U.S. Trade Growth: A New Beginning or a Repeat of
the Past?
After years of declining
export growth, new forces shaping U.S. agricultural
trade point to a resurgence in exports and slowing
import growth.
Erik
Dohlman and Mark
Gehlhar
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After faltering for several years, U.S.
agricultural export growth is
experiencing a renewal, sparked by rising
food demand in emerging markets, a weakening
dollar, and closer integration with
NAFTA partners. |
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Import
growth has also been unusually strong
as a result of regional integration
(NAFTA), consumer preferences for foreign
products, and strong overall growth
in consumer spending.
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Continued
growth in emerging markets combined
with macroeconomic factors at home points
to sustained growth in U.S. exports
and slower import growth. | |
| This
article is drawn from . . . |
| Global
Growth, Macroeconomic Change, and U.S. Agricultural
Trade, by Mark Gehlhar and Erik Dohlman,
ERR-46, USDA, Economic Research Service, September
2007.
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| You
may also be interested in . . . |
| USDA
Agricultural Projections to 2016,
Paul Westcott, ERS Contact, OCE-2007-1, February
2007.
“Weaker
Dollar Strengthens U.S. Agriculture,”
by Mathew Shane and William Liefert, in
Amber Waves, Vol. 5, Issue 1, February
2007, USDA, Economic Research Service.
ERS
Briefing Room on U.S. Agricultural Trade.
ERS
Data on Agricultural Exchange Rates
ERS
Data on International Macroeconomic Data
ERS
Data on Foreign Agricultural Trade of the
United States
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Fast-rising imports and a stretch
of slow export growth reduced the U.S. agricultural
trade surplus from a 1996 record of $27.3 billion
to less than $5 billion a decade later. But changes
in the structure of U.S. trade in recent years have
brought renewed export demand and signs of slower
import growth, signaling a potential reversal of
recent trends. U.S. agricultural exports in fiscal
year (FY) 2007 are in the fourth consecutive year
of record shipments, buoyed by rising foreign demand,
competitive U.S. prices resulting from a weaker
dollar, and strong world growth. Despite the weaker
dollar, imports are still growing rapidly, but not
quite as fast as in some recent years.
The simultaneous growth of U.S.
agricultural exports and imports are both linked
to regional integration and freer trade with Canada
and Mexico; however, there are also other separate
and distinct factors shaping imports and exports.
While a weaker dollar has helped exports in recent
years, sustained changes in export performance hinge
upon global economic and population growth trends
and shifts in demand between foreign markets. An
ongoing transition in global food import demand
from mature high-income countries to more dynamic
emerging markets, for example, played a key role
in precipitating first the slowdown of U.S. exports
in the mid-1990s and now the current expansion.
U.S. import growth, on the other hand, is not strongly
associated with domestic income and population growth.
Nor has it responded quickly to rising prices caused
by the weaker dollar. Instead, it seems more closely
tied to changing consumer preferences and macroeconomic
conditions that have stimulated the vast U.S. current
account deficits of recent years, now at an unprecedented
level of 7 percent of Gross Domestic Product (GDP).
The current account balance reflects not only the
value of trade in goods and services, but also the
value of net investment earnings to and from the
rest of the world—providing the broadest measure
of U.S. borrowing from the rest of the world.
Can Recent Export Growth
Be Sustained?
Income, population, and the rate
of economic growth in importing countries have long
been recognized as key determinants of foreign demand
for U.S. agricultural products. Many analysts expected
the rapid growth in U.S. exports in the mid-1990s
to continue, for example, based largely on increased
demand from fast-growing emerging markets. However,
analysts did not foresee a decline in demand from
high-income markets. In Japan and the European Union
(EU), relatively slow growth in income and population
helped induce a drop in demand for U.S. food products.
In 1996, these two markets accounted for $21 billion
(35 percent) of U.S. agricultural exports, but by
2006, the total was less than $15.3 billion (22
percent). A low propensity for consumers to spend
additional income on food, aging populations (with
reduced dietary needs), and, until 2002, an appreciating
dollar also helped dampen export demand. These factors
accentuated the effects of trade barriers, such
as relatively high tariffs, which have limited new
access for U.S. agricultural products.
