Enrique Martinez-Garcia and Janet Koech at the Dallas Fed present their perspective on the international macro outlook. The first is particularly interesting to me.
Chart 1 from Enrique Martinez-Garcia and Janet Koech
They state:
According to advance estimates released by the Bureau of Economic Analysis, U.S. real GDP growth was 1.9 percent in the second quarter of 2008. The contribution of net exports to U.S. growth was a robust 2.4 percent. In fact, net exports have partially offset the negative drag from private residential investment especially since 2007 (Chart 2), although this positive contribution could diminish as global growth slows.
The rest of the article is well worth reading. I’d like to just observe that the forecasts for RoW growth might have been overtaken by recent announcements regarding negative growth in Japan, incipient slowdown in the Euro Area and UK, and noticeable deceleration in some of the NICs [1]. Note that for US exports, the export-weighted RoW GDP is the more important.
Menzie,
Did you notice that the graph seems to indicate a negative correlation between exports and residential investment. That would seem to indicate that when exports increase it is an indication of an economic downturn but when they decrease there is an economic upswing. This confuses many who believe that study balance of payments.
While most see a balance of trade toward exports as positive it actually means that we are sending our capital to other countries. Other countries are using capital more than we are. This is actually a sign that we are not prospering, because we are not consuming capital. High imports mean we are exchanging little pieces of paper (cloth) for capital, we are becoming capital rich.
It also is interesting to note that the graph seems to indicate the relationship is not dependent on monetary inflation/deflation but on economic prosperity.
Menzie-
Enrique Martinez-Garcia and Janet Koech’s
article stated: “Pressures on the exchange rate against the dollar and some signs of wage spirals in emerging markets are the consequences of growing inflation, which raises the risk of imported inflation for the U.S. Trade costs worsen the inflation outlook because they reduce foreign competition and give cover for domestic companies to raise their prices. If persistent enough, they may alter long-run production plans, reduce the benefits of offshoring and add to U.S. wage pressures.“
I added emphasis on “the benefits of offshoring”, because I have acute irritation to the mindless “outsourcing” of American manufacturing overseas. Outsourcing has been driven in large part by labor cost and tax savings as well as the prospect of market penetration in the host country (read China and India). Josh Bivens at the Economic Policy Institute wrote: “An individual company need not concern itself with finding exports to offset its imports, but any analysis of the effects of offshoring on the U.S. economy must do so.”
I highly recommend that anyone concerned with the US trade deficit read his article: Truth and consequences of offshoring-
Recent studies overstate the benefits and ignore the costs to American workers
Short-sighted big business moves its production offshore, but the real costs are absorbed by everyone else as the US Terms of Trade deteriorate. This is very similar to air or water pollution, where the benefits accrue to the polluter and the costs accrue to the general public.
Menzie-
To quote from Martin in your 3/5/07 discussion Globalization and Inflation: Thinking about Identification:
Globalisation-fuelled inflation might really only have one cause; rapid growth in Third World low cost labour centres has resulted in surging commodity prices, meaning that more and more people are dipping into the same pots and forcing their prices up. ”
If I am reading the graphs right, from now until 2009, the forecasts imply a greater slowdown for surplus countries (or areas), or (the other side of the coin) a smaller slowdown for the deficit countries.
MarkS:
Do you think it is a good idea that the United States operates free trade between the states? What difference does it make to the people of Michigan that a factory closes and moves to Alabama vs China?
Or, do you think that each state in the US should raise trade barriers against other states (assuming it were legal to do so)? Do you think this would be a positive development for the US? Do you believe that each state in the country should have its own automobile industry?
If you do not think that each state should raise trade barriers against other states, then what is the difference between free trade between Alabama and Michigan vs free trade between the US and China?
Jeffrey Knoll-
I do not support trade barriers.
My motivation in providing the links to Josh Bivens and “Martin” in a previous Econobrowser dialogue were to stimulate discussion about the real costs of selfish short-sighted corporate and government policy.
I worked in an American multinational corporation. Please believe me when I say that executive decisions and directives about where to source suppliers and subcontractors ALLWAYS factored to short-term cost and market penetration. No consideration was given to future dollar depreciation, credit crunches, or socio-economic dislocations.
The international banking system with US government assistance has merrily ratcheted-up US government debt burden via securitization and globalization for more than 30 years. The current and future assets of America have been plundered for short-term gain over this period. I strongly believe that there is a profound cultural difference between Anglo-Saxon capitalism (Britain and the US) and Socialistic capitalism (Northern Europe, China, Japan, Korea?.). The Anglo-Saxons have degenerated to chronic indebtedness with stagnant or declining real per capita earnings. The socialists are creditors, with positive balances and improving living standards.
Jeffrey Knoll-
For one thing, labor displaced in Michigan would have an easier time relocating to Alabama than to China.
“Free trade with China”? Does it matter that their exports and import-competing industries are subsidized by something like 50%? The costs to them are sizeable, but U.S. residents may be more interested in the shorter-term macro-economic effects on aggregate demand for U.S. output.
Time to consult the textbooks. If you refer to Krugman and Obstfeld, you’ll find that to a first approximation, comparative advantage is relevant when factors of production a relatively immobile across borders; absolute advantage when they are mobile.
Menzie-
Herman Daly likely was the originator of the concept that ‘comparative advantage’ in modern international trade is illogical. Globalization facilitates capital flow to wherever costs are lowest…. this is the pursuit of absolute advantage.
MarkS wrote:
I worked in an American multinational corporation. Please believe me when I say that executive decisions and directives about where to source suppliers and subcontractors ALLWAYS factored to short-term cost and market penetration. No consideration was given to future dollar depreciation, credit crunches, or socio-economic dislocations.
Mark,
It is a good thing that your work with this corporation is in the past tense. Any corporation that doesn’t consider cost of mony questions, credit availability, or socio-economic conditions of their customers will not be in business long.
Herman Daly believes prosperity coming from economic growth is illogical. At the root Herman Daly is illogical.
DickF-
I fear you misunderstand me. Of course most businesses have to be concerned about cash flow, credit availability, and their customers’ welfare. My comment about corporate prioritization of short-term economic advantage over longer term economic interests speaks to something else… The difference between tactics and strategy.
I do very much applaud your concern about “socio-economic conditions of their customers”… Properly executed, global trade can result in the elevation of billions of people out of grinding poverty. Poorly executed, it can destroy the environment, produce little benefit for the poor, and spawn political and trade wars.
Herman Daly authored dozens of theoretical concepts, many of which I am plenty skeptical of. His theory that prosperity should be measured both by ecological health (opportunity), and economic activity (production) is a concept with which I agree.
Mark,
Fair enough. We do disagree in that I believe that the market is more intelligent than a couple of “experts” such as Daly and so I will defer to it. Ecological health means different things to a central planner and a free market economist.