The Competitive Edge -- Global Strength Will Boost U.S. Manufacturing

Expect to see exports become a source of economic growth for U.S. companies in the near term.

For many years U.S. manufacturers have been hit by weakness in export markets and the strong dollar. As a result, the trade deficit in goods has surged. But this trend is about to turn, and the export sector will be a source of strength for the manufacturing economy in the years ahead. This is good news not only for the U.S. economy, but also could help stem the rising tide of protectionism.

Last year the dollar value of U.S. exports of goods surged by about 14%, led by 32% growth in sales to China, and 23% to Central and South America (thanks in part to a new Central American Free Trade Agreement). Also helping was strength in the long-dormant European and Japanese economies, as exports to these economic powerhouses grew by 11% and 8%, respectively.

The outlook for 2007 and 2008 remains positive. Prospects for sustainable growth in Europe and Japan are better than at any time in this century. The hyper growth in China, India and Southeast Asia is now being complemented by strong performances in the large Latin American, East European, Turkish and Russian economies. Since the dollar has weakened by about 17% on average since 2002, such strong external markets should bolster U.S. exports in the years ahead.

The Manufacturers Alliance/MAPI forecasts a rise in the inflation-adjusted value of total exports (including both goods and services) of nearly 9% in 2007 and 10% in 2008, helped by a dollar that will continue to trend lower. Instead of subtracting from our GDP as it has in recent years, an improved trade account will result in a net addition to GDP.

Another recent development helping rebalance our external trade is the sagging price of oil and natural gas. The recent $20 drop in oil prices could, if sustained throughout the year, chop another $65 billion dollars off our trade deficit and -- like growing exports -- give a jolt to overall GDP growth. Every $10 drop in the price of oil puts nearly $75 billion back in the pockets of U.S. consumers. The forecasting firm Global Insight projects an additional 0.2% in GDP growth in 2007 and another 0.5% (or $75 billion) in 2008, assuming the slump in oil prices stretches throughout the year. Lower natural gas prices also will help our domestic chemical industries, which rely on this fuel for feedstock.

This solid growth in the global economy is especially helpful to U.S. manufacturers of capital goods. This sector has long been a leader in productivity growth and innovation, allowing it to remain globally competitive, despite the strong dollar and growing competition from lower-cost countries. Some of the leading U.S. export industries last year were: aerospace, computers, semiconductors and microprocessors, medical equipment, industrial machinery, industrial engines, electrical apparatus, medical equipment, and scientific instruments.

Our trade in capital goods was roughly in balance last year, in sharp contrast to the roughly $300 billion deficits in both the consumer goods and oil and gas sectors. The capital goods sector is the building block for U.S. global manufacturing competitiveness in the future, especially those goods with high research content. Emerging markets, for instance, need aircraft and medical, power and environmental control equipment.

A reduction in the trade deficit will thus add to GDP growth in the United States, stimulate our already-competitive capital goods producers and, hopefully, reduce some of the protectionist sentiment that has grown along with our ballooning trade deficit. Further progress still requires stimulating consumption in our major trading partners and improving savings at home; both will be aided by a lower dollar.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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