Wednesday, July 22, 2009

Will Trade Lead Us Out of Recession?

From this week's Barron's:

LARGE TRADE DEFICITS have bedeviled the U.S. for much of the past 20 years. Although puritanical critics have attributed these imbalances to a nation content to live beyond her means, Paulsen sees other factors at work. For one thing, most U.S. administrations over that period, and even during the 1980s, favored a strong-dollar policy (at least until 2002). This was in reaction to the economic traumas of the '70s when the U.S.'s weak-dollar policies helped spur hyperinflation.

Likewise, the U.S. also closely hewed to free trade, even though the policy, along with a strong dollar, cost the nation dearly in terms of manufacturing jobs. Foreign goods displaced U.S. products both here and abroad. This was a major reason why real annual GDP growth from 1982 through the end of 2006 averaged about 3.3%, while such growth from 1950 to 1980, when trade deficits weren't a problem, approached 4%. According to Paulsen, foreigners in recent decades were capturing some fruits of the U.S.'s consumer spending binge.

Yet Paulsen sees a silver lining to this leakage of U.S. demand to overseas.

In the process of gorging on overseas goods and services, the U.S. by happenstance fired up emerging economies such as China, Korea, Taiwan, India, Brazil and Mexico to build their productive capacities and spawn their own middle classes and consumer cultures. Paulsen has long called this trend the U.S.'s "emerging-market Marshall Plan."

In the strategist's view, the emerging-market demand will constitute "an incredible asset" for U.S. and other developed nations' goods and services. So far, the post-2002 weakening of the dollar has only helped U.S. trade competitiveness versus developed trading rivals such as Japan, the European Union and the U.K. That is because many emerging-world nations have been allowed to peg their currencies to the dollar -- or, like China, have made only desultory moves to strengthen their currencies. But U.S. trade competitiveness should benefit mightily from the likelihood that these currencies will no longer be able to maintain their pegs at ridiculously low levels.