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.

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?”

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