Superpower, world policeman, and now export juggernaut too? Possibly yes, says a new report (pdf) by TD Economics that takes a close look at the U.S. manufacturing sector and natural gas industry.
Exports have never been a big part of the U.S. economy, they make up 10 per cent of GDP, less than half the slice of the pie they account for in Canada. Most of America’s trade has traditionally happened within national borders. But net exports seem poised to become a larger engine of growth, one that could help offset the impact of further spending cuts in Washington or soften the punch from another bout of eurozone crisis travails, writes TD’s Michael Dolega.
After taking a ruinous nosedive during the recession and sliding again in 2011 due to troubles in Europe, international trade is set for a revival in 2014, predicts TD—and the U.S. looks perfectly positioned to ride that wave. Dolega points to six main winning cards Uncle Sam will be able to play as soon as global demand picks up. Unit labour costs in the manufacturing sector, for one, have remained roughly level for over a decade, as gains in productivity (output per hour) outpaced wage increases. The shale gas boom has been feeding firms and factories across the country with cheap fuel, dramatically lower energy costs. The greenback has been on a long-term weakening trend since the early 2000s, which makes U.S. goods and services relatively cheap for foreigners. Offshoring, which weighs on the imports side of the trade balance, is tapering off thanks to a combination of rising wages in emerging economies and opportunities to produce at relatively low cost in many U.S. jurisdictions. High-tech manufacturing continues to enjoy the advantages it always had: easy access to a large share of the world’s best and brightest, deep-pocketed and risk-friendly investors, and state of the art research and development institutions.
And, last but not least, America has increasingly been trading with the right partners: fast-growing emerging economies. The shift, according to Dolega, happened partly by chance and partly by design. On the one hand, the economic slump in Europe forced American manufacturers, who have become increasingly export-dependent over the past three decades, to look for business elsewhere. On the other hand, the U.S. has also been signing a flurry of free trade agreements, particularly with South and Central American countries, that are now bearing fruit.
On the shale revolution, the report concedes that energy prices for U.S. businesses might well rise if Washington decides to lift an old prohibition to export natural gas to countries who haven’t signed a free trade agreement with the U.S. (which includes Japan and China, among America’s best potential customers.) But liberalization, if it happens at all, will likely be a slow and gradual process that “should not severely undermine the competitive advantage that U.S. manufacturers currently have,” writes Dolega. In any case, he notes, large outward shipments of liquefied natural gas (LNG) are exports.
What’s in it for Canada? On the one hand, anything that helps boost U.S. GDP growth and income tends to increase America’s demand for Canada’s good and services—so that’s good news.
On the other hand, it’s hard not to picture Canada watching this export renaissance south of the border like a kid squeezing his nose against a bakery shop window. Exports have been picking up here too recently, and were the main contributor to economic growth in the first quarter of this year. But Canada’s attempt to diversify its own base of foreign customers (away from the U.S., that is, rather than Europe) have been far less successful. Trying to sign trade agreements with China and India has turned out to be a rather frustrating enterprise. And to add insult to injury, Ottawa is now struggling even with a trade deal with the European Union, as Brussels diplomat became distracted by the possibility of inking a similar agreement with the U.S., a much bigger prize for European exporters.
Then there’s natural gas. We have a lot of it too and we are possibly the only country other than the U.S. with the technical know-how to be able to profitably extract it. Cheap natural gas has been an important source of fuel for the oilsands, but most of Canada already had abundant hydro-electrical endowments to power homes and businesses at relatively low cost, so shale hasn’t been much of a revolution over here (pdf). Also, U.S. LNG exports are in direct competition with B.C., who is also trying to sell the stuff and targeting the same energy-starved Asian buyers.
Anything that pumps the U.S. economy tends to give Canada a boost too. But it’s hard not to feel a little jealous.
Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.