American Export Trade Business - Assignment Example

? American Export Trade Business Table of Contents Table of Contents 2 Introduction 3 US export trade 3 High-technology exports 4 Decline in US shareof high-technology goods and high tech trade deficit 6 Causes for decline 6 Input requirement 8 Standard of living 8 Strong Multiplier Effect: Reducing unemployment 8 Premium compensation and health care benefits 9 Increase in purchasing power 9 Government spending 11 Conclusion 12 Works cited 14 Name Course name Course number Date American Export Trade Business Introduction The overall export sector in the United States is showing a positive growth in the current year (2013). According to report by the U.S. Census Bureau, the total worth of volume of exports by the country increased from US $185208 million in March 2013 to US $187403 million in April 2013 (“United States exports”). A measure of the country’s competitiveness is shown by the net export surplus high-tech manufactured goods (Williams and Donnelly). Between 1992 and 2013, average exports by the United States is estimated to be US $103197.71 million and the maximum level in these two decades has reached in December 2012 at US $188686.00 million (“United States exports”). US primary export items are capital goods, industrial supplies, food and beverages, automotive vehicles, engines and vehicle parts; high tech manufacturing goods remains one of the most important categories of exports. However, in the twenty first century US started to lose comparative advantage on manufacturing of such goods. This paper aims at researching the stake of current US high tech trade deficit and how an improvement in the trade condition would help to improve living standards in the US economy. US export trade The Department of Commerce’s U.S. Census Bureau and the Bureau of Economic Analysis released their annual report of international trade of the US in goods and services for the year 2012 in December that year. The report reveals that exports of commodities and services by the country increased by 2.1 percent in 2012 since the month of November in 2012 and reached a record figure of $2.20 trillion. The trade deficit in US decreased since the country’s imports have fallen by 2.7 percent during this period (“U.S. export fact sheet”). Figure: Exports of United States between 2011 -2013 (Source: “United States exports”) Exports have been an important part of the U.S. GDP and in 2012 the share of exports in GDP was 13.9 percent. This share has improved in 2011 from 2008 (12.9 percent) and has remained steady since 2011 (“U.S. export fact sheet”). Capital goods form the largest category of export commodities for the US. In 2012, this category of exports was worth $526.7 billion. The leading manufacturing sector for export commodities has been named as the “motor vehicles and parts sector” (“U.S. export fact sheet”). High-technology exports The manufacturing sector in the US contributes a large section of the country’s GDP that other sectors and has been a driver of economic growth in the country since 1947. This sector is highly engrossed in international trade than other sectors. The manufacturing sector strengthens the growth process by bringing in technological innovation in the other industries. Production of high-technology products require high intensity of R&D. Industries that produce high tech products in the US are aerospace, pharmaceuticals, electrical machinery, computers and scientific instruments (“High-technology exports (current US$)”). The US manufactured goods account for nearly 35 percent of the total worth of high technology products traded in the international market. Till 2008 US enjoyed high trade surplus owing to high revenue income from export of high tech manufactured goods and royalties earned from the sale of technical know how. 57 percent of the country’s exports were manufactured goods. US outpaced its rival countries in the field of technological research and industrial development. Advancement in technology has support the manufacturers in the US to make their production processes more efficient by consuming less units of energy per unit of production. This has helped in significantly reducing the level of greenhouse gas (GHG) emission, particularly, carbon dioxide. Depending on this advancement of the manufacturing sector, other sectors in the country also increased their performance considerably over the last two decades (“The facts about modern manufacturing”). In 2007, before the economic crisis hit the US, total volume of export of high-technology products increased swiftly and surpassed gross production figure. This made export of goods account for 60 percent of annual production of high tech manufactured commodities (“Booming Global High-Technology Exports …”). This increase shows that the production of high-technology had expanded and its trade in the international market had broadened during this period. However, the scenario has changed since 2007. The US faced the worst financial crisis since the Great Depression which has affected the manufacturing and R&D sectors the most. Decline in US share of high-technology goods and high tech trade deficit Since 2009, US’s share of manufactured goods in the international market has dropped significantly. Analysts have pointed out that this decline has been driven by “below-average U.S. exports growth in computers and information and communications (ICT) products” (“Booming Global High-Technology Exports …”). It has been the primary cause behind the US high tech trade deficit (Weller and Reidenbach). China had already been rising in terms of manufactured goods and fall in exports from the US gave the most desired opportunity to the country for expansion on the international front. China, along with nine other countries in Asia have increased the manufacture of Information and Communication Technology products from 42% of the total world output of such products in 1995 to 64% of the total in 2007 (“Booming Global High-Technology Exports …”). In 