Speech

Protecting Exports SouthernGovernors’AssociationMeeting SessiononRegionalEconomicTrends Biloxi,Mississippi August25,2007 When the invitation to speak at providedspecialassistance.However,Iretain this meeting arrived, I jumped at fullresponsibilityforerrors. the opportunitytoaccept.Iama great believer in federalism in general. Moreover, among major national policy SOME EXPORT FACTS institutions, the Federal Reserve is probably Internationaltradeisplayinganincreasing better designed to keep in close touch with the roleintheU.S.economy.Since1970,exportsas statesthananyotherfederalinstitution.TheFed ashareofgrossdomesticproduct(GDP)have has regional roots serving a national purpose. aboutdoubled,fromabitlessthan6percentto I’llnottalkaboutmonetarypolicytodaybut 11percentin2006.Theseexportsconsistofboth insteadaboutanissueofgreatconcerntome— goods,suchasindustrialequipmentandcon- theexportssideofinternationaltrade.U.S.policy sumergoods,andservices,suchasinsurance towardexportsisprimarilyamatterofexport andfinancialservices.For2006,exportsofgoods promotionthroughfinancingarrangements— were70percentoftotalexportsandexportsof suchastheExport-ImportBank,supportfortrade serviceswere30percent.Thissplithasheldrel- fairsandnegotiationsofvarioussorts.Weneeda ativelyconstantsincethelate1980s. broaderviewofexports,whichiswhyIhave chosenmytitle“ProtectingExports.”Inparticu- UnderlyingtheincreaseinU.S.trading lar,weneedadeeperunderstandingofthecritical activityisthebehaviorofnumerousfirms.1I importanceofforeigneconomicgrowthforU.S. shouldstressthatthediscussionthatfollows exportsandoftherelationshipbetweenU.S. dealsonlywithtradeingoods.Thenumberof importsandU.S.exports. firmsinvolvedininternationaltradeingoodsis Beforeproceeding,Iwanttoemphasizethat increasingrapidly,andtheyareshippingmore theviewsIexpressherearemineanddonot productstomoreforeigndestinationsthaninthe necessarilyreflectofficialpositionsoftheFederal past.Exportingfirmsexperiencedrelativelyrapid ReserveSystem.Ithankmycolleaguesatthe employmentgrowthandwereamajorforcein FederalReserveBankofSt.Louisfortheircom- U.S.jobcreation.Thesefirmsexhibitanumber ments,particularlyCletusC.Coughlin,vice ofcharacteristics,suchasrelativelyhigherpro- presidentanddeputydirectorofResearch,who ductivityandlargersize,whichlikelycontribute 1 SeeBernard,Jensen,andSchott(2005)andBernard,Jensen,Redding,andSchott(forthcoming).Forreasonsofdataavailability,Iamrestrict- ingsomeofmystatementstotheSGAstatesand,thus,donotincludePuertoRicoandtheU.S.VirginIslandseventhoughtheirgovernors aremembersoftheSouthernGovernors’Association.Nonetheless,Iamconfidentthatmygeneralcommentsapplytoallmembersofthe SouthernGovernors’Association.Also,theexportdataIwillbeusing,whicharethebestavailable,allocateexportstostatesbasedonthe statefromwhichgoodsbegantheirjourneytotheportorsomeotherpointofexitfromtheUnitedStates.Thetransportationoriginofexports isnotnecessarilyidenticaltothelocationwherethegoodswereproduced.Thus,despitetheinclinationtothinkthatexportsfromaspecific statewereproducedinthatstate,thatisnotnecessarilythecase.Certaingoodsproducedinonestatemaybecountedasexportsfromsome otherstate. 