can be expected the policy

measures have their fair number of critics. The following lines from Ben

Bernankes article quoted above particularly attracted a great amount of

criticism:

Our earlier use of this policy approach had little effect on the amount of

currency in circulation or on other broad measures of the money supply,

such as bank deposits. Nor did it result in higher inflation

The question arises from many that if the first $1.7 trillion as admitted by

Bernanke himself did not do much good, why would another $600 billion

help? (Bernanke; 2010)

Obama: export is the answer

Many see the Quantitative Easing 2 as an element in Obamas plan

introduced in March 2010 to double exports in the next five years. QE2 is

set up to create jobs and some inflation. One of the risks of using this

monetary policy measure is creating too much inflation. Is it possible that

too much inflation and with this a weaker dollar favorable for export is

the primary goal?

On 11 March, 2010 President Obama ordered an all-out effort by the U.S.

government to increase exports to increase the number of jobs.



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"This morning, I signed an executive order instructing the federal

government to use every available federal resource in support of that

mission,"

As part of his initiative, he also created the Export Promotion Cabinet, the

members of which will be representatives from the departments of

Agriculture, Commerce, Labor and State. This Cabinet will be the central

body to help Obama execute his plan of doubling U.S. exports in the next

half a decade:

"We are at a moment where it is absolutely necessary for us to get beyond

those old debates. . . . Those who once would oppose any trade

agreement now understand that there are new markets and new sectors

out there that we need to break into if we want our workers to get ahead,"

(Weber; 2010)

Balance-of-payments

The primary goal of this paper is to analyze what steps could be taken in

order to achieve U.S.s plan of boosting exports by examining all the

options the government has at its hands to influence the balance-of-

payments. It will take into account the possible economic consequences of

these feasible political measures and take sides on whether boosting

exports and achieving a trade surplus can bring the desired economic

outcomes for the U.S. and whether it is the right policy to follow.



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We shall begin with understanding what the balance-of-payments is and

how it is built up. Simply put, it is an accounting statement that

summarizes all the economic transactions between residents of the home

country and residents of all other countries. These transactions includetrade in goods and services, transfer payments, loans, and short- and

long-term investments.

There are three balance-of-payments categories. The current account

records flows of goods, services, and transfers. The capital account

shows public and private investment and lending activities; and the

official reserves account measures changes in holdings reserve assets

such as gold and foreign currencies by official monetary institutions.

The balance-of-payments statement is based on double-entry

bookkeeping; every economic transaction recorded as a credit brings

about an equal and offsetting debit entry and vice versa. According to

accounting convention, a source of funds (either a decrease in assets or

an increase in liabilities) is a credit, and a use of funds (either an increase

in assets or a decrease in liabilities or net worth) is a debit.

Macroeconomic accounting identities

There is a set of macroeconomic accounting identities that link domestic

spending and production to savings, consumption, and investment, and

hence to the capital-account and current-account balances. By these

equations we can identify the links between the U.S. and world economiesand assess the effects of international monetary policies on the domestic

economy, and vice versa.

It begins with the observation that national income (or national product)

is either spent on consumption or saved:

National Income = Consumption + Savings (#1)



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National expenditure (what the nation spends on goods and services)

can be divided into spending on consumption and spending on real

investment. Real investment means plant and equipment, research and

development, and other expenditures to increase the nations productivecapacity. The equation is the following:

National spending = Consumption + Investment (#2)

Subtracting #2 from #1 will result in a new identity:

National Income National Spending = Savings Investment (#3)

Consequently if the nations income exceeds its spending, savings will

exceed domestic investment and the result is surplus capital. The surplus

capital must be invested in another country, because if it was invested

domestically there would not be any surplus. A country that produces

more than it spends will save more than it invests domestically and will

have a net capital outflow. This capital outflow will appear as a capital

account deficit (in some combination) and an increase in official reserves.

To the contrary, a nation that spends more than it produces will invest

domestically more than it saves and have a net capital inflow. This inflow

will appear as a capital account surplus and a reduction in official

reserves.

