Exports: 'Cause We Don't Want That Shit

As American consumption continues its long howling plummet off the cliff of the credit bubble, some might find comfort in the magic of rebranding:

The rebalancing of the U.S. economy is ongoing. The savings rate is rising, consumption is falling, and the trade deficit is declining ... (Source: Calculated Risk)

"Rebalancing" seems an awfully peachy term to describe what might very well turn out to be the worst economic collapse since the 1930s. But undeniably, the times they are a-changing. As consumption falls, we are seeing a counter-trend in our trade balance. If GDP is defined as the net product of consumption, investment, government spending and net exports (the difference between exports and imports),

Since GDP = C + I + G + (X − M), the decline in C is being offset by the improvement in net trade (X - M)

Accounting-wise, I'm a bit suspicious of this. If our trade deficit is declining (and I am making an ass out of both you and me here), I assume this has very little to do with increasing exports (our dollar is very high and foreign consumption is pretty low) and everything to do with declining imports (nobody in America is buying much of anything and that includes cheap crap from China). If that's the case, the decline in imports is just a ripple effect of the decline in comsumption.

To provide a really simplistic example, if we set the following values so that
C = 50
I = 30
G = 30
X = 50
M = 60

Therefore, GDP = 100. To make the balancing act work out, let's first assume that "C" falls by 10, so that overall GDP also declines by 10. If this is to be counter-acted by a change in net-exports, we would have to assume an "exogenous" change in net exports; that is, that the change has nothing to do with the decline in consumption. Such a change might result from a sudden increase in demand from China and Japan. The surge in exports would push our trade deficit of -10 to a perfectly balanced net export level of 0. If we do the math with our new "C" equal to 40 and our new X = 60, GDP is still at 100.

But I don't think the change in net exports is exogenous. While consumption and imports are removed from one another in the GDP accounting formula, I think it's fair to assume that for every dollar spent by an American consumer, a certain percentage of that dollar is on average spent on an imported good. This decrease in import spending is therefore by definition smaller than the decrease in consumption and represents no net increase in GDP. Therefore as C declines by 10 above, "M" declines by 2 or 3. The so-called "marginal propensity to import" is considered a stabilizer of GDP fluctuations, but the stabilization of a trend doesn't imply reversion.

To be fair to the CR post, I don't think that they were assuming a perfect and painless switch from an American economy that consumes a lot to an American economy that exports a lot. While their discussion of this rebalancing act mentions an offset between C and M, I think its fair to assume that nobody believes the offset will be anywhere near complete. We are spending less and saving more. That is perhaps the major point.

And a well taken one at that. With consumption falling, at least for now, the U.S. is in need of a long-term source of economic growth. While imports into the U.S. are falling, improving the net export portion of the GDP, is there any chance that exports will eventually pick up?

Given the current value of the dollar, the answer seems an obvious no. But currency values are notorious volatile and with all the spending that's coming up this year, severe depreciation is always possible.

So assuming away the problem of an uncompetitive currency value, can America "rebalance" its economy in the long-run towards export-orientation (or at the very least, self-sustaining trade practices)?

I took a quick look over at the U.S. Census Bureau's Foreign Trade Statistics website to see if I could pull a conclusion out of my ass. Here it is:

Our top six export partners are, as ordered respectively by total value not netted by imports, Canada, Mexico, China, Japan, Germany and the U.K. Together those countries buy-up almost exactly 50% of our exports. And what are those exports exactly? Within NAFTA it seems to be largely cars and car parts, followed by metals, plastics, chemicals, industrial machinery and miscellaneous industrial supplies. China and Japan make similar demands upon the U.S. economy and throw in some agricultural produce orders to boot. Germany and the U.K. like us for our metal, airplanes and pharmaceutical drugs particularly, but on top of that, there's the standard list of industrial supplies.

What does this say about the future prospect of our trade balance? With industrial growth suspended in mid-air throughout the world, it may take a while to ride out any resulting gluts in commercial real estate development and capital investment (building factories and the required machinery). That's a big strike against any country banking on future demand for plastics, metals, chemicals and industrial supplies is going to be in the trough for a while. On top of that, I can't imagine that consumer demand for cars and airplane rides is going to accelerate (teehee) back to its normal levels for some time.

So what can the U.S. economy fall back on as American consumers tighten the elastic bands of their sweatpants? I wouldn't look to trade.