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VOLUME -23 NUMBER 10
Publication Date: 10/1/2008
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October 2008 Issue
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Export Market Expands Even as Dollar Recovers
By Dr. Chris Kuehl, Economic Analyst, Fabricators & Manufacturers Association, International, Rockford, IL & Managing Partner, Armada Corporate Intelligence, Kansas City, MO
For the past several months the one bright spot for the U.S. economy has been the export sector. New records have been set in exporting every month for over two years now and the U.S. has even managed to make some inroads on its trade deficit. The reason for all this activity has been pretty obvious — a weaker dollar.
This weak dollar has meant that virtually all U.S. goods are being sold overseas at a 30 percent discount. This has helped U.S. manufacturers get past high tariff barriers, consumer resistance and competition to build volume in foreign sales.
The U.S. economy has managed to avoid sinking into recession on the strength of exports. The 0.9 percent growth in the first quarter of 2008 and the 1.9 percent growth in the second quarter were almost entirely attributed to expansion of export activity. This expansion has benefited many disparate sectors — everything from agricultural production to machinery and chemicals to electronics. The market for U.S. goods has expanded at a rapid rate and the U.S. has emerged as a serious trading nation — not just a country that imports things from others.
The question for many analysts is what happens when the dollar starts to recover? We have begun to witness the euro dropping against the dollar and rather quickly. The rise in the dollar's value has not yet set off major alarms, but is there an export boom when the dollar regains some of its luster? The answer is a resounding "yes" and there are four main reasons to think so.
Influence of Energy Costs.
The first of these rationales is the cost of energy. The current system of export trade is predicated on costs of transportation as they were 10 years ago. In the good old days the decision as to where to source manufacturing was pretty easy as there were all kinds of advantages to having things made in the low-cost labor countries of Asia. This is the period in which a lot of
manufacturing capacity left the U.S. to find those lucrative relationships in China, Thailand, Indonesia and elsewhere. The costs of transportation were negligible and didn't constitute a major factor in the decision.
Those days are gone, and today's overwhelming energy (and transportation) costs place more emphasis on being closer to the supply chain sources. The cost of ocean cargo has begun to rise as fuel surcharges started to appear. Plus, there is the higher cost of ground transportation in Asia. China has been subsidizing the cost of Diesel fuel for years, but has already started to hike prices. Most expect that soon they will be closer to the world price for Diesel. The higher fuel costs indeed are playing a role in the pricing of these exports.
U.S. Evolving Overseas.
The second boost for export trade is the increased sophistication of U.S. manufacturers overseas. Those that started with some trade show and Internet orders have often taken this to the next level. There are sales organizations in place, contacts have been made, and the overseas consumers now have experience and familiarity with the U.S. products. The weak dollar allowed a foothold and companies have leveraged it from there.
It has long been asserted that manufacturers who moved operations overseas are so intertwined in these new global networks, that they will be hard pressed to unravel all of this in order to move production back to the U.S. In truth it isn't all that hard to unravel these days. The manufacturers were able to swiftly move their operations into countries that were relatively unsophisticated in almost every respect. Getting a plant set up in the U.S. again is significantly less difficult. Today's communications and logistics environments enable very rapid changes in production.
The third factor is less about what is happening in the U.S. and more to do with the changes taking place in countries that have evolved as manufacturing bases. They are experiencing the challenges of development — higher inflation, shortages of qualified workers, shortages of management skill and societal demands that could affect their competitiveness. The advantages that these countries once had in terms of production costs have been eroding. For example, the average wage in China has risen every year since the 1980s and is now four times higher than it was in 1995. For skilled and technical people that increase has been tenfold. Throughout this period the productivity levels in China have remained the same.
The past year has demonstrated that quality issues are a huge concern with Chinese goods. The rapid expansion of manufacturing, the cozy relationship between the government and some companies and the lack of experience in many operations lead some categories of Chinese goods to be uneven in quality and renders some manufacturers unreliable and unpredictable.
Money More Abundant.
The fourth rationale is that there is more money in overseas markets than in the past and that means global consumers are interested and have the wherewithal to buy U.S. made products. The old markets used to be confined mostly to Europe, but now there is demand from Latin America, South Asia, East Asia and even from parts of Africa. The ability of consumers in most of the world to afford U.S. made products has expanded dramatically and created a whole new set of opportunities in countries that only played marginal roles in the past.
In addition, for all the advances made in Asia in terms of making things, there has been very little development of the marketing and distribution systems that fuel much of the U.S. and European expansions. The brand identity for Chinese goods remains very weak although they can try to emulate the success of both Japan and Korea in time. The distribution systems are still fairly rudimentary and this has allowed many U.S. companies to maintain their market share in developing markets throughout the world.
The U.S. export sector has turned a major corner due to the reduction of the dollar's value. Without that reduction these other factors would not have come into play as thoroughly and dramatically as they have. There is almost no chance that the dollar will return to the level of strength it enjoyed five to six years ago. This means that the position of the dollar will remain a major motivator for U.S. exports for some time. When the other factors promoting U.S. export growth are added to the mix, the prospect for expansion into overseas markets remains solid for manufacturers.
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