We shall analyze the link between the current and the capital account. We

can begin with national income and subtract national spending on

domestic goods and services from it. What we should have remaining isexports. Similarly, if we subtract spending on domestic goods and services

from total expenditures, the remaining spending must be on imports.

Combining these two identities leads to another one:

National Income National Spending = Exports Imports (#4)

The above equation illustrates that a current-account surplus arises when

national output exceeds domestic expenditures; and a current-accountdeficit occurs when domestic expenditures exceed domestic output.



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If we combine equation #3 and equation #4 we have a new identity, which

goes as follows:

Savings Investment = Exports Imports (#5)

So if a nations savings are higher than its domestic investment, it will runa current-account surplus. This explains why the Japanese who have avery high savings rate both in absolute terms and compared to theirinvestment rate run a current-account surplus; and why the UnitedStates, which saves less than it invests, must run a current-account deficit.

The below statistics of U.S. Trade Balance with Japan support this conceptas well:

U.S. Trade Balance with Japan

Exports Imports Balance

2010 44,313.6 86,755.8-

42,442.2

2009 51,134.2 95,803.7-

44,669.5

2008 65,141.8 139,262.2-

74,120.4

2007 61,159.6 145,463.3-

84,303.8

2006 58,459.0 148,180.8-

89,721.8

2005 54,680.6 138,003.7 -83,323.1

2004 53,568.7 129,805.2-

76,236.5

2003 52,004.3 118,036.6-

66,032.4

2002 51,449.2 121,428.6-

69,979.4

2001 57,451.5 126,473.1-

69,021.6

2000 64,924.4 146,479.4-

81,555.0

1999 57,466.0 130,863.8 -73,397.8

1998 57,831.0 121,845.1-

64,014.1

1997 65,548.6 121,663.3-

56,114.7

(U.S. Census Bureau; 2010)

Noting that savings minus domestic investment equals net foreigninvestment, we have the following identity:

Net foreign investment = Exports Imports (#6)



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This equation is saying that the balance on the current account must equal

the net capital outflow. So any foreign exchange earned by selling in

another country must be either spent in imports or exchanged for claims

against foreigners. If the current-account is in surplus, the country must bea net exporter of capital; if it is in deficit it indicates that the nation is a net

capital importer. This equation explains why the U.S. with its huge current-

account deficits is a major capital importer. Simply put, it means that the

United States is buying more goods and services from the rest of the

world, then the rest of the world is buying from the United States, and that

the rest of the world is investing more in the United States than it is

investing in the rest of the world. (Shapiro; 2003)

These identities are useful, because they allow us to assess the solutions

proposed by the United States to improve the current-account balance. I

would like to propose that based on my research a current-account surplus

is not necessarily a sign of economic prosperity; and a current-account

deficit is not necessarily a sign of weakness or lack of competitiveness.

Economically healthy countries tend to run trade deficits, because this is

the only way they can assure their capital account surplus.

We shall see some examples: as we can observe below the U.S. ran trade

deficits from early colonial times to just before World War I. as Europeans

sent investment capital to develop the continent. During its three

centuries as a debtor nation it transformed from a minor colony to the

worlds strongest power.

Interestingly enough, the U.S. ran surpluses while the infamous Smooth-

Hawley Act was passed and levied high tariffs on goods imported to the

U.S. First the act seemed to be a success, however later on it turned to be

a very bad decision that many say- contributed a lot to the Great

Depression. (U.S. Department of State; 2010)



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(U.S. Government Spending; 2010)

There is another correspondence, which we shall note. Imports are

positively related to income: a nation that grows rapidly will import moregoods and services, and at the same time weak economies will slow down

or reduce imports. As a result, the faster a nation grows relative to other

economies, the larger its current-account deficit (or smaller its surplus) will

be. So current-account deficits may reflect strong economic growth or a

low level of saving, and current-account surpluses may signify a high level

of savings or a slow rate of growth.

