Go metric and remove barriers to nationwide branch banking: these are the best ways to improve U.S. export performance in world markets.Balance of trade ; Competition ; Dollar

H. Robert Heller

English

Research Papers in Economics

IMPROVING  AMERICA’S COMPETITIVENESS 
Address  by 
H.  Roberr  Hecl’er 
Member,  Board  of  Gov,emon  of th  Fedma/  Reserve  System 
to the 
Richmond  Society of Financial  Analysts 
Marc/r  23,  1989. 
America’s  trade  balance  has improved  considerably 
in the  last  two  years,  but  much  work  remains  to  be 
done.  Today,  1 would  like  to  talk  with  you  about 
some  of  the  macroeconomic  causes  and  conse- 
quences  of  our  trade  imbalances,  and  explore  what 
we  can  do  to improve  America’s  competitiveness  in 
world  markets. 
The  Dimensions  of  the  Problem 
The  dimensions  of the problem  are enormous.  Last 
year,  we imported  over  $440  billion  in merchandise, 
but exported  only  $320  billion,  leaving  a trade  deficit 
of  $120  billion.  That  is,  our  imports  exceeded  our 
exports  by  almost  40  percent. 
Bringing  these  numbers  down  to a meaningful  per- 
sonal  level,  we  exported  a bit  more  than  $1,300  of 
merchandise  per  person,  while  importing  nearly 
$1,800  per  person.  This  leaves  an international  trade 
deficit  of  $500  for  every  American. 
A quick  moment  of introspection  shows  that  most 
of  us  have  personally  contributed  to  the  problem. 
Who  did  not  buy  a  camera  or  a  recorder  made  in 
Japan,  eat  Swiss cheese,  or enjoyed  a glass of French 
wine?  I  am  sure  we  all enjoyed  our  purchases. 
But we also have  to ask ourselves  what  did we pro- 
duce  that  was exported.  Maybe  Pogo  was right  when 
he  said:  “We  has  met  the  enemy,  and  it  is us!” 
Dollar  Depreciation  Is Not  the  Answer 
Last  year,  the  trade  deficit  was  reduced  by  $32 
billion,  but  now  several  observers  worry  that  the  im- 
provement  in our  trade  imbalance  may  have  stalled. 
They  argue  that  a further  decline  in the  value  of the 
dollar  is needed  to  bring  about  improvement  in the 
trade  accounts. 
According  to most  studies,  the  dollar is already  very 
competitively  priced  in world  markets.  For  instance, 
OECD  data  indicate  that  in  1987,  it cost  a Japanese 
person  the  equivalent  of  $148  to  buy  a  bundle  of 
representative  goods  that  could  be  purchased  with 
$100  in the  United  States.  The  same  bundle  of goods 
would  have  cost  $123  in France,  $138  in Germany, 
and  $163  in  Switzerland.  That  is, American  goods 
were  priced  very  competitively  compared  to  the 
goods  for  sale  in  those  countries. 
Canadian  and  British  goods  were  priced  about  on 
par  with American  goods  as it would  have  taken  $94 
to buy  the  same  bundle  of goods  in Canada  and  $95 
in  the  United  Kingdom. 
One  may  therefore  conclude  that  American  goods 
are  already  priced  very  competitively  in  world 
markets. 
While  it  is true  that  at  the  margin  a lower  dollar 
would  make  American  producers  even  more  com- 
petitive,  one  has to question  the  validity  of the  argu- 
ment  that  this  is the  proper  remedy  in  our  current 
situation.  If  we  already  have  a  48  percent  price 
advantage  versus  Japan  and  a 38  percent  advantage 
versus  Germany,  what  makes  us  believe  that  a  50 
or  60  percent  advantage  will  turn  the  tide? 
Moreover,  in  the  process  of  further  depreciating 
the  dollar  we  would  wind  up  paying  even  more  for 
the  huge  volume  of  goods  that  we  are  already  im- 
porting.  By  reducing  the  value  of  the  dollar  we 
would-at  least for a while-be  paying  an even  greater 
amount  of  dollars  for  a smaller  volume  of  imports. 