1 INTERNATIONALTRADEANDFINANCE totheirexportsuccess.Moreover,exporterstend firmsservingmanufacturingfirms,whichsug- tobemoreinnovativeandpayhigherwages geststheimportanceoflinkagesacrossvarious thantheirdomesticcounterparts. typesoffirms.Whileanumberofsmalland Dataoninternationaltradeandtrade-related medium-sizedenterprisesareexporters,numer- employmentforthe16memberstatesofthe oussmallandmedium-sizedenterprisesalso SouthernGovernors’Associationindicatethat providegoodsandservicestoexporters,manyof therearemanylinkagesbetweenexportingfirms whomaremultinationalcorporations.These andotherfirms.FirmsthroughouttheSouthare linkagescancreatebusinessopportunitiesand increasinglyinvolvedininternationaltrade,and, enhancetheproductivityofsmallandmedium- duringrecentyears,exportsfromtheSouthhave sizedenterprises. increasedmorerapidlythanfromtheUnited Statesasawhole.Inprice-adjustedterms,exports fromthememberstatesasashareofgrossstate GROWTH MARKETS ABROAD productincreasedfrom5.8percentin1990to Asforeigneconomiesgrow,thepurchasing 10.7percentin2006,anincreaseof4.9percent- poweroftheirresidentsincreases.Totapinto agepoints.Meanwhile,U.S.exportsasashareof risingpurchasingpowerabroad,U.S.firmsmust GDPincreasedfrom7.8percentto11.4percent, providegoodsandservicesdesiredbythese anincreaseof3.6percentagepoints.Thisgrowth potentialconsumers.Asensibleexportstrategy inexportshasbeenverybeneficialtostates istofocusattentiononforeigncountriesthatare throughouttheSouth. growingthemostrapidly. In2006,exportshipmentsofmerchandise U.S.exportgrowthtoacountryandthe fromthememberstatestotaled$385.6billion,an growthofthatforeigncountryarecloselyrelated. increaseof54.8percentoverits2002value.In Whenweexamineexportgrowthfrom2002-2006 2006,theseexportswereshippedthroughoutthe andthetop50U.S.exportdestinationsin2006, world.Notsurprisingly,thetwolargestmarkets wefindahighcorrelation(0.63fortheUnited areMexico($73billion)andCanada($62billion). Statesasawholeand0.51forSouthernStates) Inadditiontothesizesofthesemarkets,proxim- betweenexportgrowthandincomegrowth ityaswellastherelativelyfreetradeenvironment abroad.Southernstates’exportstoChinaand stemmingfromtheNorthAmericanFreeTrade Indiagrewrapidlybetween2002and2006,bya Agreementcontributedtothelargeexportshares factorofnearlythreetobothChinaandIndia. ofthesemarkets.Othertopexportmarketsare Numerousexamplescanbeprovidedofhow China,Germany,Japan,andtheUnitedKingdom. growthabroadisprovidingopportunitiesfor Asyouwellknow,exportsprovidenumerous firmsbasedintheSouth.Consideranexample employmentopportunities.Evenifwerestrictour fromArkansas.ASpringdale,Arkansas,company, focustojobsassociatedwithexportsfromthe JVManufacturing,isprovidingtechnologyfor manufacturingsector,itiseasytoseetheimpor- hydrauliccompactorsthatsmashrefusebeforeit tanceofexports.Usingdatafor2003,themost istakentoalandfill.3Currently,thesecompactors recentavailable,estimatesbytheInternational arebeingusedinHuaibei,China.Plansareinthe TradeAdministrationindicatethatslightlymore workstoexportthetechnologytootherregions than1.7millionjobsinSouthernstateswere ofChina.Thisexampleinvolvinggrowthand relatedtoexports.2 trashsuggestsaplethoraofotheropportunities. Ofthese1.7millionjobs,739,000were Undoubtedly,givenChina’senvironmentalprob- directlyinmanufacturingand983,000werein lems,U.S.firmswithenvironmentallyfriendly 2 Seewww.ita.doc.gov/td/industry/OTEA/jobs/Reports/2003/jobs_by_percentciv_totals.html. 3 SeeMorasch(2006). 2 ProtectingExports technology,aswellasfirmsinvolvedinclean-up importsandviceversa.Thus,actionsthatlimit operations,shouldprosper. U.S.importswillalsotendtoreduceU.S.exports Theconsequencesofeconomicgrowthare becausetheydepressincomegrowthabroad. beingfeltbyPowerCurbersInc.,amanufacturer Fewpeopleseemtounderstandthatraising ofequipmentusedinmakingconcretecurbsand importbarrierswilltendtoreduceexportoppor- paving.4Thisfirm,basedinSalisbury,North tunities.Countrieswithhightradebarriersand Carolina,isexperiencinglargeincreasesin relativelylowlevelsofimportswillalsohave demand,especiallyfrombuyersinChina,India