6. THE NEED FOR TREND DOLLAR DEPRECIATION
It is worth emphasising one factor which suggests a need for trend depreciation of the dollar arising from the special role played in the U.S. market by the NICs. The emergence of NICs as suppliers of manufactures in world trade is largely acted out in the U.S. market. The U.S. market is wide open and large, thus inviting any infant industry to try itself. By contrast Europe and Japan are heavily protected. This suggests that over the next decade the U.S. will suffer an unusually large share of the exports of the NICs.
In the 1960s and 1970s, U.S. exports of capital goods and technology equipped these countries as exporters of manufactured goods. Today they import technology and capital from Japan and export increasingly to the U.S. market. These facts are both apparent from Table 3, showing the shift in U.S. manufactures trade balance with the NICS.
|Table 3: U.S. Manufactures Trade with Developing Countries|
|Source: GATT and U.S. Department of Commerce.|
U.S. political interests make it very difficult to try and close that gap by protection. Thus, unless the NICs can be pushed into real appreciation and inward-looking growth there is a need for U.S. depreciation relative to Europe and Japan to provide the room for increased net exports from the developing world.
The increasing share of the NICs in U.S. imports of manufactures is another indicator of their growing importance. Some of this trade, of course, reflects new trade in intermediate products and may well enhance U.S. competitiveness. This is the case, for example, when car engines are imported from Mexico or Brazil. But the shift in the manufactures trade balance points to the fact that trade is seriously unbalanced. The common view that developing countries will spend what they earn misses an important point: in part they are high savers (as for example in Korea), in part they do spend, but they spend on imports from Japan or Europe.
The extraordinary speed with which capital and technology can move today and be implemented in low wage countries has accelerated dramatically the relocation opportunities in manufacturing. Given the vast wage differentials, no longer warranted by differences in productivity, one must expect continual entry of new producers and a tendency for much heavier competitive pressure and oversupply than has been customary .
Thus, as a long-term issue there is a triangle problem. The U.S. will be importing increasingly from the NICs, and thus there is a need to create room by gaining competitiveness and increasing net exports to Europe and Japan. There is accordingly an expectation of trend depreciation of the dollar relative to the currencies of Europe and Japan.
|Table 4: Hourly Compensation in Manufacturing |
(U.S. Dollars per hour, 1987 exchange rates)
Note: 1986 levels of hourly compensation evaluated at June 1987 exchange rates.
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