One  may  argue  in favor  of  such  a policy  when  a 
country’s  currency  is  clearly  overvalued,  but  that 
argument  is of  doubtful  validity  in  the  case  of  the 
dollar,  which  is  already  priced  competitively  and 
arguably  undervalued  according  to  the  best  data 
available. 
The  rising  import  prices  that  would  be  associated 
with  a weaker  dollar  would  also  aggravate  our  cur- 
rent  inflation  problems-and  this is hardly  a pleasant 
prospect  for  a  central  banker  to  contemplate. 
Thus,  I  believe  that,  under  the  present  circum- 
stances,  a  dollar  depreciation  is  unwarranted  and 
uncalled  for. 
Instead,  we  should  begin  to  look  elsewhere  for 
reasons  for  the  persistence  of  the  American  trade 
imbalance. 
FEDERAL  RESERVE  BANK  OF  RICHMOND  17 I will argue  that  we,  as a nation,  need  to redouble 
our  effort  to enhance  our  competitiveness  and  make 
a  concerted  effort  to  penetrate  foreign  markets. 
Before  offering  some  specifics  as to how  we might 
improve  our  trade  performance,  let  us look  at some 
relevant  facts  and  figures  that  may  help  to  put  our 
current  trade  problems  in perspective  and  point  the 
way  toward  possible  improvement. 
The  Importance  of  Trade  to  the 
American  Economy 
The  United  States  is the  largest  trading  nation  in 
the  world,  but  at the  same  time  international  trade 
plays  a rather  modest  role  in the  American  economy. 
These  seemingly  contradictory  statements  are  easy 
to  reconcile. 
The  key  lies  in the  fact  that  the  United  States  is, 
by  far,  the  largest  economy  in  the  world  and,  as  a 
result,  its absolute  volume  of trade  is also huge.  For 
instance,  the  United  States  imports  every  year  more 
than  the  entire  Canadian  economy  produces.  And 
the  total  value  of U.S.  trade,  combining  exports  and 
imports,  amounts  to  over  three-quarters  of a trillion 
dollars,  which  is slightly  more  than  the  GNP  of the 
United  Kingdom. 
However,  U.S.  merchandise  exports  amount  to 
only  about  6 percent  of  our  GDP.  There  are  only 
two  countries  in the  world  whose  export  ratio  is as 
low  as that  of the  United  States:  India  and  Yemen. 
That  I find a surprising,  if not  a shocking,  statistic. 
Just  for  comparison’s  sake,  let  me  cite  a few  ex- 
port  ratios  for  other  countries:  Canada:  28 percent; 
Japan  15  percent;  and  Germany  30  percent. 
But the  true  international  trade  wizards  are among 
the  smaller  countries  of the  world:  Belgium  73 per- 
cent;  Ireland  63 percent;  and  the  Netherlands  with 
62  percent. 
Perhaps  even  more  astounding  is  the  list  of 
developing  countries  in this  league:  the  Congo  and 
Gabon  each  export  64  percent  of  their  GDP; 
Malaysia  57 percent:  and Jamaica  exports  58 percent 
of  its  GDP. 
But  the  true  world  champions  are  Hong  Kong, 
Singapore,  and the  Netherlands  Antilles,  all of which 
manage  to export  more  than  their  entire  GDP.  They 
are  the  world  trade  champions  par  excellence. 
These  data  show  that  success  in the  international 
trade  field  depends  on  how  hard  you  try.  If small, 
third  world  countries  manage  to export  a much  higher 
percentage  of their  GDP  than  the  United  States,  are 
we  trying  hard  enough? 
These  data  also  debunk  the  myth  that  foreign 
markets  are closed  to us and that  this is the  key  trade 
problem  confronting  the  United  States.  True,  access 
to some  foreign  markets  is restricted,  and some  coun- 
tries  could  do  more  to  liberalize  access  to  their 
markets.  But  how  do  Belgium,  Malaysia,  and 
Singapore  penetrate  foreign  markets?  What  do they 
know  that  we  do  not? 
