Tuesday, November 17, 2009

Import Nation

In many respects the U.S. “bought” into the housing/credit bubble. Now to pay off our debts we must “sell” our way out of recession. The transition from importers of goods from all over the world to exporters is not easy. The rest of the world is more comfortable with selling their goods to the U.S. than in buying American. The value of the dollar is the key. The U.S. is not used to a weak dollar - the relative value needed to entice customers to buy a country’s goods. True, U.S. policy makers have been calling for stronger foreign currencies, especially China’s renminbi. Many economists hold that the Chinese helped facilitate the U.S. credit bubble by running their trade surpluses to the heavens and then lending the accumulated capital back to the U.S. for a credit-friendly, consumption economy.

What is more the Chinese government has thrown a wrench in the works that typically keep trade balances - well, balanced. Usually when Country A (China) exports more than it imports from Country B (the U.S.), it begins building balances of Country B’s currency (the U.S. dollar). Some gets invested abroad, but the excess keeps building until it leads to a decrease in the value of Country B’s currency. This makes Country B’s goods seem cheaper to Country A buyers and the trade between the two countries balances. However, if Country A steps into the currency markets like China has been buying up U.S. dollars, the rebalancing never takes place and Country A maintains its trade advantage.

China’s growth has been export-led while the U.S. prosperity has been consumer-led - a nicely symbiotic and arguably dysfunctional relationship. There is no easy way out of what is likely to become even more disastrous for the U.S. if left unchecked. Can China find new drivers for growth beside U.S. import demand? Is the U.S. capable of producing goods and services that China is willing to use on a grander scale than the few technology and engineering products and services that are going to China today?

As shown in the illustration below, China has kept the renminbi pegged to the U.S. dollar. Few economists can predict the outcome if China were to allow the renminbi to float against the U.S. dollar. Given the trade imbalance and according to economic theory the renminbi should gain against the U.S. dollar, discourage U.S. imports of Chinese goods and enable purchase of U.S. goods in China. Would it be enough However, with a stronger renminbi would the China central government simply be able to buy even more U.S. dollars? We may never know since the Chinese have been staunchly opposed to the idea. Expect that policy to remain unchanged until the Chinese figure out another way to fuel their growth. What is more, the U.S. would have to find the path to export nation from import nation and a change in exchange rates may not be enough to pave the way.

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