Reducing the Trade-deficit

As it was very clearly phrased by Mr Obama, the first priority of the U.S.

policymakers in the next five years will be to improve the competitiveness

of American goods and services on international markets. The below

section will analyze the tools that they have available to carry out this

plan.

Currency Depreciation

The devaluation of the U.S. dollar is the hot spot on todays global

economic agenda. It turned out to be the most discussed and debated

topic on the G-20 meetings in Seoul. The Fed or the Treasury have notmade an announcement in clear and declarative sentences, but dollar



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One answer is inflation, if you can get it, which will do two things: it will

make it possible to have a negative real interest rate, and it will in itself

erode the debt of the Sams. Yes, that will in a way be rewarding their past

excesses but economics is not a morality play.

The bottom line, then, is that the plausible-sounding argument that debt

cant cure debt is just wrong.(Krugman, 2010)

These two statements will certainly not experience a friendly reception from U.S. creditors.

The number of the opposition who think devaluation will have negative

consequences is much higher. The arguments that have been found

during my research mainly focus on the potential consequences, however

in the aspect of my paper the question should be: will a devalued dollar

help the trade balance?

We shall see what Daniel Ikenson - associate director, Center for Trade

Policy Studies, Cato Institute has to say about this. He conducted an

extensive research on the United States and China to find out the strength

of the link between currency values and trade flows:

The first point of the argument is that the Remninbi is undervalued. There

is a consensus among academics, businesspeople and politicians on this,

however there are debates about the magnitude. The only way to find out

how much the Chinese currency is undervalued is to allow it to float freely

and remove the restrictions on Chinas capital account.

The logic that the U.S. is following is that if the value of the Remninbi

increased against the dollar, then Americans would reduce their purchases

of Chinese products and the Chinese will increase the purchases of

American products. It works in theory; however the success of this political

measure all comes down to price elasticity, the relative responsiveness of

U.S. and Chinese customers to the price changes they face. (Ikenson;

2010)



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(Ikenson; 2010)

Between July 2005 and 2008, a 20% RMB appreciation occurred. The value

went from $0.1208 for one RMB to $0.1464. During the same period, the

U.S. trade deficit with China increased from $202 to $268 billion. (Ikenson;

2010)

The value of U.S. exports to China increased by $28.4 billion, whichmeant a significant 69.3% rise. However the reason behind this increase

can be very much debated. The above graph shows that U.S. exports to

China had a growing trend. They grew by $3 billion, $3 billion, $6.2 billion

and $6.1 billion from 2001 to 2004 with the exchange rate staying at 8.28

RMB consistently. It is very likely to have been the result of growing

Chinese demand and market penetration by American companies

happening simultaneously.

2005 was the first year when RMB appreciation occurred; the value of

exports increased by $6.8 billion. In 2006, the appreciation was 2.8%

resulting in an increase of $12.5 billion in U.S. exports. Despite an even

stronger appreciation of 4.7%, the increase in 2007 was only $9.3 billion.

The most substantial 9.5% - RMB appreciation occurred in 2008, however

the export value fell by more than $1 billion. If the determining power of



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currency value was that great, it should have caused a more significant

increase than it did in 2007, and in particular 2008.

On the import side, the recent statistics are even more worrying for those

who seek deficit reduction through currency devaluation. During the

period from 2005 to 2008, U.S. import from China increased by $94.3

billion, while the RMB was appreciated heavily. So Americans showed very

strong price inelasticity, and they actually increased the purchase of

Chinese goods, seemingly going against the law of demand.

We shall see the possible reasons behind this:

The muting effect of the world economy

So, it is evident from the above that although the RMB appreciated by

21%, the increase in import value was 38.7%. This increase was met with

an only 15% of import quantity; so Chinese exporters must have lowered

their RMB-denominated prices. This is a natural response to keep export

prices steady. But how is it possible? According to research 35-50% of U.S.

imports from China ar Chinese value-added. The rest of them reflects

costs of material, labor, production, and other costs from other countries.