Why  Americans  Don’t  Export 
Let’s  examine  a bit closer  why  Americans  are not 
very  good  at exporting.  Curiously,  our  size  may  be 
a handicap.  The  American  market  is the  largest  in 
the  world.  That  is one  of the  reasons  why  American 
producers  are not  particularly  interested  in exporting, 
while  foreigners  give  top  priority  to  conquering  our 
market. 
For  a  manufacturer  in  Virginia,  the  market  in 
Maryland,  the  Carolinas,  or in Tennessee  may  offer 
just  as  great  a potential  as  Denmark,  Belgium,  or 
Austria.  In addition,  he does  not  have  to learn  several 
new  languages;  can  deal  with  familiar  legal  codes; 
knows  the  business  customs  and  conventions;  and 
can  utilize  the  same  currency  and  maybe  even  the 
same  bank. 
Furthermore,  the  technical  specifications  for  the 
vast  U.S.  market  tend  to  be  the  same,  while  they 
are  often  different  from  country  to  country  abroad. 
For  instance,  take  the  frequently  cited  example  of 
telecommunications.  Not  only  does  an American  ex- 
porter  often  confront  a governmental  monopoly,  but 
also the  technical  specifications  tend  to differ in never 
ending  detail.  In some  countries  the  electrical  system 
runs on  110 Volt  and in others  it is 2’20 Volt.  In some 
countries  the  electricity  runs on 50 cycles  per  second, 
and  in  others  it  runs  on  60  Hertz.  The  internal 
telephone  systems  in  some  countries  have  6 Volt, 
while  in others  it  is  12 Volt.  In  some  countries  the 
zero  is next  to the  one  on the  dial,  in others  it is next 
to  the  nine.  In  some  countries  ring-ring  means  the 
phone  is busy,  in others  it means  that  the  phone  is 
actually  ringing.  Is it any  wonder  that  an  American 
manufacturer  tends  to  get  frustrated? 
In  that  connection,  the  further  integration  of the 
European  economies  and  the  adoption  of  common 
standards  will bring  a welcome  measure  of relief  to 
American  exporters.  They  will be  able to  service  the 
entire  European  market  with  increasingly  uniform 
products  as the  European  market  is integrated  and 
products  are  standardized. 
In contrast,  the  large  and fully integrated  American 
market  is extremely  attractive  to a foreign  producer. 
After  a local  manufacturer  in  a foreign  country  has 
saturated  his own  market  and  looks  for possible  ex- 
pansion  opportunities,  the  American  market  is prob- 
ably  the  most  attractive  and,  therefore,  his  prime 
target.  For  a  Philippine  exporter,  it  is just  as  diffi- 
18  ECONOMIC  REVIEW.  MARCH/APRIL  1989 cult  to  set  up  a  new  sales  organization  and  to 
familiarize  himself  with  the  various  rules  and  regula- 
tion  in  the  United  States  as  it  is  to  penetrate 
Indonesia,  Malaysia,  or  Korea-and  the  potential 
rewards  are  many  times  greater.  Thus,  the  United 
States  is  everybody’s  prime  target  market. 
Add  to that  that  we  are  a land  of immigrants  eager 
to sell the  wares produced  by our former  countrymen, 
and  you  have  a readily  available  bridge  to  the  U.S. 
economy. 
Curious  as it may  seem,  it is not  easy  to  turn  this 
advantage  around  and  to  use  the  immigrant  popula- 
tion  resident  in  this  country  in  our  export  drive.  If 
an American  exporter  were  to offer  a sales  manager’s 
job in Manila to a Philippino  who  has waited  five years 
for  his  U.S.  immigrant  visa,  it  is likely  the  person 
would  not  accept  the  offer. 
Finally,  many  of our most  successful  exporters  have 
already  set  up  local  production  facilities  in  foreign 
countries  and produce  the  goods  designed  for foreign 
markets  on  location.  Consequently,  these  sales  by 
American  companies  do not enter  the  trade  statistics. 