2008, China’s exports increased considerably and the country also started making significant levels of high-technology goods exports to the US (Berger and Martin). From $28 billion in 2000 the figure rocketed to $112 billion in 2008 (“Booming Global High-Technology Exports …”). Causes for decline Experts have expressed greater concern regarding the high-tech manufacturing sector than the general manufacturing statistics in the country. This is because the high technology industries are particularly showing greater fluctuation than other industries in this sector. The most notable causes for this decline are: Maturing of the high-tech industries Increased price sensitivity Fall in value addition by employees Globalization of high tech industry Fall in competitive advantage of computer manufacturing industry The high technology industries in the US had developed in the US in the mid 1990s and by 2007 the industry had reached the maturity stage. Innovative research work was tame and growth in the industry slackened. When measured as a percentage of GDP, The decline in contribution of high tech products export by the US was so pronounced in the mid twentieth century that inspired economists and analysts to propose that the country is reaching the stage of a “postindustrial” society (Kelley xx). While other countries entered the industry offering customers a wide range of products, customers’ bargaining power increased leading to higher price sensitivity. Demand elasticity for the products increased, due to which prices for high tech products started to slide down reducing total revenue of producers. Many of the products were swiftly becoming lower-margin items due to the new developments from foreign counterparts. Therefore the value addition by the marginal employee reduced for many of these products. This affected employment conditions adversely and there was fall in employment rates in the US in and after 2007. Globalization has further augmented this problem and made the US high tech export sector more vulnerable to global competition. The country faced strong rivalry from China. China manufactured much low cost alternatives of the high tech gadgets, including computers. This led to a drop in employee productivity in the computer manufacturing industry in the US. The data which is more concerning is that magnitude of reduction in value addition in this industry is higher than the magnitude of overall manufacturing industry (Kelley xviii). While overall fall in manufacturing sector employment decreased by 6 percent, fall in employment in computer manufacturing sector dropped by 20 percent (Kelley xviii). Input requirement Production of high tech goods requires sophisticated and cutting-edge technologies and highly skilled workforce. It requires modern machinery and continual investments in research and development in order to keep the cutting edge advantage in this economy (Weller and Reidenbach). Application of contemporary management practice in the manufacturing industry in the US has improved safety conditions in the workplace to a long extent and improved productivity of workers. Since innovation is at the core of maintaining competitive advantage in this sector, trade balance can be maintained only through relentless investment for the R&D in this sector. Standard of living Standard of living in the US has improved by the improving the performance of the high technology manufacturing products. This is because the manufacturing sector has a strong backward linkage and also provides the employees with higher benefits than the other sectors. As the export of manufacturing goods rise, the following benefits would accrue to the economy. Strong Multiplier Effect: Reducing unemployment Expansion of the manufacturing sector increases demand for energy, raw materials and various other services from other industries. This triggers a long supply chain in the economy. The breadth of this supply chain can be measured by the intensity of backward linkage existing “in the input-output structure of the economy” (“The facts about modern manufacturing”). With expansion of an industry, demand for intermediate goods rises. This strengthens the backward linkage in the economy that affects other industries directly by inducing higher production. This leads to higher investments, bigger innovations across other sectors and creation of more employment opportunities in the country. Thus, manufacturing sector casts powerful positive influence on America’s economic development. So when export of manufacturing goods rises, production by industries rises and it brings manifold benefits for the economy. Premium compensation and health care benefits In America, the employees in the manufacturing sector earn more wage than those in the other sectors and also receive higher generous benefits from their employer. The major variation in compensation occurs due to the benefits provided by the manufacturers to their workers, which workers in other industries do not receive. High tech manufacturing firms provide their employees with compensations such as supplemental pay, paid leave and insurance coverage. All these benefits do not generally accrue to other sectors workers. Manufacturing employers provide health care payments for employees and although this is a cost to the firm, this payment is continuously growing in the USA to ensure better living standard for the workers. In fact these benefit levels are growing faster than the general wage rate and salaries provided. Employers also support the families of workers. Data from Kaiser Family Foundation shows that almost three-fourth of the manufacturers in the economy offer health care policy for their employees. 