Since Chinese value-adding operations are mainly low-value

manufacturing and assembly operations, most of the final value of Chinese

exports was imported to China. So RMB appreciation increases the buying

power of Chinese consumers favorable for U.S. exports - , but at the

same time it makes Chinese manufacturers and assemblers more

competitive, because the relative prices of their inputs fall.

(Koopman,Wang,Wei; 2008)

Lack of substitutes

U.S. companies change their production strategies in the last twenty

years. Most of them placed their production facilities outside the U.S. and

kept the trading, developing and research activities only. It is enough tolook at the most successful ones, like Apple; none of the production is



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carried out domestically. (iPhone: Designed by Apple in California,

Assembled in China) Simply put: there are no U.S. alternatives for many

types of Chinese products. So U.S. consumers in many cases have to face

two options: they are pay a higher price for the Chinese product or ceaseconsumption completely. As Mr Ikenson (2010) from Cato institute put it:

It is doubtful that members of Congress, who support action to compel

Chinese currency appreciation, would proudly announce to their

constituents that they intentionally reduced their real incomes. But that is

the effect of relative dollar depreciation.

Protectionism

Another response to a current-account deficit could be protectionism. It

means the imposition of quotas, tariffs or other forms of limitation on

foreign imports. A tariff is basically a tax imposed on a foreign product

sold in a country. The purpose is to increase the price of the imported

product, give the domestically produced substitutes a competitive

advantage. A quota specifies the quantity of a particular product that canbe imported into a country. By restricting the supply, it causes a price

increase.

When it comes to protectionism opinions are very sharply divided. The

majority of academics and economists support the view that protectionism

does not work and it is adverse for those who imply it as well as those who

it is implied against. The two words protectionism and works are rarely

found right next to each other; however we shall see what arguments the

supporters come up with:

One of the open supporters of Protectionism is Pavel Podolyak (2010), a

very active economist contributor to Yahoo! Finance:

The United States industry was essentially built on protectionist tariffs

until 16th amendment of 1913 allowed federal government to start

functioning via income tax instead of high tariffs on imports; if one



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looks at how world's key societies rapidly became wealthy and powerful

(in the last 300 years), protectionism was always the dominating factor to

help out native industry. France and England in 18th-19th century, United

States, Japan, and Germany in 19th-20th century, and China in 20th arejust some of the success stories.

One may begin to argue that protectionism of old was different in that it

was an ideological pillar of now "discredited" mercantilism. However,

mercantilism never went away and still works wonderfully in more

advanced forms in China and Japan (and even in Western Europe to a

certain degree). Certainly we can understand the desire of a state to lower

protectionist measures once its industries have sufficiently grown and

benefited from them.

The opposition is much more populous. We can find a great number of

highly recognized economic experts publishing their arguments against

protectionism. We shall see the most open and illustrative one:

Alan C. Sharpios - Holder of Ivadelle and Theodore Johnson Professorship

in Banking and Finance; and author of numerous books on international

finance point in his book of Multinational Financial Management is hard

to miss: .the results are ultimately a rise in the price of products

consumers buy, an erosion in purchasing power, and a collective decline in

the standard of living. He mentions the currency exchange rate as the

factor which abolishes the possible positive effects of protectionism. For

example, if the government imposes tariffs on steel, it would reduce the

purchases of foreign steel. The consequence of this is a decreased

demand for foreign currency; which consequently increases the value of

the dollar. A higher-value dollar increases the cost of U.S. exports, and

decreases the import cost of foreign goods with no tariffs on them - into

the United States. So the conclusion is that any reduction in imports

caused by tariffs and quotes will be offset by the decrease in exports and

increase in other exports. (Shapiro; 2003)



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As one would expect, the solution is not black and white, and it is

somewhere between the two extremes. In fact, the effect of

protectionist measures highly depends on the structure of the given

economy.

In case of the current American situation I would consort with Pavel

Podolyaks (2010) words: At this point, rapid and badly needed

protectionist measures may shock United States into falling further

into the economic abyss. Chinese retaliation and corresponding rise in

cost of imports will not help United States get further away from risk of

a hyperinflationary scenario. It would thus make sense for Barack

Obama to sneak in defensive nationalist measures gradually.

