What Export-Oriented America Means

“Two sectors, under God, with liberty and justice"

By TYLER COWEN

In his State of the Union address two years ago, President Obama promised to double American exports over the next five years. At the time critics called this an unrealistic political promise, one that voters would forget by the 2012 election. But America is currently on track to meet that goal. As of early 2012, exports measure in at about $180 billion each month, whereas two years ago it was $140 billion per month. The growth rate of exports is about 16 percent per year, a trend that at least conceivably could get us to Obama’s target. 

Since the recession officially ended, exports have accounted for about half of the nation’s economic growth. They are 14 percent of GDP and rising, reflecting a decades-long trend.¹ To some extent, the vagaries of American economic growth inhere in the nature of the increasingly globalized international economy. American manufacturing employment has been badly hurt by the mobility of capital seeking lower production costs abroad, but the growing wealth of foreign populations in rising economies is creating new demand for imports, including imports U.S. workers can supply. As is well known, America was the world’s leading exporter virtually every year during the latter half of the 20^th century, losing that title to Germany only in 2003, and later falling behind China. New circumstances thus prompt the question: Might we someday regain that honor? If so, how will this shape American foreign policy, jobs, education, politics and poverty?

Three Causes for Optimism

Let’s first take a step back and see where these new American exports will be coming from. At least three forces are likely to combine to make the United States an export powerhouse.

First, artificial intelligence and computing power are the future, or even the present, for much of manufacturing. It’s not just the robots; look at the hundreds of computers and software-driven devices embedded in a new car. Factory floors these days are nearly empty of people because software-driven machines are doing most of the work. The factory has been reinvented as a quiet place. There is now a joke that “a modern textile mill employs only a man and a dog—the man to feed the dog, and the dog to keep the man away from the machines.”²

The next steps in the artificial intelligence revolution, as manifested most publicly through systems like Deep Blue, Watson and Siri, will revolutionize production in one sector after another. Computing power solves more problems each year, including manufacturing problems.

It’s not just that Silicon Valley and the Pentagon and our universities give the United States a big edge with smart machines. The subtler point is this: The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States. 

You’ll hear the word “insourcing” more, too, to join the far more familiar “outsourcing.” For instance, in one manufacturing survey from November 2011, almost one fifth of North American manufacturers claimed to have brought production back from a “low-cost” country to North America. The corresponding number from early 2010 was one tenth of those companies, partly because of rising labor costs in developing nations, and partly because labor costs don’t always matter so much anymore.³

The second force behind export growth will be the recent discoveries of very large shale oil and natural gas deposits in the United States. Come 2030, the United States may well be the new Saudi Arabia of energy markets. We have new fossil fuel discoveries to draw upon, enough to fuel this country for decades, and there is plenty of foreign demand for those resources. 

The shale gas revolution started at the beginning of the last decade, as the technology of “fracking” (hydraulic fracturing) became easier. Fracking uses compressed water, sand and some chemicals to liberate natural gas from underground repositories. Fracking suddenly accounts for 20 percent of domestic natural gas production—a very rapid increase—and the number is slated to rise further over the next few decades, possibly to account for half of all U.S. natural gas output. This is a technology pioneered and mastered by the United States, and it is the United States that has the greatest capacity to transport the product, market it and deliver to the final customers, including those overseas. The United States also has the greatest capacity eventually to monitor and control for the environmental concerns fracking raises. Even if not all the recently discovered fields pan out or meet expectations (as already seems to be the case with the Marcellus field in the Northeastern United States), the door is open for further discoveries and improvements in extraction technologies. Related new technologies will also boost domestic production of oil.

By contrast, in the European Union the development of natural gas extraction is being thwarted by the nuclear power lobby, environmentalist lobbies, the influence of Russia and the difficulties of fracking in a densely populated area. (Only Poland and the United Kingdom seem to have significant potential to increase natural gas exports.⁴) These particular constraints reflect some more general reasons why European economies are usually less flexible than America’s—namely, that European cultures and politics are less geared toward rapid economic change.

 It is unlikely that regulations will long stand in the way of exploiting these fossil fuel resources. The major difficulty with extraction, alluded to above, is that some of the gas may leak into water tables. That is a significant concern, but compared to the problems of mobilizing nuclear, solar or wind power on a larger scale, it is relatively manageable. The government could regulate “irresponsible fracking”, and thereby guarantee that the largest and best-capitalized firms would dominate the market. That’s a kind of ugly, monopolizing state capitalism, perhaps, but it will get the job done. 

