The truth about trade

By Michael Elliott, contributor


(Fortune) -- I bet you're glad we have a National Export Initiative. It's going to help rebuild the economy. President Barack Obama says so.

In his State of the Union address, the President pledged to double America's exports over the next five years, an increase he said would support 2 million jobs. Last month, at the annual conference of the Export-Import Bank of the U.S. -- the federal agency that helps companies finance trade -- the President fleshed out that promise and announced the national initiative.

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Michael Elliott is the editor of Time International.

He's created an Export Promotion Cabinet, with 15 members (so far), and a President's Export Council, chaired by Boeing (BA, Fortune 500) CEO Jim McNerney. He's sponsoring lots of trade missions, and he's setting up various government-run "one-stop shops" that will offer a "comprehensive toolkit of services -- from financing to counseling to promotion -- to help potential exporters grow and expand."

Oh, there's no end to the initiatives in this initiative.

Some of them -- like that Export Promotion Cabinet -- seem about as worthy, and pointless, as an egg-white omelette. But other parts of the administration's plans do make sense. Given that trade financing dried up during the Great Recession, it's a fine idea to expand the funds available to the Ex-Im Bank, especially so that it can help small and medium-size firms break into new markets.

More generally, Obama and his team are right to stress the importance of exports -- and not just because of short-term job creation. As the world economy recovers, the patterns of global demand need to be rebalanced, with surplus nations (China, Germany, Japan) expanding domestic consumption, while deficit nations (principally the U.S.) shift their output more toward external trade.

So far, so good. But there is an elephant in the room: the relative prices of tradeable goods, which in turn depend largely on exchange rates.

Price is not the only thing that matters in export markets, of course; so does quality and service. Germany has proved for four decades that you can run an export machine and at the same time have a strong, appreciating currency.

But the price of goods isn't irrelevant, and the composition of U.S. trade is such that it will be hard to meet Obama's target. Outside North America, Western Europe is by far the biggest market for American goods and services, but the dollar has appreciated by around 11% against both the euro and the pound since the beginning of December. If that trend continues, U.S. exporters are in for a rough ride, however good their products.

Beyond the unstated importance of exchange rates, there's something troubling about the administration's plans. Politicians love talking about boosting exports; it sounds macho. But in the long run, it isn't exports that matter; it is trade, which is something different.

In 1817 the British political economist David Ricardo coined the theory of comparative advantage, explaining how encouraging economies to specialize in what they do best and trade for the rest raises total output and welfare. After nearly 200 years Ricardo's basic tenet still holds. More than that: When you think of what really contributes to human happiness, it is imports, not exports, that count.

The whole point of trade is that it lets you enjoy goods and services you wouldn't otherwise see. But you never catch a U.S. politician admitting what we all know: that imports make everyone's life better.

Obama hasn't so far. Nor has he said much at all about trade as a whole, beyond committing himself to "work toward" an agreement on the stalled Doha round of world trade talks, and to move forward with those free-trade agreements the U.S. has already negotiated with South Korea, Panama, and Colombia. (Don't hold your breath.)

I understand why politicians find it so difficult to sing the praises of foreign trade during tough times at home. But from an administration that claims to be big on intellectual honesty, some truth telling about why trade matters would be much more welcome than one-stop shops. Even if they do stock comprehensive toolkits.

Michael Elliott is the editor of Time International.  To top of page

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