The true miracle of U.S. exports is that they have done so well for so long in the face of aggressive competitive devaluations abroad. Japan, China, and Continental Europe have all chosen the easy way out for economic growth--cheap currencies and exports--over the more difficult regimen of restructuring their economies and lowering taxes to stimulate domestic demand. Even with the dollar overvalued by some estimates by 20% against the yen, the yuan, and the German mark, U.S. exports are at a record high. But the yellow lights are blinking, warning of trouble ahead. From a rate of growth of 19.3% in 1995, exports were up only 6.9% in 1996 and less so far in 1997. In fact, the overall rate of growth for U.S. exports has slowed to 5%, from 20% two years ago.
This is serious and warrants attention from Washington. Until recently, the expanding U.S. trade deficit, which has doubled since 1992, was due to the surge in imports. While Europe and Japan languished, the U.S. economy grew nicely. Strong domestic demand pulled in imports. Yet exports boomed as well. Higher productivity, falling prices for high-tech goods, and popular new products shot a flood of U.S. goods into overseas markets despite an ever-rising dollar.
But the dollar's overvaluation may finally have gone too far. The dollar is up so much that the advantages of productivity, price, and product innovation are beginning to be overwhelmed by the high cost of currency. Look at Japanese autos. The yen is now 50% lower against the dollar compared with two years ago. It's so low that Japanese carmakers are reversing previous policy to build autos in the U.S. and are, instead, choosing to export hundreds of thousands of them to America. Even Honda is sharply curtailing its own imports of Made-in-America Hondas into Japan because of the strong dollar. The decline in export growth rates for pharmaceuticals, semiconductors, chemicals, paper, and nonauto capital goods supports the thesis that the dollar, finally, is too high.
Each country has its own reasons to undervalue its currency against the dollar. Japanese politicians and bureaucrats prefer public-works spending and exports to stimulate growth rather than creating a consumer-led economy. In Europe, politics hamper the downsizing of the welfare state. Exports are used to promote growth, and a weak mark and franc facilitate it. The new euro is expected to be even more undervalued vis-a-vis the dollar. China hesitates to privatize its state sector because it fears unemployment and political upheaval. So Beijing spends its $100 billion in reserves to keep its currency cheap and export its way to growth.
The U.S. benefits greatly from a strong dollar. It keeps inflation in check, restrains the economy from overheating, and exerts pressure on Corporate America to be competitive. But there are costs, and they are rising. Competitive devaluations have robbed the U.S. of potential exports, income, tax revenues, and jobs. They permit Japan, China, and Europe to procrastinate over domestic economic reforms. They increase the foreign debt the U.S. owes. They may now be threatening the new high-tech U.S. economy, which relies on exports for much of its vitality. In short, the ever-rising dollar, which benefited so many for so long, is beginning to hurt all those it helped. The buck is too high for everyone's good.