Many of the new fossil fuel resources are found in political swing states, such as Pennsylvania, Ohio and states in the Midwest, and that will translate into political support. Fossil fuel production creates middle-class jobs, and that is exactly what those states need, and what their politicians crave.⁵

That brings us to the third reason why America is likely to return as a dominant export power: demand from the rapidly developing countries, and not just or even mainly demand for fossil fuel. As the developing world becomes wealthier, demand for American exports will grow. (Mexico, which is already geared to a U.S.-dominated global economy, is likely to be another big winner, but that is a story for another day.)

In the early stages of growth in developing nations, importers buy timber, copper, nickel and resources linked to construction and infrastructure development. Those have not been U.S. export specialties, and so a lot of the gains from these countries’ growth so far have gone to Canada, Australia and Chile. Usually American outputs are geared toward wealthier consumers and higher-quality outputs, which is what you would expect from the world’s wealthiest and most technologically advanced home market. To put it simply, the closer other nations come to our economic level, the more they will want to buy our stuff. Indeed most of those nations are growing rapidly, so we can expect their attentions to shift toward American exporters. The leading categories of American exports today—civilian aircraft, semiconductors, cars, pharmaceuticals, machinery and equipment, automobile accessories, and entertainment—are going to be in the sweet spot of growing demand in what we now call the developing world. 

Indeed, of the wealthy nations, the United States probably will do the best at capturing those growing markets. Japan already has moved to trade-deficit status for the first time in three decades. This status may not persist, but the country is no longer the export powerhouse it once was, and companies like Toyota and Sony are no longer global innovation leaders. As for Europe, significant parts of the common currency area may lose a decade or more as they sort out the current financial mess. Both Europe and Japan are shrinking in population, too, while that of the United States is growing. 

Over the past twenty years, the United States has suffered an oddly unfavorable position in the global economy. China has been wealthy enough to bid up resource prices, including oil, but not wealthy enough to buy enough major American exports to bring buying and selling into even rough balance. Nor has China been innovative enough to come up with new products for American consumers. As China continues to grow, America will become a bigger winner. Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council. Furthermore, American companies, with their practicality and marketing expertise, will be well positioned to convert scientific innovations from Chinese labs into new commercial products once such innovations start to arrive in large numbers.

The vision I’m painting isn’t around the corner, but, barring global catastrophe, it stands a good chance of arriving over the next two decades. We can think of exports as one path out of what my 2011 book called “The Great Stagnation”, referring to the slowdown in economic growth and living standards in the United States.

Export success will resurrect the United States as a dominant global economic power. America will be wealthier, its products will have greater global reach, and it will largely cure its trade imbalance with China. The fear of American foreign policy being determined by Beijing, or constrained by the financial resources of the Chinese central bank, will be forgotten. No one will view the United States as the borrowing supplicant in the U.S.-China economic relationship, and, all else equal, our exports to China will increase friendly feelings toward that country. 

As a major exporter (among other strengths), the United States can be expected to maintain and even extend its investments in its Navy and Air Force. The current defense budget austerity won’t last very long, meaning, among other things, that it won’t be a fun time to be a pirate. Parts of the Pacific may, politically speaking, become a “Chinese lake”, but the two economically dominant countries will favor both open seas for trading and some approximation of global free trade, albeit with remaining protections in China itself. The United States will solidify its relationships with Latin America, and the old dream of an economically integrated New World will largely come true. Our neighbors to the south, too, will be buying a lot more U.S.-made goods.

The opposition to free trade as it existed during the 1980s, and which led even Ronald Reagan into auto protectionism, is almost gone, and these pro-export developments mean that it won’t come back anytime soon. The core political truth about this, however, is a little awkward: So many of the jobs vulnerable to foreign imports have already vanished that there is little left for voters or less powerful manufacturing-based labor unions to fear from free trade. The new job growth has been in health care, education, services and government, areas that are largely insulated from foreign competition and that will themselves seek out export markets. American higher education is in demand around the world, too, and has little to fear from foreign colleges trying to expand offerings in the United States. 

American expertise with smart machines will further weaken protectionist pressures, if only because exports in artificial intelligence won’t create so many middle class jobs, and because the United States will remain a leader in information-intensive goods and services. America is also well positioned to be an enduring productivity leader in fossil fuel extraction, which currently requires a lot of organization and expertise in both science and engineering. The preconditions of their production and extraction will favor the wealthier and more productive nations.

The late 19^th-century “Open Door Policy” stressed free and open markets abroad, and that view will make a comeback, too, well beyond its initial application to China. FDR’s Secretary of State Cordell Hull, who worked hard for free trade around the world, may even return as a seminal thinker in the American political landscape of 2030.

Jobs, Jobs, Jobs?

