Now for the good news: U.S. exports strong, especially in the West

February 28, 2007

In 2006, the United States' trade deficit in goods was $836 billion, a record for the fifth year in a row and an 80 percent increase from four years earlier. With China alone, the gap last year was $233 billion. The symptoms of America's trade woes were most glaring in Detroit, where the big U.S. automakers recorded historic losses, at a time when the major foreign car manufacturers were thriving in the U.S. market.


But there actually is good news for the United States in the latest international trade data, according to researchers at the W. P. Carey School of Business. While the United States was seemingly going overboard importing oil, textiles, toys, and apparel, it was exporting high value added products, such as computers, transportation equipment, machinery, electronics, and aircraft. In 2006, the U.S. exported $1.04 trillion in goods, up almost 16 percent from 2005. According to analysts at the business school, these numbers represent opportunities for many states and regions in the United States.


"There is a constant barrage of alarming news that the trade deficit is getting larger and larger," said Lee McPheters, director of the JPMorgan Chase Economic Outlook Center. "Nonetheless, exports are continuing to grow. States in this country that participate in exports have the whole world they can deal with."



Exports strong: especially in West


McPheters points out that net exports contributed 1.5 percentage points to the 2.2 percent growth posted for Gross Domestic Product in the fourth quarter of 2006.  "That was a larger contribution than services," McPheters says.


While all U.S. states participate in exports, the strongest region now -- both in volume of exports and export growth -- looks to be the West, according to the March issue of the Western Blue Chip Economic Forecast, a publication of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business.


The Western Blue Chip Economic Forecast reports that Texas and California ranked first and second respectively among U.S. states in value of exports last year, while Washington placed fourth. Arizona was 17th and Oregon 21st. The 12 Western states accounted for 38 percent of all U.S. exports and 29 percent of U.S. jobs. The Western states all recorded double digit growth in exports, while Washington and Nevada were among the national leaders in export growth, with increases approaching 40 percent over the previous year.


W. P. Carey research economist Dawn McLaren noted that the goods exported from the Western states tend to be of high value, which is good news for the regional economy. "For Washington state, most of their growth was in aircraft, optics, and medical instrumentation," she said.


McPheters said the strength of aircraft exports is very important, both for Washington state and the country. "Aircraft is back. It's good for the United States. There are very few producers of large aircraft."



Winners and losers


California and Texas last year were the country's leading exporters of computers and electronic products, with California accounting for nearly one-fourth of the U.S. total. Arizona ranked fourth in the computer and electronics category, while Oregon was seventh and Colorado, tenth.


Export growth does not guarantee prosperity, according to Economics Professor Jose Mendez. "It depends on what you are exporting," he said. But for most U.S. states, the level of exports -- most of which are high value added products -- is a reasonable gauge of economic well-being, according to McLaren. She said, "It does seem to go along with it. The places that are having a hard time, you see it in their exports."


While most states saw export growth, a handful experienced declines -- Hawaii, Vermont, Georgia, and South Carolina. Michigan saw its exports grow -- despite the troubles in the car industry -- but only by a modest 7.5 percent, less than half the national average.


Several states outside of the West had big increases in exports, including Delaware (54 percent), Alabama (28.6 percent) and Kansas (28.4 percent). According to McLaren, Delaware's growth was in pharmaceuticals, Kansas's in aircraft, and Alabama's in vehicles. She said big percentage fluctuations can be a bit misleading, however. "One big sale to Boeing can make a big difference," McLaren said.



Exporting to Mexico


In trade, the Western states -- especially Texas and California -- benefit from their proximity to Mexico, according to McPheters, who notes that Mexico is the United States' second leading trading partner after Canada. Mendez, who directs the W. P. Carey MBA program in Mexico City, said machinery exports to Mexico are important for the Western states, and geography probably plays a secondary role, particularly since transportation costs have fallen dramatically over the last three decades.


"Proximity only helps U.S. retailers located along border," he said. "For particular states in the U.S., it's not the proximity that matters but the mix of products that you can produce at competitive prices and that Mexicans are seeking to purchase."


The North American Free Trade Agreement has not been that important in stimulating exports to Mexico, according to both Mendez and McLaren. Since the 1995 treaty was enacted, a series of academic studies have shown no strong connection between NAFTA and increased trade with Mexico, the researchers said.


"The extra paperwork required for firms exporting to Mexico offsets the benefits of the duty reductions," Mendez said. McLaren added, "It is easier to trade under the old system and pay the tariffs."


The increase in trade with Mexico after NAFTA went into effect was probably mainly due to the sharp devaluation of the peso in late 1994, and the surge in the U.S. economy and stock market in the late 1990s, according to Mendez.


Exports to Mexico are important to the United States, and the political and economic unrest since last year's election in Mexico could have implications north of the border, according to the researchers.


McLaren said that rising food prices in Mexico could present the United States with difficult choices. Exports of manufactured goods will be a tough sell if Mexican consumers are spending more money on food, according to McLaren. But exporting cheap food to Mexico could create political problems because it would undercut local producers, she added. "If the United States starts exporting cheap corn, we are going to get into big trouble," she said.


Mendez said he thinks continued unrest in Mexico could have effects in the United States. "There is anecdotal evidence that says businesses and people in Mexico during the election campaign held back on making purchases of consumer durables, such as automobiles," he said.


Mendez offered one anecdote of his own: a high-level executive in the W. P. Carey MBA program in Mexico City was lamenting the sharp drop off in purchases of automobiles during the election campaign. The executive speculated that their sales might be off by 25 percent during the year as a result of the uncertainty.



Importing what we want


The other side of the equation in the U.S. trade imbalance -- imports -- is not all bad news, according to McPheters. After all, he points out, many of the things we are importing -- such as apparel, footwear, toys, consumer gadgets -- are associated with low wage jobs.


"Most economists would say it's a good thing that we buy them from other countries. If they can make it cheaper, then we should be buying it from them," McPheters said.


The best path for the American economy is to stay on the forefront of such areas as electronics, aircraft, heavy machinery, and computers, according to McPheters.


"These tend to be accompanied by well-paying jobs at high skill levels," he said. Americans will keep on buying imports, he added. "It's the American way. We like to buy foreign stuff."



Bottom Line:


  • The ballooning U.S. trade deficit is only part of the country's trade picture. U.S. exports are strong and growing, totaling over a trillion dollars last year, up almost 16 percent over 2005.
  • The 12 Western states all experienced double digit growth in exports last year, and Nevada and Washington approached 40 percent. Texas and California rank first and second respectively among U.S. states in dollar value of exports.
  • What you export may be more important than how much you export. The U.S. generally and the West in particular are strong in exports associated with high paying and high skilled jobs: computers, electronics, aircraft, and heavy machinery.
  • Prosperity tends to accompany strong exports, as long as the goods being exported are associated with high skills and high wages.
  • The United States' second-largest trading partner is Mexico. Economic and political unrest in the country could present problems for U.S. industries and regions that export to Mexico.