relativelylowlevelsofexports. andVietnam.Investmentintheinfrastructure neededfortransportationservicesisacritical factorforeconomicgrowth. TRADE WAR DANGERS Economicgrowthinconjunctionwithafree- Let’slookmorecloselyatthefindingthat tradeagreementhasprovidedanumberofexport exportingfirmshaverelativelyhigherproductiv- opportunitiesforSouthernfirmsinChile.For itythannon-exportingfirmsdo.Researchsug- example,WikoffColorCorporation,locatedin geststheconclusionthathigherproductivityisa FortMill,SouthCarolina,recentlysignedacon- requirementfor,ratherthanaconsequenceof, tractinChiletoprovideinksandcoatingsused engagingininternationaltrade.Apossiblereason intheproductionofscratch-offlotterytickets fortherequirementofhighproductivityisthat andprepaidphonecards.5Meanwhile,Impex, thehighentrycostsofbecominganexportercan locatedinPaducah,Kentucky,hasexperienced onlybeborneprofitablybythemostefficient largeincreasesinconveyorsystemsusedinmin- inginChile.6 firms. Interestingly,researchhasshownthatafter Anotherconsequenceofeconomicgrowthis increaseddemandforfoodproducts.Increases firmsenterexportmarketstheydoexperience inincomefromlowlevelsinvariablyleadto fastergrowthofemploymentandoutputthan increaseddemandforanimalprotein.Chicken, non-exportersdo.Reducedbarrierswillinduce porkandbeefareallexportedfromArkansasto morefirmstoexport.Increasedexportsinturn China.7TysonFoodsexportedthemajorityof wouldgenerateanincreaseddemandforlabor frozenchickencuts,whichistheleadingfood and,therefore,higherwages.Low-productivity exportfromArkansastoChina.Wecouldmulti- non-exportingfirmswouldbeforcedtoexitthe plytheseexamplesmanytimesover. industryandbothcapitalandlaborwouldbe Whattheseexamplesillustrateisthateco- reallocatedfromthelessproductivenon-export nomicgrowthprovidesexportopportunitiesand firmstothemoreproductiveexportingfirms, thattheseexportopportunitiescomeinnumer- increasingaverageproductivityandaverage ousareas.Thekeyrolethatincomegrowthplays wages. ininternationaltradealsosuggeststhat,froma Theproductivityfactsrelatingtoexporting nationalperspective,exportsandimportsare firmssuggestanimportantrolefortradeliberal- linked.Onelinkageisasfollows:Foreignincome izationinimprovingtheaggregateproductivity growthaffectsU.S.exports,whichhelptodeter- oftheeconomy.Productivitygainsstemming mineU.S.incomeand,therefore,imports.Con- fromtradeliberalizationallowforincreasesin sequently,changesthataffectexportswillaffect outputandincome.Recentresearchindicates 4 SeeTannenbaum(2006). 5 Seewww.buyusa.gov/southcarolina/wikoffcolor.html. 6 SeeTompkins(2005). 7 SeeSmith(2007). 3 INTERNATIONALTRADEANDFINANCE thatthepayofftotheUnitedStatesofliberaliza- goods.10Frankly,Idonotunderstandthestrategy tionoftradeandinternationalinvestmenthas ofattackingaverylarge,rapidlygrowingcus- beenquitelarge.8Basedonseveraldifferentsta- tomer.Chinaisanincreasinglyfrequenttarget tisticalapproaches,theestimatedpayoffranged foranti-dumpingactions.Ininternationaltrade from7.3percentto13.2percentofU.S.GDPin law,“dumping”issaidtooccurwhenafirmsells 2003.Using2006dollars,theseestimatessuggest aproductatahigherpriceinitshomemarket ahigherpercapitaincomeintheUnitedStates thanthepriceitchargeswhenitexportsthesame rangingfrom$3,000to$5,434.Thesearenot producttoanothercountry.IfU.S.manufacturers smalleffects. canestablishthattheyarebeingharmedbydump- Theprecedingreasoning,supportedby ingonthisdefinition,thenduties(i.e.,import empiricalestimates,impliesthatnegotiations taxes)areimposedtocounteracttheextentof thatreducetradebarrierscanbeverybeneficial.9 thedumping.Theillogicofantidumpinglawsis Conversely,legislationthatimposestradebarriers clear:WouldwepreferthatU.S.consumerspay