The  unexploited  export  potential  of  the  United 
States  therefore  rests,  to  a considerable  degree,  in 
our  small and  medium-sized  firms,  who  have  not  yet 
captured  a significant  share  of  the  foreign  markets. 
It  is here  that  we  should  focus  our  efforts. 
What  can  be  done? 
Improving  Our  Export  Performance 
First  of all, a reduction  in the  federal  budget  deficit 
would  also help  to  reduce  the  trade  deficit.  It would 
do  so by  reducing  our  domestic  absorption  of goods 
and  services  and thereby  help  to reduce  the  demand 
for  imports. 
Furthermore,  lower  government  spending  would 
also  set  free  resources  that  could  be  exported  or 
invested  in  additional  productive  capacity. 
The  second  point  to be made  is that  protectionism 
is not  the  answer  to our  trade  problems.  Restricting 
imports  via trade  barriers  would  not  be to our benefit. 
It would  deprive  Americans  of the  goods  they  want 
to buy  and  drive  up prices  here  in the  United  States. 
Moreover,  we would  be  subject  to retaliation,  which 
would  restrict  our  own  ability  to  export. 
Instead,  we  should  opt  for  export  growth  by  en- 
hancing  our  own  competitiveness  and  export 
awareness.  More  research  and  development  and 
greater  investment  in plant,  equipment,  and  human 
resources  is needed.  We need  everything-from  more 
multilingual  secretaries  to  experts  in  Japanese 
marketing  techniques  and  European  trade  law.  All 
that  represents  a trade  infrastructure  that  takes  a long 
time  to  assemble  and  perfect. 
Perhaps  most  important  of all-success  abroad  re- 
quires  patience.  If we are just there  for the  quick profit 
and  are  ready  to  abandon  our  markets  when  tem- 
porary  difficulties  are encountered,  foreign  producers 
will seize  the  opportunity  and grab  our market  share. 
And  you  can  be  sure  that  they  plan  to  keep  it. 
This  is one  key  reason  why  the  1984-85  episode 
of  dollar  overvaluation  has  had  such  lasting  effects 
on our export  markets.  As the  temporary  dollar surge 
made  our  products  uncompetitive,  Americans  were 
quick  to  abandon  their  foreign  markets  instead  of 
redoubling  their  efforts  to enhance  productivity  and 
to offer  better  service.  Afterwards,  it was difficult  to 
again sign up the  customers  that  we had  abandoned. 
But  I am  not  here  to  criticize  American  industry 
over  past mistakes.  Instead,  I would like to offer  some 
constructive  suggestions  as to  how  we  can  enhance 
our  competitiveness. 
Let  me  offer  two  specific  suggestions:  go  metric 
and  permit  nationwide  branching  for  banks.  These 
may  seem  to be unorthodox  suggestions  to improve 
our  export  performance,  but  I believe  that  they  will 
work. 
Here  is why:  Going  metric  will  make  it  possible 
to  sell  our  products  directly  abroad  without  further 
modifications.  During  a recent  trip to Europe  I heard 
the  story  of an American  producer  of nails and screws 
who  attended  one  of the  large  European  trade  fairs. 
He  was  able  to  beat  everybody’s  prices  by  20 
percent-in  line  with  the  data  on  price  com- 
petitiveness  that  I cited  earlier.  But,  unfortunately, 
he  did  not  make  a single  sale.  The  reason?  All his 
nails  and  screws  were  calibrated  in inches,  and  they 
would  not  fit  the  metric  specifications  of  his  Euro- 
pean  customers. 
Earlier  I cited  the  fact  that  only  Yemen  and  India 
have  as low  an  export  to  GDP  ratio  as the  United 
States.  Would  it come  as a surprise  to  you  to  know 
that  the  United  States  and  Yemen  share  something 
else  in  common?  They  are  the  only  two  countries 
in  the  world  that  have  not  yet  gone  metric! 
If an American  manufacturer  has  to  retool  first  in 
order  to  sell  his  wares  abroad,  his  incentive  to  do 
so is considerably  reduced,  and it makes  his first step 
into  export  markets  all that  much  more  expensive. 