When it comes to economic efficiency, it might be worth taking Shapiros

thoughts into consideration as well. According to him, protectionism

punishes the efficient and internationally competitive businesses and it

shelters the inefficient ones that would otherwise be unable to

compete against imports.

Restricting Foreign Ownership of Domestic Assets

Although this policy measure has not come up as a possible element of the

currently implemented U.S. economic policy, a small section shall be

devoted to it as a possible tool of current-account deficit reduction.

Reducing foreign capital inflows will raise real domestic interest rates. It

stimulates savings, because the opportunity cost rises with the real

interest rates. It also causes domestic investments to fall, because

more projects have positive net present values. In theory, the effect is

balance between savings and investment; and the elimination ofexcess domestic spending that caused the current-account deficit in

the first place. (McConnell;Brue;Flynn; 2010)

Although this approach could generally work, there are two reasons

behind its impracticality for the current U.S. situation. First, restricting

foreign ownership historically goes with slower-than-normal growth, which



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If we look at the below table containing current data from 2009-2010, we

can see the same theory proved:

(Data from: Wikipedia)

The correlation between unemployment rates and trade balances in

percentage of the GDP is around 60%. Although countries with trade

deficit tend to have a higher unemployment rate, we can find many

extremes; and we need to take into consideration that unemployment is

determined by a great number of factors besides the trade balance.

Conclusion

Gary Locke, U.S. Secretary of Commerce lays down the logic behind

export-led policies very simply: ..export initiative, which aims todouble the amount of U.S. exports over the next five years creating some

two million new jobs in the process. The reasoning behind the presidents

plan is very simple: the more products we sell abroad, the more products

our companies have to make here at home, and the more products we

make, the more we hire people to make those products. However, after

conducting an analysis on factors that influence international

competitiveness and on policy tools that could initiate this process, we can



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see that it is not as simple as U.S. policymakers would like it to seem.

(Locke; 2010)

The elements of Obamas National Export Initiative program are aiming atenhancing the competitiveness of American business internationally in

every way. They develop programs for export assistance, programs that

improve information and technical assistance to first-time exporters. The

Export Promotion Cabinet promotes Federal Resources currently available

to assist export by U.S. companies. Commercial Advocacy is guaranteed to

companies that open to new markets. Credit availability for exporters is

increased. American trade representatives visit countries to improve

market access overseas for U.S. manufacturers. (The White House Office

of The Press Secretary; 2010)

In sight of the above, we can believe that the National Export Initiative

assumes that it is only foreign-borne obstacles that reduce the U.S. export

potential. However American companies are producers, before they are

exporters. And as producers, they consume equipment, industrial

components, energy, raw materials, capital and labor. And as consumers

of all these inputs, they face the consequences of U.S. taxes, tariffs,

regulations, mandates and other impediments imposed by their own

governments; which reduce their competitiveness both at home, and as

exporters. These producers account for half of the value of U.S. imports.

(Ikenson; 2010)



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Taking these facts into consideration, we can say that the United States

needs an overall structural change in order to achieve its goal to be an

export-led economy. U.S. producers have to face much stronger

domestic regulation than their competitors in Asia. They need to deal

with much stricter environmental, occupational health and safety

regulations, accompanied with much higher social security

contributions. Let alone Labor Unions that would fight severely against

any cuts in wages. These issues would all have to be on the table if

exports are wanted to be doubled, and the trade balance to be

improved.

I was led to the conclusion that doubling exports in the next five years can

be an achievable goal. I cannot deny either that increased international

competitiveness would indeed help the U.S. economy recover. However

based on the research and analysis that have been conducted, there is no

strongly proven relations between the economic measures that are taken

currently and their effect on the problems that are being targeted. In order

to become an export-led economy, the structural changes needed to bedone would have to be so deep-rooted that they might put the United

States on the slippery slope during this unstable period.



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export is the way out - peter balazsik

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