If the US – the world’s importer of last resort – is going on an export drive, the implications for Asia may be profound, writes Aberdeen's Hugh Young.
During his State of the Union address, President Obama pledged to double America’s exports over the next five years, which is precisely the strategy most Asian countries have pursued in recent decades. If the world’s importer of last resort is going on an export drive, the implications for Asia may be profound.
What was obvious to Obama, and to many others, was America’s huge trade deficit had caused significant weaknesses to build on in the country’s economy.
Although the link is a complex one, many see the recent spike in unemployment as the result of globalisation and the transfer of jobs overseas. From the late-1960s until 2000, the US lost manufacturing jobs at a low and steady rate of around 30,000 per year as productivity increases meant fewer workers were required. Since then, the rate has shot up to 560,000 per year (see graph 1).
The reason the link is not clear is globalisation began many years ago, whereas the unemployment rate spiked only recently. In fact, unemployment remained low, even as jobs “moved” overseas, because as manufacturing jobs were lost they were replaced with jobs in non-productive service sectors such as government and healthcare.
Such a situation made America very vulnerable to the sort of economic collapse that has taken the world by surprise in the last two years. The financial crisis and the bursting of the housing bubble caused the loss of 1.8 million construction sector jobs, a quarter of the total.
I am sure President Obama would dearly love to go on a fiscal binge and put all of these unemployed to work rebuilding America’s sagging infrastructure but that would spell disaster for the dollar. Instead, and rightly so, his focus is on boosting exports.
The question is, who is he going to export to? Germany has reaffirmed a commitment to its export model, Japan’s exports are rebounding, and I suspect countries like the UK are also planning to address their balance of payments problems via their export sector.
In the same spirit as Keynes’ paradox of thrift, we cannot all export our way out of trouble.
Furthermore, there is the issue of relative competitiveness. If the dollar is stable or rising against the currencies of those countries it wishes to export to, then the job is made all the harder.
Of course, it is not just about currency rates but also relative wage costs, and this is where America has gained substantially in recent months.
As many Chinese provinces, most notably export-driven Jiangsu, announce double-digit increases in their minimum wage, America’s output per hour has risen 22% as workers have been laid off and unit labour costs cut.
Furthermore, income inequality in the US was high to begin with and thus the wage level
of those who would be employed in a rejuvenated export sector is more competitive than one might think.
During the recent World Economic Summit in Davos, Larry Summers, chief economic adviser in the White House, issued veiled threats about protectionism if countries continued to pursue mercantilist policies at a time of demand shortages. This comment was clearly aimed at China, which keeps its exchange rate pegged to the dollar and runs a current account surplus equivalent to 9% of GDP, admittedly down from 11% at its peak (see graph 2).
The pressure has been building on China to revalue its currency, pressure it has thus far resisted. And perhaps rightly so. The US dollar is the world’s de facto reserve currency and thus the one to which developing countries can peg their currency in order to maintain stability.
If there are adjustments to be made to address chronic trade deficits, let them be made via domestic wages, not currencies, argue the peggers. The US has certainly benefited from being the keeper of the world’s reserve currency but with these benefits comes the responsibility to protect its value, a responsibility the US has, arguably, been shirking recently.
What this all means is instead of America’s trade deficit falling as it needs it to, it is now rising again. Having fallen over the space of eight months from $60.1bn to $25.8bn in May last year, it is now back at over $40bn.
Whether Summers will carry through on his threats remains to be seen, but the pressure on American politicians from their increasingly irate electorate is becoming hard to bear.
Conspiracy theorists suggest the spectacle of a distraught witness describing her horrific experience at the hands of her Lexus was designed purely to whip up protectionist feeling, giving the politicians the justification they need to propose anti-free-trade measures.
The problem is Toyotas sold in the US are also made in the US, so a move against the company would result in yet more pain for American workers. Indeed, Toyota has already announced the suspension of production at two US plants as a direct result of the recall.
However America rejuvenates its manufacturing sector, the losers are likely to be in Asia. But that is not to say Asia is no longer an exciting place to invest.
To the contrary, it is a sign Asia is evolving. Nobody wants to be a slave, to be tirelessly working for someone else, to be the world’s factory. The only reason countries export stuff is to be able to pay for things they need to grow their own economies, such as commodities and capital equipment. But China and other Asian countries before it have benefited enormously from learning how to make things to rich world standards.
The next stage for countries like China and India is to begin doing more for themselves, producing the capital equipment they need in the construction industry and auto manufacturing for example – equipment they may currently import from Japan or Germany.
This second stage of growth is likely to last for many decades and is, from an investment perspective, far more exciting than the first. Somewhere in China or India lurks the next Boeing, the next Intel, the next Nestlé, and the next Pfizer. For investors, the Asian century will be a very exciting one.
Hugh Young is managing director of Aberdeen Asset Management Asia
Graph 1: US employees on non-farm payrolls – manufacturing industry
Graph 2: China: current account as % of GDP