And now for the bad news: The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success. The class of elite labor will grow, and protest against the “one percent” will seem anachronistic. Expect something more like, “We are the ninety percent.” That will still fall well short of the median, so significant segments of the American workforce are likely to continue suffering falling real wages, even in a time of rising export prowess. 

As the number of American jobs in manufacturing has fallen dramatically, it is often forgotten that American manufacturing output has continued to rise, even during some slow times. In the past decade, the flow of goods coming from U.S. factories has gone up by a third as capital has increasingly become a greater share of input over labor. In this regard, the recent experience with Germany’s export success is inspiring, but it is sobering, too. At the beginning of the last decade, Gerhard Schröder’s Social Democrat government decided to reform labor markets and revamp Germany’s export prowess. These policies succeeded beyond most expectations, but less well advertised is the fact that real wages in Germany’s export sectors have been stagnant or declining, depending on which measures are used.⁶ This was part of what Germany needed to be competitive in foreign markets, and without the export growth a lot of these wages would have fallen anyway—or perhaps the jobs involved would never have existed, or would have moved to production platforms further east. In this sense, the German experience can still be spun as a success story for labor, but a comparable development in the United States may not be perceived as helping workers very much. 

Nonetheless, we’ll probably see a lot of the American workforce accept lower wages. A lot of American exporters are already experimenting with a two-tiered wage structure, with significantly lower wages for incoming workers. General Electric recently created a whole new class of jobs that pay $12–$19 an hour, compared to the incumbents’ pay of $21–$32 an hour. Comparable arrangements are showing up in the auto sector, steel and tire companies, and with makers of farm equipment. If you’re wondering, in general these contracts are being blessed by the associated unions. The general expectation is not that these new jobs soon will rise to the pay levels of the old, but rather that this is the first wave of the new and lower—but hopefully dependable and stable—manufacturing-sector wage structure. More generally, the median wage in the United States has continued to fall, by about 6 to 7 percent, even during the period of recovery from the financial crisis.

To some extent, these trends resonate with the old saying, “Live by the sword, die by the sword.” Jobs in the export sector face intense competition, precisely because U.S. companies are increasingly selling into a global market, and that means wages in this sector cannot be guaranteed to rise. They might, and they might not, depending on how creative, efficient and well managed we are. Services, in contrast, are often produced inefficiently, but the jobs are more extensively cocooned within a protected domestic market, often based on government privileges and market-distorting third-party payment schemes. 

The more America becomes an export-oriented economy, the more it and the nation as a whole will live by the principles of competitive markets. Let’s be clear what this means: Our companies will be living under this market pressure, not most of our jobs. We will continue to cut a proverbial “deal with the devil”, in which ever more jobs will be created in the relatively protected service sectors, while much of the economic dynamism and income gains will accrue to the capitalists, CEOs and managers who dare to export. A lot of people complain about this deal from both sides of the political spectrum, but few observers are willing to countenance a truly open, competitive set of educational, governmental and health care institutions as a remedy. Libertarian-leaning recommendations for open competition everywhere may or may not be acceptable to us, but they have a bracing way of pushing the truth before our eyes. When it comes to protecting service-sector jobs and paying for their enormous inefficiencies, we are sleeping in the bed we ourselves made some time ago.

Not all the news is bad for working-class Americans. There is the prospect of a better career path, accompanying future export gains, that stands a chance of making life less grim for the working class. Some of the new technological and export-related breakthroughs will consist of making education and health care more affordable, often through software and smart machines that bypass the current credentialized control of those fields. Imagine getting an online medical diagnosis from a smart machine like IBM’s Watson, or learning mathematics from an online MITx program or one of its successors. The American poor and lower middle class will have considerably greater opportunities, at least if they are savvy with information technology and disciplined enough to take advantage of these new free or cheaper goods. Of course, this will not come close to helping everybody. These internet tools reward the self-motivated, who will be disproportionately well educated, even if their parents lack higher education, wealth and connections. Many of the rest will still fall by the wayside. 

Even American earners who must cope with stagnant wages will probably reap big gains from new opportunities to lower their basic living expenses. Imagine a family earning $37,000 per year that has much cheaper education and health care costs, thanks to government benefits and internet-based innovation. No one will be tempted to call such households wealthy, but they won’t fit the standard measure of poverty either. They will have positive experiences in their lives and lots of free and nearly free goods. 

If we play out this scenario long enough, housing expenses will be the biggest remaining economic problem for the poor. Many lower earners will make do with lower-quality housing, or housing more distant from work, than most Americans are used to. Currently even the American poor commonly have more living space than the typical Swiss family; this may change as poorer individuals move to smaller living quarters as one way to save money.

