Currency Valuations and Trade, 2001-2012

May 23, 2014

Economists claim that, when the dollar strengthens vs. other currencies, our trade deficit will worsen as our exports become more expensive for other nations and as our dollar goes further toward the purchase of imports.  Our large trade deficit with China is often blamed on the Chinese manipulating their currency to keep it artificially low in value in order to protect their trade surplus with the U.S.

In my previous post, in which we examined the effects of changes in curency valuation from 2011 to 2012 – just one year’s worth of data – we concluded that any such evidence in support of economists predictions was pretty sketchy at best.  We concluded that tracking the data over a longer time frame was necessary.

So, in this post, we’ll examine changes in currency valuations and America’s imbalances in trade in manufactured goods from 2001 to 2012.  Surely, this should be enough time for long-term changes in valuations to have their effect on trade imbalances if, indeed, there is any effect at all.

Here’s a scatter chart that plots the change in currency valuation vs. the change in America’s trade imbalance in manufactured goods over this twelve-year time frame:  2001-2012 Change.  One thing jumps out right away – that most of the data points lie to the left of the y-axis, indicating that most nations’ currencies fell in value relative to the dollar.  This would seem to suggest that America’s trade imbalance should have worsened over this time frame.

It depends on how you look at it.  In fact, America’s trade imbalance actually worsened dramatically during that time frame.  But if you simply average the change for each country, without weighting them for our trade volume (in other words, for example, tiny Cameroon is counted the same as China) the average change in America’s trade imbalance is a big improvement of 286%, in spite of an average decrease in exchange rate (or strengthening of the dollar) of 11.1%.  You have to look at the individual data points to understand this large discrepancy.

There were many very large swings in our trade imbalances over this 12-year time frame.  For example, we experienced a worsening imbalance of more than 1000% with three nations:  Estonia (-7,732%), Nicaragua (-1,388%) and Vietnam (-1,000%).  On the other hand, we experienced an improvement in our balance of trade of more than 1,000% with 15 nations.  They are Malawi (4,827%), Iraq (4,815%), Iran (3,770%), Ethiopia (3,416%), Sudan (2,624%), Guinea-Bissau (2,033%), Benin (1,48%), Papua New Guinea (1,868%),  Suriname (1,856%), North Korea (1,732%), Mozambique (1,597%), Russia (1,345%), Tajikistan (1,231%), United Arab Emirates (1,170%) and Togo (1,101%).

The U.S. experienced an improvement in its trade balance in manufactured goods of between 500% and 1,000% with fifteen other nations, but let’s stop right here.  An examination of the above list of 15 nations makes it apparent that there is much more at play here than population density or currency valuations to explain such huge increases.  There’s politics at play.  You’ll notice many African nations on this list.  It’s no secret that, as China’s influence in Africa has grown as Africa has become a major source of resources and raw materials for China’s economic expansion, the U.S. has tried to counter China’s growing influence there with big increases in foreign aid.  And all aid is counted as exports at book value.  Iraq and Tajikistan?  Huge influxes of military equipment and supplies to prosecute the wars in Iraq and Afghanistan.  Iran (until recently) an attempt to curry favor with the more moderate regime that has taken hold there.

So averaging all these countries together is yielding a very distorted picture.  As we did in my previous post, let’s simply break it down by country – which ones’ currencies increased or decreased in value, and how did our trade imbalance with them respond?  Of the 164 nations studied, 67 experience a weakening of their currency.  Our trade imbalance weakened with 21 of them.  (Economists would predict that our trade imbalance would have worsened with a majority of them, not by only 31%.)

The currencies of 76 nations rose in value.  Of these, our trade imbalance improved with 52 of them.  This is more in line with what economists would predict.  In seven cases, currency valuations were unchanged.  Our balance of trade weakened with one of them.  (There was no currency data available for 14 nations.)  So, all total, our trade imbalance responded as predicted in 73 of 156 cases – a little less than half.  What this tells us is that changes in our trade imbalance as a result of currency valuation changes was completely random.  There is no relationship whatsoever.

And what if we focus on just America’s top 15 trade partners who account for 95% of all of America’s trade?  What we find is that the currencies of eleven of them rose from 2001-2012 relative to the dollar.  In response, our balance of trade improved with only three of them – Canada, Brazil and the Netherlands.  Three others experienced weakening currencies – Mexico, India and Venezuela.  Our balance of trade worsened with all but Venezuela.  Saudi Arabia’s currency was flat (since it’s tied to the dollar).  Our balance of trade improved with them.  So, when it comes to our top trade partners, our balance of trade responded over a 12-year period as economists would suggest  in only four cases – exactly the opposite of what economists would predict.

Conclusion:

This results of this twelve-year study prove that there is absolutely no merit to economists’ claims that currency valuations plays a  role  in driving trade imbalances.  Blaming other nations for manipulating currency valuations to gain unfair trade advantages is a complete waste of time.

Another of economists’ popular scapegoats for trade imbalances is the lure of low wages in foreign countries.  We’ll explore the validity of this claim in an upcoming post.


Time to “Man Up,” Mr. President!

November 12, 2010

http://www.cnbc.com/id/40130051

President Obama will be returning home from Asia empty-handed.  The G20 has pushed him around and South Korea poked its finger in his eye with their refusal to open their market to American cars, in spite of selling millions of them in the U.S.  Aside from a promise by India to buy a few cargo planes (which they probably had planned to buy anyway), he has nothing to show for his efforts except a few footprints on his backside, a black eye and a fat lip.  Bullying Barack has become the new sport on the global school playground. 