So what explains the renewed growth
of U.S. exports? In addition to the weakening dollar,
a key factor is that demand from emerging markets
is having an appreciable impact on both global food
demand and U.S. exports. Emerging markets contributed
to the growth of global and U.S. food trade throughout
the 1990s, but gains since 2000 have been far greater.
Global agricultural trade expanded less than 25
percent during the 1990s but has already grown 50
percent in the first part of this decade, spurred
by rising incomes in emerging markets. As a result,
the share of U.S. exports destined for emerging
markets climbed from 30 percent during the early
1990s to 43 percent in 2006. China and Mexico now
account for 25 percent of U.S. exports—nearly
triple their share in 1990. Exports to China alone
are now nearly equal to exports to the EU. Overall,
U.S. exports are up from $50.7 billion in FY 2000
to a projected $78 billion in FY 2007.
Although U.S. exports always have
ebbed and flowed, there are a number of reasons
to believe that the increased prominence of emerging
markets in global food trade could lead to sustained
export growth. In the past decade, the emerging
market share of global GDP has risen from 43 percent
in 1996 to 50 percent in 2006 (as measured by “purchasing
power parity” rather than exchange rates),
and the emerging market share of global trade has
climbed at an even faster pace. Developing regions
such as China, Southeast Asia, Mexico, Central America,
and India will likely continue to increase their
share of global GDP in the coming decades. They
will also account for 95 percent of the expected
increase of 1 billion persons to the global population
by the year 2020. Despite generally higher agricultural
commodity prices brought on by the expansion of
ethanol production in the U.S., enhanced spending
power abroad is projected to substantially raise
the value of U.S. agricultural exports over the
next decade—from $69 billion in 2006 to $95
billion by 2016, according to USDA projections.
Food expenditure shares will also
factor into sustained growth of agricultural exports.
Food purchases represent a much larger share of
new expenditures in developing countries than in
high-income markets. For example, for every additional
dollar of income, consumers in Egypt, Indonesia,
and Vietnam spend more than 25 cents on food, while
consumers in France, Japan, and the United States
spend less than 10 cents. It will take decades for
the developing countries to reach a level of development
where food demand becomes saturated.
The larger proportion of young
people in developing countries is another indicator
suggesting sustained demand growth. Slowing economic
growth and food demand is associated with an aging,
high-income population, and food demand tends to
taper off as the population matures, even while
per capita incomes may rise. Less than 15 percent
of the population in Japan and Europe is under 14
years old, in contrast to roughly a third of the
population in India and Mexico.
ERS analysis of historical changes
in U.S. agricultural trade also suggests that the
shift of U.S. exports to regional partners with
open markets and more durable demand helped to sustain
recent export growth, as seen over the past 5 years.
The unwavering demand from North American Free Trade
Agreement (NAFTA) partners is providing continuity
for U.S. agricultural exports that was missing from
other lead markets (Japan and Europe) in previous
decades. Canada and Mexico are now the two top markets
for U.S. exports, expected to generate a combined
$26 billion in demand for U.S. agricultural products.
Due to Canada’s comparatively slow population
and income growth, the pace of U.S. exports to Canada
may eventually subside. However, exports to Mexico
will most likely continue to show strong growth
and will enable Mexico to overtake Canada as the
leading market for U.S. agricultural products, due
to Mexico’s higher rates of income and population
growth.
Trade agreements, the strength
or weakness of different currencies, and unpredictable
market developments for particular commodities (e.g.,
the disruption of U.S. beef exports to Japan following
the discovery of bovine spongiform encephalopathy
in U.S. cattle) will affect the evolution of U.S.
trade flows in individual markets. The differences
among countries reflect the contrasting effects
of trade liberalization in some markets (NAFTA and
China’s World Trade Organization (WTO) accession)
and exchange rate rigidities and trade barriers
in others. Nevertheless, ERS research indicates
a strong connection between foreign economic growth
and overall U.S. agricultural exports, and suggests
that if economic growth continues at the recent
pace in emerging markets it should help sustain
U.S. export growth for the foreseeable future.
Research also indicates, however,
that the rapid pace of U.S. imports in recent years
is not well explained by domestic economic growth
and population change. Actual import growth dwarfed
levels projected by these factors especially since
2001, indicating that other forces have been at
play.
What Lies Behind the Rapid
Growth of U.S. Imports?
