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The Importance of Export Trade

14 Mar 2017

One of the first things that US President Donald Trump did in his first week in office, was to cancel the USA Trans Pacific Partnership (TPP) participation deal that was signed up under Barack Obama’s administration.

We live in a very export driven country. Currently over 30% of our Gross Domestic Product (GDP) is derived from exports. Contrast this with the United States where exports account for only 12.6% of US GDP. Despite this, US exports are still worth more than in most countries, totalling $2.2 trillion in 2016. The only other country that comes close to or surpasses the US in terms of export value is China, which the latest World Bank figures put at a value of $2.4 trillion.

The massive US consumer economy is not highly dependent on exports. However, when it is broken down by state, the situation is more complex. Only ten states derive more than 10% of their state GDP from exports: Indiana, Kentucky, Louisiana, Michigan, Mississippi, South Carolina, Tennessee, Vermont and Washington. Eight of these states are in the Mideast or the South and voted for Trump. Michigan and North Dakota are highly dependent on exports to Canada, Texas is highly dependent on exports to Mexico, and Washington is heavily reliant on exports to China.

So, on an export basis, those states that export the most were not likely to benefit by much. Canada and Mexico were already covered by the NAFTA free trade agreement, and much of Washington’s exports to China are Boeing aircraft.

US Exports benefit from having such a large domestic economy. This gives manufacturers economies of scale, an advantage that helps pricing wise. The highly successful companies such as Microsoft, Apple, General Electric, Boeing, Ford etc., are also massive importers, making billions on the low cost of production that their suppliers in for example, China and Mexico offer.

If an importing country wants to lower the cost of imports, it can lower the import tariffs on the class of goods that they are importing. This is fine if there is minimal local production. Local production just must be price competitive. For New Zealand in the TPP negotiations, Pharmac was an issue. The US wanted NZ to use more expensive drugs, whereas Pharmac has pricing and efficacy hurdles that must be met for drugs to be state funded. This serves to keep the multinational pharmaceutical companies more honest in their pricing, rather than their more normal price gouging practices.

From an investment purpose, companies to invest in should have a strong franchise. Market leaders, price setters, low cost production are examples. In the US, this would typically infer having a large domestic market. In New Zealand on the other hand, there would normally need to be strong and growing export levels, as it is unlikely that our local market would be sufficiently strong to sustain growth. Therefore, the NZ government focuses so much on assisting exporters and tourist operators, whereas some countries such as the USA adopt a fortress like mentality to protect their inefficient producers, to maintain jobs and votes.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.