It should come as no surprise.  Like a pack of wolves, these bullies can smell fear and weakness.  His weakness in negotiating became evident almost immediately.  When he went to Mexico to complain about the terms of the NAFTA trade agreement, he was sent packing with a bunch of new Mexican tariffs.  He made no response.  When he delayed allowing Mexican big rigs access to American highways, they smacked him with even more tariffs.  Still no response.  At the same time, while everyone inside and outside the auto industry knew that the Japanese were dumping vehicles on the American market, Obama pretended not to notice. 

So it’s no wonder that he’s now endured the biggest humiliation yet at the hands of South Korea.  In spite of taking in this orphan six decades ago, nurturing it and sheltering it from the bully to the north, it’s now clear that we’ve rasied a spoiled brat.  After all we’ve done for South Korea, including opening our market to their cars, they thank us by refusing to allow us to sell them a few.   They gave our president a swift kick and a push, laughing at his weakness.  He then found himself confronted by the G20 and they too, laughing at his feeble attempts to address China’s currency valuations and global trade imbalances, gave him another shove. 

Yet, all the while, he remains in denial, thinking these are his friends.  As reported in the above-linked article:

…. he contended he has now developed genuine friendships with leaders including Indian Prime Minister Manmohan Singh, German Chancellor Angela Merkel and South Korean President Lee Myung Bak — and even Chinese President Hu Jintao.”That doesn’t mean there aren’t going to be differences,” the president added.

This is sickening.  Mr. President, these aren’t your friends.  They’re your (our) trade adversaries.  Just because you’re unwilling to put up a fight doesn’t mean you’re not in one.  Until you display some backbone and come out fighting, they’re going to continue to treat us this way.  It doesn’t have to be like this.  You could change it in a heartbeat.  Like a kid on a playground who gets pushed around and shoved to the ground one too many times and suddenly comes up with a baseball bat he found lying on the ground next to him, their attitudes would adjust very quickly.  Watch how fast they start back-pedaling.  “Hey.  Barack.  We’re still buddies, right?  You know we were just kiddin’ around, right?” 

South Korea’s refusal to open its market to American cars screams out for a response.  The most obvious response would be to immediately slap a 50% tariff on Korean auto imports.  If we can’t sell them cars, why should we buy any of theirs?  If they don’t like it, then perhaps it’s time to start withdrawing our forces from the Korean peninsula.  South Korea is of little strategic significance anyway.  Who needs them?  Who cares if they end up groveling in the rice paddies for the “dear leader?”  Good riddance. 

It’s time to “man up,” Mr. President.  See that bat lying on the ground next to you (the one whose label reads “tarriffs” instead of “Louisville Slugger”)?  Pick it up.


Obama Backs Down on China Currency

October 19, 2010

http://www.reuters.com/article/idUSTRE69E0OB20101016

Just about the time you think the Obama administration may be growing a backbone in dealing with China ….. well, no.  Once again, they’ve chosen to duck and cover, leaving American workers to take the brunt.  The administration has decided to hold off on issuing a report that would brand China a “currency manipulator,” opening the door to corrective tariffs.  (See the above-linked Reuters article.)  It seems that Obama wants to hold off at least until after the next G20 meeting in November, giving a “multi-lateral” approach another chance.  Earth to Obama:  the U.S. trade deficit with China isn’t a multi-lateral issue.  Aside from the U.S. and China, none of the other 18 in the G20 gives a damn about our trade deficit. 

The issue here isn’t multi-lateralism vs. a go-it-alone approach.  The issue is that this administration hasn’t the courage to take even the simplest of measures in defense of our economy and American workers.  If it doesn’t have the guts to issue a report, what are the chances that they’d have the guts to actually impose tariffs on China and then make them stick? 

President Obama clearly places more importance on diplomacy, on maintaining an air of cooperation at G20 meetings, and on a legacy of being a world-respected statesman than on providing real leadership for the American people.  Maybe this shouldn’t be a surprise, since he vowed to take such an approach during the campaign two years ago.  But he also vowed to tackle the trade deficit and re-write the North American Free Trade Agreement.  Neither has happened, nor will they happen. 

There will be no improvement in America’s trade deficit under this administration.  The president’s plan to cut into the deficit by doubling exports is less of a plan than it is a dodge.  There’s no hope that American manufacturing jobs will be coming home under this administration.  It’s clear that our only hope for “change” will have to wait until the 2012 election.  Obama and his adminstration will have to go.


Geithner: China Currency Manipulation a “Significant Issue”

January 21, 2009

http://www.reuters.com/article/companyNewsAndPR/idUSN2148652720090121

As reported in this linked article, Timothy Geithner, Obama’s Treasury Secretary nominee, when questioned about currency manipulation by China, described it as a “significant issue” and as “… an important issue for the country …” 

I’ve really got my antennae up, alert for any clues as to whether or not Obama will really take meaningful action to restore a balance of trade.  This is just one, small, early indication that he’s willing to take it on.  Yes, I’m making a bit of a leap from Chinese currency manipulation to our overall trade deficit, but why else would Obama be concerned about this issue?  Does he merely want American consumers to pay more for imports from China?  It doesn’t seem logical that that’s all he’s after.  A strengthening yuan would indeed drive up the cost of Chinese imports, but what he’s really after is a restoration of the profit potential to motivate a return to manufacturing products domestically, driving up the demand for labor which, in turn, would drive up incomes, more than off-setting any rise in prices. 

Of course, if we wait for currency valuation to improve the trade deficit, we’ll be waiting forever, just as we have for the last three decades.  The dollar may fall against the yuan, but the Chinese will simply compensate in some other way – perhaps by increasing the government’s subsidies of Chinese manufacturers – in order to hold prices down.  So the real question is how quickly Obama will run out of patience.  When he does, it’s going to be fun to watch what happens!