U.S. agricultural imports doubled
in the past decade to a record $64 billion in FY
2006. Since 2001, U.S. import growth has averaged
more than 10 percent per year, far above the long-term
trend and similar to import growth in some of the
fastest growing emerging markets. This upward surge
comes even as the U.S. dollar has depreciated, which,
other things equal, should curb imports by making
them more expensive (see box, “The
Role of Exchange Rates”). In 2007, import
growth appears to have lost some momentum, compared
with that of the previous 4 years, with annual growth
currently below 10 percent.
One fundamental cause for the
growth in U.S. imports appears to be the combined
effects of regional integration promoted by NAFTA
and increased consumer preference for a wide variety
of imported foods. The largest absolute and percentage
gains in imports have come from NAFTA partners Mexico
and Canada. For example, the U.S. has been an attractive
market for live animal imports from Canada with
its efficient large-scale slaughter operations.
Both live animals from Canada and U.S. meat exports
to Mexico have grown rapidly in recent years. The
United States is also sourcing much of its off-season
demand for fruit and vegetables from Mexico and
the Southern Hemisphere. Reflecting the diversity
and affluence of U.S. consumers, the largest increases
in U.S. imports since the early 1990s are attributed
to such products as confectionery, beer and wine,
and fruit and vegetables.
The accelerated growth of agricultural
and food imports in the U.S. is also connected to
the same macroeconomic conditions that spurred a
dramatic rise of U.S. merchandise trade and current
account deficits. Over much of the past decade,
conditions in the U.S. economy encouraged strong
consumer spending, leading to rapid, across-the-board
growth in imports. Although the dollar has depreciated
since 2002, U.S. spending on imports has remained
strong, and in 2006, the U.S. current account deficit
reached a record $811 billion (7 percent of GDP)—up
from $100 billion in 1996. Imports of all categories
of goods have grown at a brisk pace—most notably
consumer goods, but also services and agriculture—categories
in which the U.S. remains a net exporter. Thus,
the recent changes in U.S. agricultural trade appear
to be part of an economy-wide phenomenon.
Recent economic literature associates
the overall growth in U.S. imports with such factors
as the increased wealth of U.S. households, low
domestic savings rates, strong consumption growth,
and foreign demand for U.S. financial assets. The
stock market appreciation in the 1990s and housing
sector wealth gains in the current decade encouraged
U.S. consumers to draw upon their equity, reduce
their savings, and spend more on both domestic and
imported goods. At the same time, growing inflows
of foreign capital kept interest rates low and prevented
the dollar from declining further. The unprecedented
size of the U.S. current account deficit has sparked
widespread debate about the capacity to sustain
such levels and the implications of a potential
adjustment.
Many Factors Influence
U.S. Trade Prospects
To better understand the current
shifts in U.S. agricultural trade, ERS focused on
the implications of mounting U.S. current account
deficits and examined the effects of potential changes
that may place downward pressure on the U.S. dollar
and consumption. A model of the U.S. economy simulated
the impacts of reduced foreign willingness to purchase
U.S. financial assets such as Treasury securities
(these purchases, while made as investments, also
represent lending to the United States used to finance
the current account deficit).
During the past decade, foreign
investors have become increasingly attracted to
secure, but relatively low-return, U.S. investments.
Given the importance of foreign capital inflows
(lending) to the U.S., a central concern is that
improved investment prospects elsewhere or a desire
for currency diversification could reduce the willingness
of foreign investors to hold U.S. financial assets.
Lower demand for dollars would lead to further dollar
depreciation, more subdued U.S. consumption growth,
and lower overall deficits—all of which should
raise net U.S. agricultural exports.
For example, capital inflows may
eventually subside if less developed economies,
which account for a large share of foreign lending
to the U.S., choose to invest their savings elsewhere.
According to conventional economic theory, less
advanced economies would typically offer higher,
albeit more volatile, rates of return on investments
because capital in these countries is relatively
scarce. A more stable investment climate could encourage
investors from emerging economies to redirect their
savings to investment opportunities in their own
or other emerging economies. A desire to diversify
currency holdings could also motivate a shift in
assets from the U.S. to other economies. Korea,
Japan, and China, among other top holders of dollar-denominated
foreign currency reserves, have all hinted at the
possibility of diversifying their foreign exchange
reserves.
