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Will America Supply or Demand?

August 17, 2010

America is renowned for its unrestrained hunger for imports.  From bananas to oil, the United States imports more goods than any other country in the world.  According to a report by Emilia Istrate, Jonathan Roswell, and Bruce Katz of the Brookings Institute, however, “[Large increases in exports] will be the norm in the next 10 to 15 years.”

What is the significance of this?  An article in the Financial Times states that, “Many economists believe this is desirable.”  Don Kohn, vice-chairman of the Federal Reserve, claims that increasing our level of exports (even including services) will produce a “stronger, more resilient, and …more sustainable growth path” as well as make America “less vulnerable and better able to withstand shocks in the future”. 

Put simply, the explanation for promoting exports that Christina Romer, outgoing chair of the president’s Council of Economic Advisors, espouses is this: the United States is suffering from low levels of demand for its goods.  Our country has  high productivity, but our real manufacturing output is relatively low because there just isn’t much domestic demand for goods.  By pursuing policy to increase exports, the U.S. is effectively increasing demand via encouraging more engagement with foreign markets.  Generally speaking it follows that: More foreign markets means more demand.  More demand encourages more supply.  More supply comes from more jobs.

Yet the United States faces significant obstacles to President Obama’s goal of doubling exports in the next five years, an accomplishment which he states could create 2 million jobs.  As European countries rein in spending and embrace somewhat more protectionist policies, both the quantity and quality of available markets diminish.  Additionally, the United States faces tough competition from the world’s top two exporters, China and Germany.  While slowly appreciating, China’s currency is still undervalued enough to makes its goods far cheaper (and thus more appealing) than U.S. goods.  Germany, on the other hand, circumvents barriers to trade with the enormous collective economy of the European Union and provides goods in high demand, especially to the United States

Combined with other measures to increase demand and jump-start job creation, increasing exports could provide additional help to a struggling economy.  Recent reports, however, show that the U.S. trade deficit has only grown in recent months.  Trade experts have received President Obama’s goal of doubling exports with incredulity.  Leslie H. Gelb, president emeritus of the Council on Foreign Relations, wondered, “How will he perform this miracle? It really is a mystery.”  Mystery or not, if Obama pulls this one off and the economy recovers quickly, I may start to believe in magic.

-Brett Gall

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