Exports & A Strong Dollar: Not Necessarily Perfect Together

By Aug 30, 2012, 6:54 AM Author's Blog  

It’s become fashionable in this election cycle in some circles to promote the idea of a strong dollar as a key part of the solution to the economic ills that plague the U.S. But simple “solutions” in economics aren’t always what they seem. That’s a caveat worth considering when it comes to America’s growing exports and how it relates to the value of the dollar. Arguing that America should have a strong dollar may sound good in a political speech, but the details can be messy.

It’s well established that changes in export levels tend to be inversely related to currency value, and for a rather obvious reason: domestic goods and services are less expensive in foreign markets when the home currency’s value falls. When prices decline, consumption usually rises. But there’s no free lunch here. A weaker currency also translates into higher prices for imports. That’s a key issue for the U.S., which is dependent on crude oil imports in rather large quantities–nearly 11.4 million barrels a day in 2011.

Nonetheless, it’s narrow-minded to talk about a strong dollar and ignore the fact that U.S. exports have increased sharply in recent years, in part thanks to a weaker greenback. Four years after the Great Recession ended, American exports are up 44% through June 2012, according to Census Bureau data. In 2010, exports’ share of U.S. GDP was 13%, up from 11% the year before, the World Bank reports. Roughly 10 million full-time jobs are directly related to exports, based on 2008 data, the International Trade Administration advises, which equates with nearly 7% of total employment.

Exports, in short, are big business, and getting bigger. A recent Brookings Institution report notes:

U.S. export sales grew by more than 11 percent in 2010 in real terms, the fastest growth since 1997. In terms of job creation, the number of U.S. total export-supported jobs increased by almost 6 percent in 2010, even as the overall economy was still losing jobs.

Unsurprisingly, the data show that a weaker (stronger) dollar is linked with higher (lower) exports, as the chart below shows. It’s not a perfect relationship, but nothing ever is in macroeconomics. What the relationship implies is that a stronger dollar at some point will trim exports and, perhaps, jobs, and vice versa. Funny how that risk is never discussed by the folks who bang the table for a strong dollar.

Exports & A Strong Dollar: Not Necessarily Perfect Together

I don’t want to suggest that a mindless policy of weakening the dollar is an easy solution either. There are limits to what a lower dollar can deliver in terms of higher exports and new jobs. Let’s not forget the costs in terms of higher prices for imports via a weaker dollar. The great question is deciding where the sweet spot is for America? At what level does the dollar’s value maximize exports/jobs without incurring a net loss for the economy in terms of higher import prices? That’s worth modeling and discussing, but it’s a two-way street.

Discussing a strong dollar without talking about the potential impact on exports is, at best, a naive view of international trade. The next time someone tells you that we need a “strong dollar” policy, ask them: “Why?” You might follow up with: “How strong?” And the zinger: “What would a ‘strong dollar’ policy mean for exports?”

  • SHARE:
  • Share on StockTwits

LEAVE A COMMENT

SPY208.02  chart+1.30  chart +0.63%
GOOG525.02  chart+2.16  chart +0.41%
AAPL125.69  chart-0.31  chart -0.25%
TSLA267.88  chart-11.84  chart -4.23%
TWTR35.52  chart+0.09  chart +0.25%
BBRY7.99  chart+0.02  chart +0.25%
NFLX658.64  chart-3.36  chart -0.51%
FB87.22  chart-0.33  chart -0.38%

Nikkei19911.39  chart-465.20  chart -2.28%
UK6432.21  chart-103.47  chart -1.61%
France4604.64  chart-106.90  chart -2.32%
Germany10676.78  chart-213.85  chart -1.96%

EUR / USD1.1000  chart+0.0007  chart +0.06%
GBP / USD1.5439  chart-0.0019  chart -0.12%
CAD / USD0.7857  chart-0.0007  chart -0.09%
AUD / USD0.7415  chart-0.0028  chart -0.38%