Analysts can only speculate about
a sudden downturn in demand for U.S. financial assets,
but should it occur, it would most likely trigger
further depreciation of the dollar and higher interest
rates. A weaker dollar would tend to raise foreign
demand for U.S. exports of agricultural (and other)
products because the price of U.S. goods would be
cheaper in foreign currency terms. Similarly, the
price of foreign products would increase for U.S.
consumers, eventually dampening import growth. Higher
interest rates in the U.S. would reinforce these
tendencies if they result in reduced borrowing and
spending on both imported and domestically produced
agricultural products.
ERS research suggests that a 20-percent
depreciation of the U.S. dollar could increase export
volume by as much 13 percent and decrease import
volume by somewhat less than 10 percent, compared
with projected levels without this depreciation.
This occurs because exports become less expensive
for foreign purchasers, while imports become more
expensive for U.S. domestic consumers. Imports would
also be affected by a slowing of consumption growth,
which is essential because recent experience demonstrates
exchange rate depreciation by itself may not slow
import growth.
Between 2001 and 2006, for example,
the value of U.S. agricultural imports from the
EU accelerated despite a substantial depreciation
of the dollar against the euro (and some other currencies).
The reason may be that U.S. demand for many imported
products is price inelastic—that is, a given
price change induces a relatively small change in
quantity demanded. In fact, the continued strength
of U.S. consumption boosted the quantity of imports,
which translated into an even larger increase in
value terms due to the weaker dollar. Impacts of
exchange rates on U.S. agricultural exports and
imports also depend on which foreign markets experience
the greatest exchange rate changes, delays in purchasing
behavior by importers and exporters, and the degree
to which exchange rates are passed through to buyers.
Although many other factors will
influence agricultural trade prospects, shifts in
foreign economic growth and macroeconomic influences
potentially point to sustained growth of U.S. agricultural
exports and slower growth of U.S. imports. The U.S.
food sector encompasses a broad and diverse set
of interests, but these new developments would be
positive for stakeholders involved in agricultural
production, belying the attention given to the recent
narrowing of the agricultural trade balance. The
fact that U.S. agricultural exports and farm income
levels have been historically strong in recent years
demonstrates that a declining trade balance is not
necessarily an indicator of lower demand or reduced
returns to stakeholders in the sector. Strong consumption
growth and the desire for a wide variety of foods
and beverages may continue to spur import growth,
but imports remain a relatively small share of domestic
food consumption.
| The
Role of Exchange Rates |
As a measure of the value
of a country’s currency, exchange rate
changes affect the volume and value of a country’s
imports and exports. When the value of the
U.S. dollar falls (depreciates) relative to
another currency, imports to the U.S. become
more expensive in dollar terms even if the
price in the foreign country remains constant
in its own currency. Similarly, the price
of U.S. goods and services become less expensive
in foreign-currency terms even if the U.S.
dollar price does not change.
Although there is a fairly
strong historical relationship between exchange
rates and the value of U.S. agricultural exports,
the relationship is not as strong for imports.
This is especially true since 2002, when a
weakening U.S. dollar corresponded to a rapid
rise of imports. While U.S. agricultural exports
have grown fairly rapidly since the dollar
began declining—rising by 26 percent
($13.7 billion) between FY 2002 and FY 2006—the
value of U.S. agricultural imports grew by
59 percent ($24 billion).
Some observers suggest that
one reason the overall U.S. trade balance
continues to deteriorate is that the dollar
has not depreciated sufficiently, in part
due to the intervention of foreign governments
in exchange markets. Evidence indicates that
a number of countries that account for a substantial
share of U.S. bilateral trade—particularly
in East Asia—do manage their currencies
to support exports.
The long lag between the
dollar’s depreciation since 2001 and
a slowdown of imports also reflects the wealth-driven
increases in consumer spending and/or a slow
adjustment of spending habits—which
makes U.S. consumer demand for imported agricultural
products appear unresponsive to exchange rate
movements. Even as the dollar declined against
the euro, increasing prices for imports, U.S.
consumers continued to demand more imported
goods. For example, while the import price
of European wines rose 27 percent from 2001
to 2006, the volume of wine imported by the
U.S. increased more than a third. This reinforces
the point that while imports eventually track
exchange rate movements, other factors affecting
demand—such as consumer preferences
and other macroeconomic forces—also
play a role.
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