The recent era of the strong, overvalued dollar is over, as a result of weaker U.S. growth, a large and persistent trade deficit, and surging commodity prices. The most recent strong dollar period started in 1995, gradually dissipated after 2003, and now is in clear retreat. The Manufacturers Alliance/MAPI forecast is for continued weakening through 2009, and then stability through 2012. Such a sea change has important ramifications for American businesses -- positive for exports and negative for U.S. investors.
On the positive side of the ledger, exports from U.S.-based locations are surging and starting to reduce the gaping trade deficit of the past 15 years. Starting in 2005, exports of consumer goods, aircraft and capital goods have been growing at double-digit rates, which should persist through 2012. Import growth will be in the 3% to 4% range for 2007 and 2008, before picking up to 5% to 6% in 2009-2012 as the U.S. economy strengthens from the current slowdown.
As for investment, the global boom, which has driven up commodity prices, is putting dollars into the hands of natural resource powers such as the OPEC nations, Russia, Australia, Norway, Canada and Brazil, driving their currencies higher against the greenback. China and other Asian export powers have also accumulated dollars by keeping their currencies undervalued. The combination of huge foreign liquid reserves and a weakening dollar is making U.S.-based assets increasingly attractive to foreign buyers.
Many of the potential foreign buyers are "Sovereign Wealth Funds" (SWFs) and state-owned companies. China has accumulated $1.5 trillion in foreign reserves, which it is beginning to deploy (often through state-owned enterprises) aggressively in the United States and Europe. State-controlled natural resource companies in Russia are buying into international energy firms and into industries such as aluminum. The Abu Dhabi Investment Authority has an estimated $500 billion to $875 billion pool that it is using to build stakes in foreign enterprises and domestic petrochemicals industries. According to economist Ted Truman, "At least 60% of the cross-border investments" of India, China, Thailand, Indonesia, Korea and Malaysia are controlled by their national governments.
The massive shift in resources to state-controlled enterprises or SWFs has important strategic consequences, especially since the weak dollar inflates their buying power. The motives for investment of such entities are not always the same as those of private investors in the United States and other market economies. Instead of profit and efficiency gains, motives of prestige, market dominance and national strategic advantage may sometimes enter into the calculations of these growing entities. Strengthening the national industrial base, sometimes at the expense of profitability, is clearly a leading driver for some state-owned firms. Improving the defense industrial base is also an important motive for rising powers such as China and Russia.
The United States and Europe should take the lead in urging international institutions, particularly the International Monetary Fund, to develop mutually agreed-upon ground rules for cross-border investments by these funds. Increased transparency in the operations of SWFs, as well as mechanisms and rules for review of transactions by officials in the country of sale, would be a good start. Some guidelines regarding transparency in the objectives and investment strategies of these funds would also be helpful.
Cross-border investment has been growing faster than trade for some time, and the weaker dollar era will lead to an increased level of foreign interest in U.S. assets. An international consensus is urgently needed to avoid tension related to the sale of strategic or highly symbolic assets and to avoid market distortions by state-owned enterprises. Any consensus should reaffirm the market-based foundation for international transactions.
Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.