willlikelybeharmful.Tomydisappointment,as higherpricesthanchargedabroad?WouldU.S. Isurveythecurrentstateoftradenegotiations consumersbeharmedinthemostextremepossi- andnumerouslegislativeproposals,Iamtroubled ble“dumping”scenarioinwhichtheyreceived thatthedirectionoftradepolicyintheimmediate goodsfromabroadforfree? futuremaynotbetherightone.Letmegiveyou Currently,theChineseshareofanti-dumping afewofthemanyreasonsthatcreatemyconcern. actionsisnearlydoubleitsshareofU.S.imports. First,fast-tracknegotiatingauthorityexpired Moreover,inMarch2007,theCommerceDepart- onJune30.Thisauthorityallowsthepresident mentbeganapplyinganti-subsidylawstoChina. tonegotiatetradeagreementsthatCongresscan Thisactionreversed23yearsofpolicyandled eitheracceptorreject,butcannotamendorfili- tofilingsthatChinahasillegallysubsidized buster.Thelackoffast-trackauthoritymatters exportsoftires,paperbags,steelpipesandsteel becausetradingpartnersareextremelyreluctant nails.Theselegalactionsareanti-consumer. tonegotiatewiththeUnitedStateswhenexperi- TheU.S.isalsopursuingcomplaintsagainst enceindicates,unfortunately,thatagreements ChinawithintheWorldTradeOrganization.The maybesubstantiallyalteredduringthelegisla- U.S.traderepresentativehasinitiatedfourcases tiveprocess. againstChina,whichismorethanagainstany Second,theDohaDevelopmentAgendamulti- othercountryatthistime.Thechargesinclude lateraltradenegotiationsappeartobeonthe illegallyhighChinesetariffsonautomobileparts vergeofcollapse.AcollapseoftheDoharound importedfromtheUnitedStates.U.S.pressure wouldraisedoubtsaboutthefutureeffectiveness toreducebarriersforU.S.exportsshouldideally oftheWorldTradeOrganization,whichisthe encourageamoreopenworldtradingsystem; keyinternationalorganizationfornegotiating, however,theprospectsforsuccessfulnegotiations implementingandenforcingmultilateraltrade dimwhen,simultaneously,theUnitedStatesis agreements. imposingimportbarriers. Third,manyintheUnitedStatesseemto SomeU.S.legislativeproposalsseemtobe favoramoreconfrontationalapproachwiththe basedonapresumptionthattraderetaliationis Chinese,despitethefactthatChinaisahuge aneffectivestrategy;however,economichistory marketwithrapidgrowthinpurchasesofU.S. suggestsotherwise.Ratherthanpassivecompli- 8 SeeBradford,Grieco,andHufbauer(2006). 9 Bradford,Grieco,andHufbauer(2006)conservativelyestimatethatglobalfreetradewouldproducehigherpercapitaincomerangingfrom $1,540to$2,069using2003dollarsorfrom$1,679to$2,255using2006dollars. 10SeeWeisman(2007). 4 ProtectingExports ancewithtraderestrictions,thetargetedcountry chemicals.Shortlythereafter,theChinesesus- tendstoretaliate.Successiveroundsofretaliation pendedimportsofchickenfeet,pigearsand canspiralintoatradewar.Actually,theprocess otheranimalproductsfromsevenU.S.compa- shouldbecalled“ananti-tradewar.”Restriction nies.11TheChinesejustificationfortheiraction ofacountry’sexportsforcesittoreorientits wasthattheproductscontainedbacteriaaswell economytowardalternativesuppliersandmar- asresiduesofdrugsandpesticides.Thereisno kets.Suchareorientationisfacilitatedbythe reasonwhythetwocountriesshouldnotwork factthatatraderetaliationpolicytendstoexpand cooperativelyonafoodinspectionprogramto theroleofgovernmentinthetargetedcountry.In servetheircommoninterestsinhigh-qualityfood. thepresentcase,U.S.interestsarelikelybest servedbyanincreasingroleforindividualcon- sumersandfirmsinamoremarket-oriented CONCLUDING COMMENTS Chineseeconomy. TheU.S.economyisfullyemployed;the Atragicepisodefromeconomichistorypro- unemploymentratehasbeenbelow5percent videsadditionalreasonsformyconcernsabout sinceDecember2005,comparedtoanaverage