America's spectacular export surge since the mid-1980s is usually attributed to the combined impact of the sharply declining dollar and economic growth overseas. Economist Andrew M. Warner of the Harvard Institute for International Development contends, however, that this view misses a critical determinant of U.S. export growth: capital spending in foreign economies.
In the latest issue of the American Economic Review, Warner analyzes the relationship of shifts in U.S. export growth to changes in foreign consumption, capital investment, and economic growth. Over the past 25 years, he finds that U.S. merchandise exports are far more closely tied to foreign investment patterns than to either foreign economic growth or consumption, particularly in the past decade. Indeed, the influence of overseas investment on U.S. export performance even overshadows the considerable impact of dollar depreciation.
This picture parallels ongoing changes in America's industrial structure. Since 1967, the capital equipment share of U.S. manufacturing output has jumped from 28% to nearly 40%, and the percent of capital goods that is exported has climbed from 20% to 45%.
The influence of foreign investment demand on U.S. exports helps explain why they have been so variable, since investment itself is a highly variable component of economic growth. Warner's findings also imply that the role of a depreciating dollar in America's export performance has been exaggerated, while the importance of the nation's technological expertise in capital goods areas may well be underappreciated.
In this light, U.S. efforts to shore up Mexico's economy and keep its crisis from spreading appear more than prudent. Given the developing world's investment boom and Europe's growing interest in productivity-enhancing investment, the outlook for U.S. exports seems brighter and brighter.