Get Ready for the Export Boom

03/30/2010 11:39 am EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says US exports will grow strongly this year, although more purchases of imports will offset that somewhat.

US exports will expand by 14% this year, a welcome increase after last year’s drop of 15%. But rising trade won’t boost growth.

Why? Because imports will climb even more than exports. As the economy picks up, demand will mount across the board.

Because the US imports much more than it exports, even with exports growing at the same pace as imports, the net impact is negative. More demand for imports of oil, machinery, consumer goods, etc., will outweigh rising US sales made to other countries. For the first time since 2006, the trade gap will widen, to $430 billion, 2.9% of GDP.

Playing a big role in this: intrafirm trade. Integrating their supply chains across North America helps US firms keep costs down. But it also means that the frames an auto plant in California once shipped to Ohio for finishing now go to Canada or Mexico.

And the value of the finished car imports is greater by far than that of the unfinished frame exports. Also, subpar growth in much of the world [is] offsetting the gains being made in emerging markets.

Protectionism will get a lot of attention, but have little real effect on trade. In fact, one pleasant surprise in the recession was how well the world trade system held up, despite widespread fears that it might unravel.

The one potential area of concern: A brewing fight over China’s currency. Despite US-Chinese acrimony over currency values and trade issues, the two countries are mutually dependent. Like junkie and drug dealer, the US can’t go without its fix of Chinese money to help it float the national debt, and for its part, China needs a ready market for its exports and then a place to park the cash it earns.

If China abruptly shunned US Treasuries—or worse, dumped its enormous current holdings, it, as well as the US, would pay the price. The value of China’s holdings would nosedive. Still, China is taking slightly smaller bites, apparently following through on its stated goal to diversify its investments in the coming years. (For now, there’s no worry about attracting other buyers of debt. But buyers are starting to insist on higher yields—pressure that will only mount.)

Sales of capital goods and supporting services will provide the biggest lifts. Companies that will benefit most include manufacturers of electronics, chemicals, heavy equipment, and medical technology, along with providers of business services, engineering, wholesale trade and transportation. Exports of food and beverages will also show improvement as living standards in developing countries rise further.

The Northwest US will gain most. Washington will maintain its trade surplus as China buys more aircraft and parts made by Boeing in Everett and Renton. Oregon will also do well, thanks largely to its semiconductor and grain exports.

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