A weakening currency traditionally helps a country raise its exports and create more jobs for its workers. However, the declining value of the dollar may not help the US increase economic growth as much as it might have in the past.
Though a weakened US dollar would help exports to some degree, business executives and economists have said that because of the ways US multinational companies operate, it was uncertain whether it would cause much of an increase in hiring.
The issue is crucial for US President Barack Obama, who made economic growth and job creation the main themes of his recent 10-day trip to Asia. He has also held out the prospect that a surge in exports would reduce the nation’s stubborn unemployment rate, currently at 9.6 percent.
Other world leaders have complained that US policies, especially the monetary easing the Federal Reserve announced this month, will depress the dollar and give US exporters an unfair advantage.
Obama and US Treasury Secretary Timothy Geithner have repeatedly defended the central bank’s action as a move designed to encourage US businesses to borrow, invest and hire rather than one specifically aimed at lowering the value of the dollar.
However, even if the Fed’s action does end up weakening the dollar, American workers may not benefit much. For one, many big US manufacturers, from General Motors to General Electric, often make goods in the countries where they are sold rather than shipping the products abroad. This effectively takes exchange rates out of the equation, since they are using only one currency.
What is more, companies that do send goods to other countries often buy components from abroad, so the advantage of a weaker dollar in selling is offset by the higher cost of buying.
“There are very few corporations that would see this just in one way,” said Martin Regalia, chief economist at the US Chamber of Commerce. “It cuts across a whole bunch of lines.”
Even when a company enjoys a relative surge in foreign sales, it won’t necessarily lead to a hiring spree. That is because the largest proportion of US exports are still manufactured goods, which are no longer so labor-intensive.
And many of the companies that still manufacture in the US are businesses that have not gone offshore because they are too small to justify setting up overseas operations. A weak dollar can help their businesses, but it may not prompt a wave of hiring.
“The net export effect is going to be positive, but it won’t be the driver of jobs,” said Daniel Meckstroth, chief economist of the Manufacturers Alliance, a trade group. “You can replace people with machines.”
According to Nigel Gault, chief US economist at IHS Global Insight, the dollar fell by 31 percent against a basket of major currencies since 2001, as US exports increased by 45 percent. However, manufacturing employment dropped by nearly a third in that time, to 11.7 million workers from 16.4 million.
The dollar has already fallen by about 10 percent against a range of currencies since the beginning of June, and government figures show that US exports rose in September by US$500 million, or 0.3 percent, to their highest level in two years.
Despite the outcry from other world leaders after the Federal Reserve’s decision to inject US$600 billion into the economy, the dollar strengthened slightly. However, even if it does start drifting down again, most economists do not expect the devaluation to be steep. Some argue that most of the weakening has already happened because traders have anticipated the Fed’s action for some time.
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, said he expected the dollar to fall another 10 percent in coming months, based on a basket of currencies from countries that trade with the US.
He estimates that such a decline would lead to about a US$100 billion increase in US exports over the next two years, which he believes could translate into about 500,000 jobs. Although Hufbauer said that number was “not bad,” he said that it would not put much of a dent in the nearly 15 million people who are still out of work.
Another reason increased sales abroad might not translate into US jobs is that US companies have moved steadily overseas in recent decades. The number of workers employed by US companies abroad more than doubled from 1989 to 2008, to 10.5 million, according to the US Bureau of Economic Analysis. Companies mostly wanted to open up foreign markets, and in some cases take advantage of cheaper labor, studies show, but less vulnerability to currency movements was an important fringe benefit.
With more companies building local factories, exchange rates matter less. General Motors (GM) and Volkswagen (VW) compete fiercely for business in China, a crucial market where both -automakers build almost all their cars locally rather than ship units in from their home countries.
Because the Chinese yuan tracks the dollar — meaning that products from the US should be cheaper than imports from Europe — GM would seem to be at an advantage.
While GM has been gaining market share in China, “it has nothing to do with currencies,” said Ferdinand Dudenhoffer, director of the Center Automotive Research at the University of Duisburg-Essen in Duisburg, Germany.
Rather, he attributes GM’s gains to cars like the Chevrolet Sail that have found favor with local consumers.
“The dollar is not a problem for VW or GM,” Dudenhoffer said.
Experience suggests that currency movements alone are unlikely to correct trade imbalances or lift exports. A decline in the value of the dollar against the yen did little to correct the US trade deficit with Japan during the 1980s, according to a study released last week by HSBC.
Indeed, some US companies report that a weakening dollar does not enhance export volumes. Roger Sustar, president of Fredon Corp, a Cleveland-based manufacturer of parts for the aerospace, defense, rail and medical industries, said that although the dollar had weakened against the British pound over the last two years, the company had not increased sales in Britain.
Rather, Sustar said, existing clients “haven’t been beating the bejeebers out of us to lower our prices.”
Some economists argue that if the dollar weakness lasts long enough it will have some effect on unemployment in the US. A sustained increase in exports would create jobs throughout the economy as businesses that supported the companies selling abroad also started hiring.
“There’s a multiplier effect,” said Steve Blitz, a senior economist for ITG Investment Research.
Blitz said that, in fact, the US economy should rely more heavily on export businesses to create jobs, rather than predominantly depending on US consumers, who account for an estimated 60 percent of the country’s economic activity.
“The model of the last 30 years can no longer continue,” Blitz said. “The job creation has to come from the export sector.”
Another potential for jobs will come from foreign companies who build operations in the US, in part to avoid currency fluctuations going the other way. BMW, for example, broke ground on its first plant in South Carolina in 1992, and in September opened a second factory near Spartanburg, South Carolina, where it had already hired 1,000 workers, with plans to hire 600 more.
“Currency hedging is definitely one piece” of the company’s rationale for building the plants in the US, said Thomas Kowaleski, a spokesman for BMW North America.
Currency fluctuations are just one part of what makes a US good or service more attractive to foreign buyers. Typically, a weaker dollar has provided a lift to US hotels and tourism destinations, as travelers from Europe and Asia suddenly find their money goes further at Disneyland or Bloomingdale’s.
However, these days, tourism officials say, travelers have so many locales around the world to choose from that currency moves don’t necessarily translate into travel booms.
“Nowadays in the travel world, it’s such a competitive market to try and get people to come to your destination,” said Carol Martinez, a spokeswoman for the Los Angeles Convention and Visitors Bureau. “The value is a factor, but there are many other factors, too.”
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