Critics  of  the  metric  system  scoff  that  it  would 
make  little  sense  to  redraw  the  dimensions  of  our 
football  fields  and change  other  cherished  traditions. 
Not  so-even  here  are  new  opportunities.  My 
daughter  competes  in  the  Northern  Virginia  Swim 
League.  Half  the  pools  are  25  yards  in  length  and 
half the  pools  measure  ‘25 meters.  Does  this  repre- 
sent  a problem  for the  kids?  No!  They  set  new  pool 
records  for  both  the  yard  and  the  meter  distances, 
FEDERAL  RESERVE  BANK  OF  RICHMOND  19 and they  love  it. But they  also know  that  if they  want 
to  compete  in  the  international  leagues  and  the 
Olympics,  it  is going  to  be  in  meters. 
Finally,  let  me  turn  to  banking.  Our  American 
banking  system  is  more  fragmented  and  compart- 
mentalized  than  that  of  any  other  country.  State 
borders  represent  real barriers,  and as a consequence, 
a  small  or  medium-sized  manufacturer  in  Iowa  or 
Colorado  will not  get  the  support  from  his local  bank 
that  he  needs  in  his  first  push  abroad. 
It may  be  argued  that  correspondent  banking  will 
enable  the  small  town  banker  to  offer  international 
services  also to his local customer.  But does  the  small 
town  banker  really  wish  to  turn  his  best  customer 
over  to the  large  multinational  banks  so that  they  can 
provide  the  foreign  exchange  and  international  trade 
finance  that  the  exporter  needs?  Or  will he  be afraid 
that  he  will lose  his best  customer  to  the  large  bank 
when  it comes  to financing  new plant  expansions  that 
will  be  needed  for  the  export  markets? 
Contrast  this  situation  with  that  prevailing  in 
Canada,  England,  or Germany.  There  the  hometown 
banker  will  also  have  branches  and  representative 
offices  in key  cities  around  the  globe,  and offer  global 
financial  services  in  support  of  the  international 
trading  efforts  of his customer.  When  a factory  owner 
or sales  manager  from  a firm  located  in a small  Swiss 
village  or  Dutch  town  steps  off  the  plane  in  New 
York,  he  will be  met  by  a  representative  from  his 
own  bank,  ready  to  offer  his  services  and  advice  as 
to how  to  conquer  the  American  market.  That  is an 
advantage  that  the  typical  American  small-town 
manufacturer  will  not  have  abroad. 
I  recently  learned  that  85  percent  of  all  small 
American  manufacturers  finance  their  own  foreign 
trade.  That  uses  up valuable  capital,  is cumbersome 
and  generally  inefficient.  Just  think  how  much 
better  American  exporters  could  do  if they  had  the 
support  of their  hometown  banker  available  to them 
on  a global  basis! 
Conclusion 
But  let  us  not  get  too  pessimistic.  American  ex- 
porters  are on the  come-back  trail. They  have  already 
made  considerable  progress.  In  1987,  exports  in- 
creased  by  12 percent  and  in  1988  they  increased 
by 27 percent.  These  are impressive  figures  and they 
show  that  international  trade  is  the  most  vibrant 
sector  of  the  American  economy. 
But  we  have  a long  way  to  go.  The  trade  deficit 
still  looms  large,  and  it  will  take  years  of  deter- 
mined  effort  to  close  that  gap. 
I am confident  that  we  can  do it. We  have  already 
done  so  in the  case  of  Europe,  where  last  month’s 
data  showed  a  small  U.S.  trade  surplus.  In  other 
markets,  we  still  have  a  lot  of  work  ahead  of  us. 
But  we  should  stop  handicapping  our  own  ex- 
porters.  Let  us  give  them  a better  chance  to  com- 
pete  by  converting  to  the  accepted  global  standards 
and by giving them  the opportunity  to rely upon their 
hometown  financial  institutions  in their  export  drive. 
20  ECONOMIC  REVIEW,  MARCH/APRIL  1989 

Improving America's competitiveness

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Improving America's competitiveness

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