from Follow the Money

The Dollar Trumps Carrier

November 30, 2016

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Here is a bit of ballpark math.

Carrier has announced it will keep open a factory in Indiana, retaining around 1,000 jobs.

Since the election, the broad dollar has appreciated by about 4%, presumably because of the impact of an expected loosening of fiscal policy. Let’s assume the change in the nominal dollar is equal to the change in the real dollar, and that the rise in the real dollar persists (e.g. it isn’t eroded by inflation differentials)

Using a rule of thumb I learned from the Peterson Institute’s Ted Truman (hence, the accumulated wisdom of the Federal Reserve’s International Staff in the 1990s) a 10 percent move in the dollar changes the U.S. trade balance by about 1 percent of GDP.

So the 4 percent dollar appreciation should raise the U.S. real trade deficit by about 0.4% of GDP.

Nominal U.S. GDP is about $18.65 trillion now (q3 data).

0.4% of GDP is currently about $75 billion.

The Commerce Department estimated that a billion dollar of (goods) exports supports about 5,300 (5,279) jobs in 2015.*

To be conservative, let’s use that number for import competing and service jobs too. That works out to a very rough estimated loss of 390,000 jobs in export and import competing sectors from the stronger dollar (job losses that play out over time, as the exchange rate has an impact with a long lag).

Just saying …

Discussions about trade often tend to focus on trade policy, not the actual trade flows. But trade flows—and the trade deficit—are what matters for total jobs in the tradables sector, and changes in the value of the currency have a big effect on the level of exports and thus the size of the trade deficit.** One that is very hard to counter with sector or firm specific measures.

Trade agreements tend to get the most press, but changes in the dollar tend—at least in my view—to have a bigger impact on trade flows. Trade agreements should raise both imports and exports (or, in some cases, the offshore income of U.S. multinationals—but that is a more complex story). A stronger dollar by contrast raises imports and reduces exports. It encourages multinationals of all stripes to locate less of their global production in the U.S.

And while the value of the dollar fluctuates, a persistent increase in the dollar – say from looser fiscal policy in the U.S. than in its peers – would have a persistent effect on the trade balance.

The numbers I used are arguably conservative.

The IMF – in a large study that explicitly looked at the impact of global supply chains (published as chapter 3 of the fall 2015 WEO; summarized here) – found that a 10% currency move generally changes the trade balance by about 1.5% of GDP.

And one of the models the Fed uses also suggests a 10% dollar move has an impact of around 1.5% of GDP. Joseph Gruber, Andrew McCallum, and Robert Vigfusson summarized the Fed staff’s current trade model; the fall in real GDP they mention comes primarily from a deterioration in the real trade balance.***

“The equations for goods and services exports predict that a 10 percent appreciation of the real dollar would reduce the level of overall real exports by about 7 percent after three years. After three years, the model predicts that real imports would be almost 4 percent higher. In total, therefore, a 10 percent dollar appreciation would reduce the level of real GDP by about 1-1/2 percent relative to its baseline path after three years”

And I could have estimated the impact on goods and services separately, as the Commerce Department estimates that a billion dollars of services exports supports more jobs than a billion dollars of goods exports. 7,000 for services versus 5,300 for goods in 2015 (with the result that a billion dollars of goods and services exports supports close to 6,000 jobs, given the relative shares of goods and services in a billion dollars of exports).

The higher number of jobs supported by a billion dollars of service exports shouldn’t be a surprise. Some services exports derive from high end design and engineering (intellectual property rights show up in the balance of payments either as service export or as offshore investment income), which generate large profits and rents but do not directly support all that many jobs. But the “high-end” image of service exports is a bit deceptive. To be blunt, the typical service exporter is a hotel that caters heavily to international travelers.

Using the higher end estimate of the impact of the dollar and the weighted average for goods and services for the loss of export jobs (and assuming that the jobs impact of imports is similar, e.g. a dollar in lost exports/ higher imports leads to a loss of around 6,000 jobs in the associated sectors) would raise the loss of tradable sector jobs to well over 600,000.

To be clear, the loss of jobs in the tradables sector isn’t the loss of jobs in the economy overall, not when the economy is operating at full employment. A fiscal expansion that leads to a monetary tightening that pushes the dollar up will generate additional jobs in the non-traded parts of the economy.

But the work of David Autor, David Dorn, and Gordon H. Hanson also should by now have generated a consensus that the transition out of manufacturing and tradeables jobs isn’t seemless; the expanding sectors won’t be in the same place, geographically speaking, as the shrinking sectors. (See Tim Duy)

* The Commerce Department found that a dollar of exports supported more jobs in 2015 than in 2014—as employment in the export and export supported sector went up even though exports didn’t. In 2014, a billion dollars of goods exports "only" supported 5,000 jobs. So much for always rising productivity in the export sector. I would emphasize the numbers are estimates … the results are plausible, but there is an error band.

** China is an exception, as its peg and then managed currency have been a policy focus. Some trade policy types though argue that too much emphasis is placed on the currency relative to China’s other commercial policies that impede U.S. firms.

*** The Fed’s model has predicted the impact of the dollars 2014/15 rise on exports relatively well. Imports have increased by less than the model implies, for reasons that have been discussed previously (inventories, the impact of the fall in investment and the like—though some of the gap remains a mystery).

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