The internet will continue to make it easier for small businesses to export, but many of the growth areas, including fossil fuels, heavy equipment and cars and other high-tech items will remain the province of big business. America will likely see a new age of corporate titans selling their products and services to the entire world, and the world as a whole will be far wealthier than in times past. The wealthiest American earners will be very wealthy indeed, even by current standards. Due to their export activities, they will take an increasingly global perspective, and they will give away lots of their money, just as Bill Gates has expanded his philanthropy abroad. Recently the Gates Foundation claimed that Gates’s giving has saved six million lives, in large part by making medicines and vaccines available to the developing world. He probably could not have achieved comparable moral value by redistributing that money just within the United States.

That number of saved lives is probably an overstatement (it was produced by Gates’s own foundation), but in any case it reflects a coming fight over resources. On one side of the divide will be the push to redistribute more of these resources to the American worker or to the unemployed using public policy and the tax system; some of the Democratic Party agenda already reads along such lines. On the other side of the divide will be a combination of elites and cosmopolitans defending the very wealthy and their global charitable giving and making sure that America remains sufficiently free economically to maintain its export success. These strands exist in both political parties, although the current Republicans phrase their wealth-oriented program in nationalist rather than cosmopolitan terms, in part to make it more palatable to voters.

It’s a well-known description in the literature of political economy that the economy of a developing country may have two quite distinct tiers: a relatively dynamic export sector and a relatively backward domestic sector, often comprised largely of agriculture and local production. That used to be true of the Japanese economy in the early postwar period, and today think of the relatively efficient automobile production in Thailand, backed by Japanese capital, and compare it to the millions of Thais who grow their own food on small-scale plots or run very small local businesses. Workers clamor for posts in the better-paid export sector, but the exporting firms can absorb only so many, so they are sorted by education, social status and connections. 

In the next stage of development, a country moves beyond this picture to having virtually all of its sectors become dynamic, as we have found in most of the United States, Japan after around 1970, and Western Europe. These days, this old portrait of the two-tiered economy, originally applicable to a developing economy, may be re-emerging for the United States. We had not thought through seriously enough the possibility that the world’s most technologically advanced economy would, over time, develop persistent and indeed growing productivity differentials across sectors. It clearly has, and the social and political frictions this has caused now dominate our politics—or soon will. 

One way to understand this is to note a neglected implication of Moore’s Law for computer processing speed, namely that its use in the value-added process benefits some economic sectors much more than others. In this case the static sector consists of the protected services (a big chunk of health care, education and government jobs), and the dynamic sector is heavily represented in U.S. exports, often consisting of goods and services rooted in tech, connected to tech, or made much more productive by tech innovations. Piece by piece, bit by bit, we Americans are replicating the two-tiered developing economy model, albeit from a much higher base level of wealth and productivity.

We may need one day to edit the Pledge of Allegiance to read: “Two sectors, under God, with liberty and justice"

1. Current statistics, by the way, already overstate the size of the American trade deficit. Sales of iPads or iPods, for instance, count as imports because these products are shipped in from China. Yet a lot of the value in these devices was produced here in the United States, including much of the design and retail sophistication. In reality, American ingenuity and production have had a lot to do with those gadgets, in a way that current measures do not pick up.

2. Cited in Adam Davidson, “Making it in America”, The Atlantic (January/February 2012).

3. See MFGWatch: Quarterly Survey of American Manufacturers; and for background, “White House Offers Plans to Lure Jobs to America”, New York Times, February 2, 2012.

4. See Andrew Michta, “Shale Storm”, The American Interest (January/February 2012).

5. What about global warming and climate change? Perhaps tragically, American public policy doesn’t pay much heed to these factors. Even a Democrat-controlled Senate would not pass the Waxman-Markey bill, and that bill would not have administered its tough medicine until twenty years after passage. Following the experience of the congressional Supercommittee and other fiascoes, hardly anyone puts much stake in a “twenty years from now” commitment to do something painful, whether on carbon prices or anything else. But we don’t have to rely on the stupidity of voters or the venality of fossil fuel interest groups. Most technocratic economists admit that the best mix of policy is to proceed with fossil fuel development and impose a carbon tax or cap-and-trade. Under that blend, the fossil fuels that are worth their environmental costs remain profitable, while the least beneficial forms of pollution are reduced. Maybe we’ll be spared the bitter medicine, but either way U.S. fossil fuel development is still the correct and also the most likely outcome.

6. See Karl Brenke, “Real Wages in Germany: Numerous Years of Decline”, German Institute for Economic Research (2009).