thefuturecourseoftradepolicy.TheGreat rateof6percentoverthepastquartercentury. Depressionwasaglobalcatastrophe.Most GiventhattheUnitedStatesdoesnothavea researchersagreethattheSmoot-Hawleytariffs highunemploymentrate,weneedtofocusless of1930precipitatedretaliationandlikelywors- oncreatingmorejobsandmoreoncreatingbetter enedtheeffectsoftheGreatDepressionbycon- jobs.Betterjobsrequiremoreproductiveworkers tributingtothecollapseoftradethroughoutthe andpayhigherwages. worldintheearly1930s.Anall-outtradewar GrowthinU.S.exportsincomingyearswill seemsunlikelytoday,butaseriesofsmallerbar- playacriticalroleincreatingbetterjobs.U.S. riersinflictingeconomiccostsonatradingpartner exportingfirmsonaverageenjoyhigherproduc- hasthepossibilityofinflictingharmfarbeyond tivitythanthosethatsellonlyintotheU.S. theoriginaltarget.Iamveryuncomfortablewith internalmarket.Becauseexportopportunities thenumerousactionsandproposedlegislation areespeciallygreattocountriesabroadthatare thatnotonlyareunlikelytoaffectthelargeU.S. growingrapidly,weneedtoencouragethat tradedeficitbutalsoareincreasingthechances growth,oratleastnotinterferewithit.Imports ofescalatingtradefrictions.Escalatingtradefric- intotheUnitedStatesfromhigh-growthcoun- tionshavethepotentialtohinderinternational trieshelptoencouragegrowthabroad.Wehave tradeandeconomicprosperitybothhereand acommoninterestwithallthecountriesofthe worldinpromotingtradeliberalization.Increas- abroad. ingliberalizationiscentraltocreatingbetterjobs Thereisarole,ofcourse,forprotectingU.S. aroundtheworld,includinghereathome.In consumersfromunsafeproducts,butthisrole ourapproachestotradeissues,weneedtoshift shouldnotdependonwhethergoodsarepro- attentionfromprotectingworkersagainstimports ducedintheUnitedStatesorabroad.Akeyprin- toprotectingexports.Thatwillbethekeytoa cipleisthatidenticalstandardsthataddress moreprosperousfuture. genuinesafetyissuesbeappliedtoagoodregard- lessofwhereitisproduced.Oneunfortunate possibilityisthatproductsafetyissuesbecome REFERENCES partofatradewar.Forexample,recentlythe UnitedStatessuspendedsomeChineseseafood Bernard,AndrewB.;Jensen,J.Bradford;Redding, importsafterfindingtracesofcancer-causing StephenJ.andSchott,PeterJ.“Firmsin 11SeeIrvin(2007). 5 INTERNATIONALTRADEANDFINANCE InternationalTrade.”JournalofEconomic Perspectives(forthcoming). Bernard,AndrewB.;Jensen,J.BradfordandSchott, PeterJ.“Importers,Exporters,andMultinationals: APortraitofFirmsintheU.S.ThatTradeGoods.” InstituteforInternationalEconomics,Working Paper05-10,September2005. Bradford,ScottC.;Grieco,PaulL.E.andHufbauer, GaryClyde.“ThePayofftoAmericafrom Globalisation.”TheWorldEconomy,July2006, 29(7),pp.893-916. Irvin,David.“TysonSaysChineseBanIsaNarrow One.”ArkansasDemocrat-Gazette,July17,2007, p.21. Morasch,Charlie.“SpringdaleMayorCements RelationsinChina;TrashFirmOpensSisterCity System.”ArkansasDemocrat-Gazette,August14, 2006,p.7. Smith,David.“ChinaaGrowingMarketforState; NationofOneBillionFormingaTastefor ArkansasGoods.”ArkansasDemocrat-Gazette, January21,2007,p.79. Tannenbaum,Fred.“Exporting,NewProjectsBuoy Manufacturers’Hopes.”CharlotteBusinessJournal, December29,2006,p.17. Tompkins,Wayne.“FreeTradewithChileaGold Mine in Paducah.” Louisville Courier-Journal. June 19,2005,p.20a. 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William Poole (2007, August 24). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20070825_poole

@misc{wtfs_speech_20070825_poole,
  author = {William Poole},
  title = {Speech},
  year = {2007},
  month = {Aug},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20070825_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}