US exporters fail to reap benefits of lower dollar
By Christopher Swann in Washington
Published: March 21 2005
When the US dollar reached its peak three years ago Kendig Kneen, whose Indiana-based business makes car crushers and landfill equipment, all but abandoned foreign sales.
Now after a 30 per cent fall in the currency, Kendig is once again expanding overseas. "The noose of the strong dollar has been removed from our neck," he says. "But it is still far from comfortable out there."
Many economists are equally ambivalent about the performance of US exports over the past year. Despite the dollar's slide, US companies are still losing market share and appear to be finding some export markets an uphill struggle. Last year total world imports excluding the US rose 11.3 per cent while US exports rose by just 8.5 per cent in real terms.
The rise in exports has not been nearly enough to narrow the ballooning trade deficit. The dollar has fallen by 54 per cent against the euro since February 2002, while the trade deficit with western Europe has risen from $100bn (€76bn, £53bn) to $114bn in the past year.
Similarly the US bilateral deficit with Canada rose from $124bn to $162bn during last year, in spite of the 25 per cent fall in the dollar since February 2002.
"The benefits of depreciation have not been as great as expected so far," says Nigel Gault, director of US research at Global Insight. "US exporters may be losing market share at a slower rate than in 2002 but they are still lagging behind the growth in world trade."
Part of the reason for this uninspired export perform-ance from the US appears to be the strength of domestic demand.
Some US exports appear to have been diverted away from foreign markets to satisfy voracious domestic demands. "We have sometimes had to ask ourselves, why go overseas for what you have on your own doorstep," says Mr Kneen. With corporate profits at record levels more than $1,100bn annualised few economists are weeping for US businesses.
However, not all of the disappointing export growth appears to be voluntary.
Some economists believe that as US exports become more focused on the higher end of the market, demand has become less sensitive to changes in price. "Currency movements don't seem to matter quite so much when you are buying very top-end goods," says David Bloom, currency strategist at HSBC in London. "You either buy Microsoft or you don't.
Meanwhile, the lower-end production that is more sensitive to price has been shifting to places such as China, India and Mexico." Ultra-price sensitive apparel exports have fallen as a share of total overseas sales from 1.4 to 0.8 per cent. This may help explain why exports have not had quite the boost from the falling dollar that some economic models might have predicted.
After so many lean years, US exporters may also have decided to fatten up their margins again rather than reduce prices and grab market share.
In addition, the falling dollar may have helped US companies hold their own against domestic competition in Europe, Japan and Canada. But they have still had to confront growing competition in these markets from Chinese exporters. Because of the renminbi's peg to the dollar, Chinese companies have been enjoying exactly the same competitive boost in these markets as US businesses. "Aside from the currency advantage, Chinese companies have been going through a productivity boom with unit labour costs falling fast," says Ian Morris, an economist at HSBC in New York.
The weakness of demand in many of the world's biggest economies has made things even harder. US consumer spending rose by 3.8 per cent last year but only 3.1 per cent in the UK, 1.5 per cent in Japan and just 1.1 per cent in the eurozone. Consumers have been particularly cautious in Germany, Europe's biggest economy, where structural reforms have been making it easier for companies to make workers redundant.
"In the long run, these reforms should mean stronger growth," says Paul Donovan, global economist at UBS. "In the short run, it has meant that workers are putting more money aside rather than spending in case the axe falls on them at work."
Even assuming that the full effects of the dollar's fall have not yet come through, rising US exports are unlikely to be enough to narrow the deficit.
According to calculations by HSBC, if the economy grows 3.5 per cent next year then the US import bill may be expected to rise 10 per cent. This means US exports would need to grow by 15 per cent in real terms just to prevent the deficit widening further.
The conclusion, says Ray Attrill, director of research at 4Cast, is that unless US consumption slows considerably, a much greater fall in the dollar is necessary to narrow the trade gap. "It appears that we have got only half the fall that we need in the dollar in order to help close the deficit," he says.