30 percent of them also provide healthcare benefits to the retired employees. Thus enhancement of the high tech manufacturing sector can improve living standard in the US. Increase in purchasing power High investments, brisk advances in innovation and higher competition on the global front lead to heavy productivity gains. All these factors have also led to deflation in price of manufactured items. By 2008 prices of manufactured goods have fallen by 3 percent, while there has been an overall increase in inflation rate in the economy by 33 percent. In contrast to the other sectors in the economy where prices have risen, such as, in the education and the healthcare services, prices of high-quality manufactured goods show a downward trend. Among all industries in the manufacturing sector, the electronics industry shows the most spectacular deflation. Deflation affects manufacturing sector’s contribution to GDP in value terms. This explains the reason behind the fall of this sectors’ share in GDP. Over time although the manufacturing sector is expanding, and more physical quantity of the commodities is being manufactured at almost the same rate as the growth in overall GDP, prices of these goods have fallen in dollar units. The worth of the manufacturing output is given by the product of dollar price of the commodity times the physical magnitude of goods produced. This makes clear that mathematically, the share of manufactured goods in the total economy falls. However, deflation benefits the general consumer by increasing their real income and therefore their purchasing power. As prices of the high technology goods fall it implies that the consumers’ budget grows. Hence consumers can purchase more quantity of the goods for lesser financial resources. Figure: Manufacturing Improved Living Standards (Source: “The facts about modern manufacturing”) Since there is deflation in the US, value of US dollar rises; i.e., exchange rate for US appreciates and exports would rise. This would once again push up US exports in the international market and improve US balance of trade. With rise in exports, national income would rise, thereby increasing per capita income and living standards. Government spending President Barrack Obama’s budget forecast for the FY 2013 estimates a federal deficit of $901bn down from the $1.3 trillion last year (2012) (Hourihan). R&D is a part of discretionary spending in the budget. Since the discretionary spending has been subjected to cuts in order to reduce the deficit, spending on R&D has been reduced considerably. Under the spending caps implemented by the Budget Control Act discretionary spending is set to reduce by 4.4 percent in FY 2013 (“Federal Budget Deficits …”). R&D is not receiving any special treatment in the federal budget this year. Hence, innovations and modern research developments would face financial strains. This would hamper production of technologically advanced commodities. Although the US export sector is swelling, share of high-tech goods would fall in both physical in value terms in the current year. Since competitiveness of the US in the global market is maintained by the country’s export of manufactured goods of high quality, restrains on government spending in R&D would hurt USA’s economic growth. The competitive advantage of US is already dwindling in the face of high global competition. To preserve the competitive edge, the US has to make new innovations and it requires investment in R&D. Experts have strongly recommended to replace sequestration in the budget with some alternative, sine the discretionary spending cuts would by far impede USA’s capacity to “generate export-oriented growth” (Hicks and Atkinson) that has been the foundation of the country’s economic growth. Conclusion The above discussion shows that the US export sector is an important boost of the country’s economic growth. Although the US export sector is growing, share of manufacturing goods is falling as a percentage of total exports. This creates huge high tech trade deficit. Although the paper presents the reasons behind the fall in mathematical measure of manufacturing goods, it is not refuted that there is still huge opportunity for further improvement of its share in export sector (Greene). This can be achieved by reducing the US high tech trade deficit. It has been advocated by experts that lessening of high-tech trade deficit would promise betterment of living standards. This is because higher production and therefore higher export of high-tech goods reflects the economic health of the country. Innovation in the export oriented manufacturing sector can create impact in all other sectors in the form of productivity rises and increase in wage rates, which would ultimately improve living standards. As economic growth reinforces, performance of the manufacturing sector can be further integrated into the growth of the US economy in the future. Works cited Berger, Brett and Robert F. Martin, “The Growth of Chinese Exports: An Examination of the Detailed Trade Data.” November 2011. PDF File. “Booming Global High-Technology Exports Rearranging World Trade Patterns.” NSF. National Science Foundation, 2010. Web. 27 June 2013. “Federal Budget Deficits Will Reach Levels Never Seen in the U.S.” Heritage. The Heritage Foundation, 2012. Web. 27 June 2013. Greene, William. “Export Potential for U.S. Advanced Technology Goods to India Using a Gravity Model Approach.” March 2013. PDF File. “High-technology exports (current US$)”.) World Bank. The World Bank Group, 2013. Web. 27 June 2013. Hicks, Justin Hicks and Robert D. Atkinson. “Eroding Our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth.” September 2012. PDF File. Hourihan, Matt. “Federal R&D in the FY 2013 budget: An introduction.” 2013. PDF File. Kelley, Charles. “High-technology manufacturing and U.S. competitiveness.” March 2004. PDF File. “The facts about modern manufacturing.” 2009. PDF File. “United States exports.” Trading economics. Trading economics, 2013. Web. 27 June 2013. “U.S. export fact sheet.” 2013. PDF File. Williams, Brock R. and J. Michael Donnelly. “U.S. international trade: Trends and forecasts.” October 19, 2012. PDF File. Weller, Christian E. and Luke Reidenbach. “The Case for Strategic Export Promotion.” American Progress. Center for American Progress, February 9, 2011. Web. 27 June 2013. Read More