Industry Today: The World of Manufacturing

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 Date:12/6/2007

 

Wake Up Call
What Export Boom?
A look at the numbers from Alan Tonelson shows that the ‘export boom’ may be more of a bust, demanding a revolution in U.S. trade policy.

The more I look at U.S. trade figures (and I look at them a lot), the weirder and weirder widespread reports of an American export boom sound. And nowhere do they sound weirder than in the U.S. manufacturing sector – as any detailed look at the data plainly show.

President Bush echoed the conventional wisdom on Oct. 17 when he argued that exports “helped us overcome the weakness in the housing market last quarter” and the claim has reverberated through the ranks of economic pundit-dom and the outsourcer-dominated business groups. Even California Governor Arnold Schwarzenegger has gotten into the act. At the same time, serious economists like James Paulsen of Wells Capital Management have boarded the bandwagon, too. It’s hard to believe that any are genuinely familiar with the most important facts.

First, the gross import and export numbers can be terribly misleading measures of America’s trade performance. The reason is not, as libertarian hacks insist, that trade balances do not matter. The reason is that such a large share of U.S. exports – and especially manufactured exports – are not finished goods. Many are parts and components of final products that are sent abroad for further processing or final assembly, and then sent right back to the United States for final consumption. What these intermediate goods exports represent most faithfully is how much production capacity has been sent from the United States to foreign locations like China and Mexico – not how competitive domestic U.S. manufacturing remains. It’s amazing how many so-called experts, especially inside industry (who know full well how disintegrated and globalized all phases of the manufacturing process have become) conveniently forget this reality.

Similarly, many other U.S. exports simply go into building foreign export bases. Notable examples are sales of industrial machinery (which are used to build export factories) and construction equipment (which are used to build the transportation systems used by these export complexes). Are all of these U.S. exports, then, totally unrelated to final consumption abroad? Of course not. Are lots of these sales to export-dominated economies totally unrelated to foreign consumption? You bet.

But even when the standard trade figures are taken at face value, an export boom worthy of the name is nowhere to seen. Total goods exports generally did surge 15.60 percent from 2005 to 2006. But through September, 2007, the growth rate has slowed to 11.80 percent year-on-year. That’s a number that the nation has essentially matched several times in recent years.

The numbers are even less impressive in manufacturing (which of course enables us to factor out America’s trade in oil, which operates according to its own unusual dynamics). Annual export growth swelled to 15.48 percent from 2005 to 2006, but has fallen to 10.30 percent year-on-year through September, 2007. Again, that’s a performance that’s nothing new for the nation’s industrialists.

By far the biggest changes in trade flows have come on the import side. After rising by 10.99 percent from 2005 to 2006, total goods imports are up only 3.8 percent year-on-year through September. For manufacturing, the numbers are 10.13 percent and 4.3 percent, respectively.

If nothing else, the importance of falling manufactures imports in ever-so-modestly reducing the astronomical trade deficits and nudging up growth rates should discredit that arguments made by the White House and the outsourcers’ lobby about the need to maintain the momentum by approving new free trade agreements to open up foreign markets. The relevant lesson of this year so far is that the trade deficit is likeliest to fall significantly and relatively quickly if imports are brought under control.

Some macro-economic perspective is also badly needed when discussing exports. Recent months have seen almost ideal conditions for restoring balance to U.S. trade flows – if indeed they are shaped largely by free market forces instead of foreign barriers and subsidies, and corporate offshoring. The dollar has weakened dramatically, the housing boom that has driven so much American personal and household consumption is going bust, and economic growth overseas remains strong. Some expansion of U.S. exports and shrinkage of U.S. imports was inevitable, and much more progress surely would have been made had relentless offshoring not created such large and lasting structural damage to America’s productive base. The big unknown is how much longer Americans can rely on such a favorable macro climate.

Examining exactly what America exports most successfully also undermines export boom claims. So far in 2007, only six of the top 10 U.S. exports this year have been high-value manufactures: aircraft, autos and light trucks, semiconductors, plastics and resins, auto parts, and pharmaceuticals. The other four were gasoline and other petroleum refinery products, basic inorganic chemicals, waste and scrap, and a “special classification provision” goods, a broad products category containing everything from assorted auto parts to handicrafts to religious articles. Moreover, five of this top 10 clearly are intermediate goods associated most closely with offshoring – semiconductors, plastics, auto parts, inorganic chemicals, and waste and scrap.

Seven of the top 10 U.S. imports this year are high-value manufactures: autos, consumer electronics, pharmaceuticals, broadcast and wireless communications equipment, computers, computer parts, and iron and steel. (The other three are crude oil, gasoline, and a category of goods returned and reimported from foreign markets.) Only two of them are clearly producer goods (computer parts and iron and steel).and since America’s is not an export-led economy, most of these purchases are no doubt used in goods consumed domestically. Moreover, the import flows generally exceed the export flows for most of these sectors because of America’s still-huge manufacturing trade deficit.

The trends are at least as bad. Only five of the 10 fastest growing American export categories are high-value manufactures: biologic products (plasmas, vaccines, allergens, etc.), oil and gas field machinery, construction equipment, telecommunications hardware, and turbines. Oil and gas field machinery, construction equipment, and turbines have strong links to foreign export bases. Rounding out this Top 10 list are waste and scrap, smelted ores, cyclic crude chemicals (products distilled from coal tars, gasoline, and natural gas), corn, and soybeans.

The 10 fastest growing U.S. imports? Six are high-value manufactures: telecommunications gear, aircraft, aircraft engines, pharmaceuticals, broadcast and wireless communications devices, and computers. They are joined in the Top 10 by games and toys, basic inorganic chemicals, smelted ores, and those special classification goods.

But the so-called export boom is seen in its clearest perspective by examining the picture over a 10-year period. Although manufacturing exports rose a total of 43.14 percent between 1997 and 2006, this figure doesn’t count inflation – which would reduce the increase considerably. Equally important, factoring in inflation, at least 24 major U.S. industries have seen exports fall from 1997 through September, 2007, including broadcast and wireless communications gear, paper, paper industry machinery, heating and cooling systems, computers, computer parts, miscellaneous electronic components, audio and video equipment (a category that now includes high-definition TVs), metal-forming machine tools, conveyors and conveying equipment, power and specialty transformers, several auto parts categories, several electronic components categories, and fiber optic cable.

Several other key industries have simply seen virtually no export growth at all – notably semiconductors, farm machinery, motor vehicle transmission and power train parts, metal-cutting machine tools, and special dies and tools, jigs, sets, and fixtures.

The American Revolution was fought largely because of what economists call terms of trade issues. Britain wanted to colonists to remain hewers of wood and drawers of water, while they monopolized the production and export of much more valuable manufactures. The Founding Fathers rightly recognized that producing commodities and other low-value goods was a recipe for economic stagnation and political servitude, and decided that a brighter future was worth fighting for.

The U.S. economy is clearly not in such dire straits yet, but the trends above are pointing in all the wrong directions. Reversing them will require many changes in government and business practices. But clearly one of the most important must be a revolution in U.S. trade policy.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C. A contributor to the Council’s AmericanEconomicAlert.org Web site, he is also a consultant to CNN anchor Lou Dobbs and the author of The Race to the Bottom (Westview Press, 2000). The views expressed here are his own. Sarah Linden of the U.S. Business and Industry Council provided research assistance for this article.



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