Countering the Negative Influence of the American Dollar on Exports

The trade gap bumped to $46.6 billion in December from $39.8 billion in November showing a move in the wrong direction. Exports are somewhat complex and even though new businesses have been recently attracted back to American shores they have not yet taken hold in full force. Likewise, the rise of the value of the American dollar means that exports are expensive and imports cheaper. Despite the damaging effect of a higher dollar there is something that can be done to counter this impact and improve exports.

It should first be remembered the any number and any dollar is subjective in value. This means that its value is only as good as it relates to some other item. For example, the number two is a higher number than one but both are relative to the other. One must still relate to some measure such as inch, centimeter, etc... that reflects an actual distance in our environment.

The same can be said for the dollar that is compared against some other metric to determine its value. One American dollar equates to .88 Euros. In January of 2014 the dollar was worth .72 Euros. The dollars value as a stable currency is rising and this is making American dollars and products more expensive for international markets. Exports are becoming more expensive because it takes more international currency to purchase.

As a subjective measurement the price is a reflective number on the comparable worth of a unit of production. In the U.S. we consider an hour of a person's time as a unit of production and we are willing to pay a certain dollar value per hour. Wages are factored into the overall cost of producing a product for sale on the market. If the dollar rises in value we are paying more for that unit of labor that is reflected in the final price.

This doesn't mean that the American economy is doomed. It is possible that it won't have a long term impact if we understand the other factors that go into the value the dollar that result in a particular value on the market. The dollar produces more when worker productivity, innovation, and skill are put to use in industries that can compete on the market.

The American worker would have to produce a lot of generic widgets to keep up with a Chinese worker to create value. However, if the American worker is more productive through the use of technology then his/her value rises in the overall production requiring less hours to produce products. Technology, skill and productivity can come together.

We may also raise the value of American labor through focusing on those industries that have the highest value on the market. One of the reasons we don't compete in textile industries anymore is because the products can be produced cheaper overseas and have relatively low value. The process can be run with moderate technology somewhere else.

Now if we were to place our workers in high end manufacturing, service, and other valuable industries we can create high value products that can lead the market. We can find this value in manufacturing, light metals, micro processing, IT services, and much more. These are the advanced industries that should power our economic return and create a more export driving economy. The value of the American dollar is subjective based on the value of the products produced and the efficient use of input. Educating our workers in demand industries and focusing their attention on exports can go a long way.

American Automakers Win WTO Complaints-Are Tariffs a Wise Chinese Policy?

The economy is a hot topic in today’s society as the American economy starts to show signs of sputtering to life. Recently, American automakers won a significant WTO case concerning Chinese tariffs on American-made cars and sport utility vehicles. According to the complaint, tariffs ranged from 2% to 21.5% on large cars starting in 2011 that impacted nearly two-thirds of $8.5 billion worth of U.S. Auto Exports (1, 2).  American manufacturers and officials lodged the complaint as an unfair practice within the global economy and sought a level trading field.

It is believed that the duties were implemented by China in retaliation for an American 2009 enactment of an anti-dumping duty of up to 35% on imported tires (3). The WTO also backed the U.S. anti-dumping program due to the unfair practice related to pushing cheap Chinese products on the market. Lower than cost products are viewed as an attempt to game the free market and damage American manufacturing capacity.

In the ruling the WTO global trade arbiter found that China’s duties on American made vehicles violated international laws and is in line with other WTO decisions involving steel and chicken broiler parts (4). Tariffs often restrict free trade and countries that effectively negotiate treaties with each other expect relatively transparent trading approaches. 

American automakers are likely toasting to the ruling as an official endorsement of their complaints. The automotive industry will have an easier time improving upon their sales and marketing in the Chinese region of influence. Combining this legal market adjustment with an improving U.S. manufacturing costs there are new opportunities rising (5). 

Countries often engage in tariffs to strengthen domestic markets. Despite this seeming advantage there are long-term risks to the Chinese economy. A paper by Azam Chaudhry highlights some of the tradeoffs that countries face when they use tariffs (2011). Raising tariffs allow for greater rental income and political stability while reducing tariffs increases long-term growth and potential instability. 

Tariffs support emerging economies but damage those same countries when they mature and need advanced knowledge. China is an emerging economy that is maturing and they seek to suck in innovation, knowledge, and production capacity when possible. However, as American markets become more equated in costs those same tariffs lower the desire to invest and share knowledge which has a direct impact on innovative growth. 

The tariffs that were supposed to help China are now contributing to political and financial instability. China is concerned about growing corruption within their society and is trying to curb the loss of intellectual and financial capital to shore up economic waste. According to Rotunno & Vezina (2012), the use of tariffs increases corruption as companies and officials skirt government restrictions in search of greater financial gain. We experienced much of the same thing during the Prohibition Periods. This process of business and government officials bulking national laws for personal interest has increased thereby furthering the strength of the shadow market (6). 

China’s economy isn’t as stable as was once thought. They have reaped the reward of cheaper labor but as the economy globalizes some of these benefits become limited. What once protecting their new industries may have a detrimental flip side of the coin. Multi-national companies are seeking greater mobility, flexibility, and fairness in the transference of goods, services, and information and are not able to get that in difficult import markets.

This ruling not only creates greater opportunities for American businesses to sell in China but also develop their own internal capabilities through better policy, information management, and investment guidance. As Multi-national companies search out innovative enhancements they will naturally seek business friendly and information rich clusters. Semi-closed economies may do better if they open up and reach out to international investment opportunities and improve their financial positions beyond protectionist policies. American clusters combined with progressive trade policies may just further tip the manufacturing balance in favor of the next American transformation.

Chaudhry, A. (2011). Tariffs, trade and economic growth in a model with institutional quality. Lahore School of Economics, 16 (2). 

Rotunno, L. & Vezina, P. (2012). Chinese networks and tariff evasion. World Economy, 35 (12).