Aunt Jane writes: “The USA currency is suffering and we no longer have the advantage in world trade. We are now in the beginning of the downslope that was predicted about 10 years ago with the emergence of China. How can we recover our advantage in world trade?”
That is an interesting thought, recovering a lost advantage in world trade. There are many answers to this question, but here’s the point that I will attempt to make below.
Key data do not indicate that we have lost a strategic advantage at all.
- Import prices have remained steady in spite of a tumbling the U.S. dollar (USD) since 2002; only recently have import prices started to climb, underscoring the strong incentives to pass on the recent surge in energy prices.
- Amid a sharp decline in the USD recently, foreigners are still snatching up U.S. stocks and bonds. This insatiable appetite for U.S. equity and debt has not subsided.
- The U.S. is not alone in its economic struggles. Driven by the falling USD, export growth is rising, which is pushing us through some very tough economic times.
In economic terms, “advantage” refers to the U.S.’s ability to produce something at a lower cost than can another country. In theory, it is this advantage that describes the directions of trade. However, since Jane refers to the U.S. dollar (USD), it is likely that she is addressing more of a “strategic advantage.” Many countries target the U.S. for export and are happy to sell to U.S. customers at reduced prices (usually by means of a currency peg) or giddy to acquire U.S. debt by the truckload.
As outlined in Reuters on July 5, the recent drop in the USD topped Bush’s policy agenda. However, the value of the USD has been falling quite precipitously since 2002, but only recently have import prices begun to rise. Theoretically, if the
Only recently have import prices excluding energy begun to rise. In May, the USD fell 9.4% on average over the year, but import prices only rose 6%. Given that energy costs are off the charts and the USD continues its decline, foreign producers are restrained in their price setting behavior.
In this light, I deduce that the
The U.S. dollar has been tumbling,
We just brushed the subject of international finance. Be like Aunt Jane: If you have any further questions or comments, please write a note below. I will respond with an answer.
Thank you Aunt Jane!